by Adam Hartung | Jul 8, 2008 | Defend & Extend, General, Leadership, Quotes
Ed Bronfman, Jr. is a scion of the family that used its ownership of Seagrams, and U.S. liquor prohibition, to build a fortune in Canada. Eventually he made a very large investment in Warner Music and appointed himself CEO. Unfortunately, his investment has not turned out as well as he would have liked due to market shifts in how people buy music. Here’s his quote (source of quote here):
"We expected our business would remain blissfully unaffected even as the world of interactivity, constant connection and file sharing was exploding. And of course we were wrong. How were we wrong? By standing still or moving at a glacial pace we inadvertently went to war wtih consumers by denying them what they wanted and could otherwise find – and as a result, of course, consumers won."
Lock-in caused Warner Music to be complacent – and ignore customers that switched to competitors. When markets shift, standing still (doing the same thing – or Defending & Extending your old Success Formula) can cause you to become competitively less viable.
Here’s an even better quote from Bill Gates, founder of Microsoft (source of quote here):
"Your most unhappy customers are your greatest source of learning."
Listening to your biggest, and your best, customers is important, but you won’t learn much about the market. They like your Success Formula and share your Lock-ins. It’s the customers who complain that are telling you about changes in the marketplace. They are telling you they will shift if they can find an alternative. And those who outright become disloyal, who leave, are really able to tell you about market shifts and changes in competition that threaten your returns. You might want to take your best customer golfing to keep her happy, but you should invest your resources in understanding the customers that complain, threaten to leave, cut their business or completely leave. They can give you the market information you need to plan for a future with higher returns.
by Adam Hartung | Jul 7, 2008 | Defend & Extend, In the Swamp, Leadership, Lock-in
We are all told to be "glass half full" kinds of folks. We are surrounded by messages that things won’t be all that bad, and when bad they will get better ("the storm is always darkest just before the dawn"). Unfortunately, when market shifts happen it’s the optimistic ones who ignore the signals, don’t fully prepare for a changed market and thereby come under the greatest risk of failure.
Take for example General Motors (see chart to 50 year low valuations here). GM has been around so long it is inconceivable to most Americans – and probably all of GM management – that GM could fail. I mean, this was the world’s largest auto company, and still is one of the largest. By any historical measure, GM should be able to weather a downturn and survive. But when markets shift, history can become irrelevant. All that matters is competing in the shifted, altered future. And, is GM ready?
What’s so different about the future? Well, we all know gasoline is a whole lot more expensive. The result? Demand for driving in the USA is declining. That means autos will last longer so people will need to buy fewer autos less often. Beyond that simple fact, consider how many autos Americans own. (Following facts courtesy of David Rosenberg at Merrill Lynch and his market memo – see article here.) In most of the developed world the average family owns at most 1 car. But in the USA the average family owns 2.2 cars – more than twice the world average. There are 40% more licensed vehicles in the USA than there are licensed drivers!! So if Americans start driving less, and figure out they don’t need to replace all the cars currently licensed, you get an exponential negative affect on U.S. auto demand. And since GM is almost completely reliant on U.S. demand – where it competes with practically everyone else on the globe – what will happen to GM if American miles driven declines 10% – and if the total demand for new cars starts to decline (not increase) at say a meager 5% per year???? Or 15% per year? Now you can see how it is possible that either GM or Ford may not survive the next shakeout in auto manufacturing (read more on Merrill Lynch downgrade of GM here).
We’re seeing a market shift not just in preferences, but in the overall economy that affects the auto industry and every competitor. Who will survive? That’s hard to say. Expect lots of government interference as well as free-market competition to create a very unpleasant marketplace. But in the end, the most likely winning survivor will be a company that is not strictly focused on automobiles. A competitor that is involved in growing markets, like mass transit light rail cars or robotics or another alternative marketplace will be able to meet market needs while maintaining overall company growth. That competitor will be able to continue raising capital and maintain wherewithal much better than a single -market competitor like GM or Ford stuck in declining annual sales volume and negative returns.
After selling asset upon asset (remember the big sale of GMAC 2 years ago?) GM has run out of assets to sell for subsidizing its auto business. Now it needs to quickly raise $15B to $18B to survive this downturn (read more here). Would you give GM management your life savings? Those two companies will be slashing costs with layoffs, plant shutdowns, and brand closings (read latest GM speculation on Marketwatch here.) But they will always be behind the curve, cutting costs fast but not fast enough to make a profit. Always promising a profit at some future time (like now promising profits in 2010 – do you believe it will happen?).
While GM and Ford will increasingly be unable to raise new capital (and what is raised will be at extra-ordinarily high cost), and unable to develop new products, competitors with more diversified businesses will be able to better meet market needs. So we can expect better results from Toyota, Honda and Tata than from GM, Ford, Chrysler (or even most European manufacturers.)
Roger Smith tried to diversify GM in the early 1980s by buying EDS, then Hughes and then investing in an all new White Space company named Saturn. But GM management sold off those assets for profits in order to subsidize it’s Locked-in auto manufacturing – while forcing Saturn into the GM mold (just compare a Pontiac Solstice to a Saturn Sky and you’ll see just how unique Saturn now is) . How will they now raise desperately needed capital to design more fuel-efficient, high quality, attractive autos? Besides the government, with a vested interest in saving jobs to avoid an economic depression, who would invest in GM or Ford rather than Toyota, Honda or someone else with better return on assets?
The Red Cross used to teach first aid, in the days before paramedics were common and smaller towns depended upon volunteers to treat accidents and emergencies as first responders. The Red Cross training motto was "Hope for the best, Plan for the Worst." Being optimistic is a nice mentality. But competing long-term means preparing for market shifts by focusing on the future. Using scenarios that lay out options which may seem highly problematic given current operations or conditions. Competitors that wait for the market Challenges to emerge, to show themselves clearly, are already too late to be effective against those competitors who build plans based upon potential shifts. Leave optimism at home when planning, it breeds contempt for market shifts. Instead, bring along outsiders who are likely to help you see future scenarios that you might otherwise choose to ignore.
GM management has had 30 years to create a different kind of company. One less reliant on U.S. automobile sales – and more reactive to shifting market needs. But optimism allowed management to keep Defending & Extending what it always did. Optimism allowed the company to believe people would forever want the high-margin large light trucks/SUVs they were making. It would have been better to be more pessimistic – and prepared.
by Adam Hartung | Jul 3, 2008 | In the Swamp, Leadership, Lifecycle, Lock-in, Quotes
We all get so used to running our businesses that it is very easy to miss a significant market shift. We may well be in the Rapids of growth and then within a very short time fall into the Swamp of stagnant revenue and lower margins. Because we are so good at doing what we always did, our biases keep us thinking we will succeed while we ignore important signs of market shifts. By the time we react, it can be too late.
Take music recording and sales. For years this was a simple business. EMI, RCA, Sony, etc. simply signed up a lot of artists who wanted contracts. The music company spread its risk in a form of venture capital play by signing lots of bands and then needing only a few to succeed. The artists had no way to make an album and get it distributed other than to sign a contract, often at very low initial returns, with a major studio. It was a business that made it very easy for the large recording companies to make good money.
So we should not be surprised that when MP3 technology came along the major recording companies ignored it. They blithely allowed Apple to set up iTunes and sell iPods while they kept right on pushing the same contracts to artists and making CDs. What they ignored was that MP3 technology made it possible for consumers to bypass albums completely, dramatically impacting sales, and likewise artists could now bypass the recording studio by making their own songs and albums available directly to consumers across the web. Even though this future was not hard to visualize, and plan for, the recording studios kept planning for past markets and ignored desperately needed changes given easily expected future market conditions.
Get the following statistics (all of the following information comes from Paul Grein at Chart Watch):
"The paid digital download medium scarcely existed five years ago and now it’s the biggest growth area in the music business. (It may be the only growth area in the music business.) Billboard reports that album sales in the first half of 2008 totaled 204.6 million, down slightly from 229.8 million in the first half of 2007. Digital track sales for the same period totaled 542.7 million, up substantially from 417.3 million….Just three albums topped 1 million copies in sales (CDs and digital downloads combined) in the first six months of 2008, the lowest total since Nielsen/SoundScan set up shop in 1991. Six albums sold 1 million copies in the first six months of 2007. Fully 16 albums hit the million mark in the first half of 2006. (The business hit its peak in 2001 when a whopping 37 albums reached the 1 million mark in the first 26 weeks of the year.)"
When markets shift, trying to maintain Lock-ins in the hope of making money is like pushing on a rope. Lots of work with poor results. When new technologies or market practices come available, we have to focus on new competitors to understand how they make money. Likely, they will change the market in a way that diminishes the returns from old Success Formulas while making new Success Formulas more profitable. Customers won’t tell you about new solutions, because they are buying your solution – right up until they switch and aren’t customers any more. Focusing on customers only helps you understand and marginally improve your Locked-in old Success Formula. You have to look at the new competitors to see what is happening in the market. New competitors can show you that given market shifts, it’s better to pull the rope than push it.
In today’s global and connected economy markets can shift a lot faster than they did in previous eras. Resources and customers can shift quickly. Old Success Formulas can become obsolete (unable to make above average returns) before we even have time to react. If we don’t maintain a powerful focus on competitors, and generate scenarios about the future regardless of current market conditions, we will almost always be late to the changes. And that can be deadly to sales and returns. Just ask the people trying to generate profits by making and selling CDs today.
by Adam Hartung | Jul 2, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
This week Bill Gates officially retired completely from Microsoft (article here), and we also learned the company will no longer ship Microsoft XP (article here). At first blush these two press items seem unrelated, but in fact they should give any investor, or customer, of Microsoft real pause.
Microsoft has long dominated desktop computing. From operating systems the company branched out to personal applications, and has held top market share with most of its successful products. Microsoft was a wonderful example of a company that found a high growth market (PC sales), figured out a Success Formula to grow with the market and make money, and then Locked-in on the behaviors and processes which helped it make money. During the Rapids of growth, Microsoft was a model of doing the right things. To the point it was sued for becoming a monopoly due to its high market share.
But sales of PC aren’t growing like they used to. Instead of non-portable desktops or bulky and often heavy laptops consumers of all types are switching platforms. Increasingly everything from mobile phones to PDAs or MP3s are replacing the old platforms – especially as internet connectivity is more easily accessible on these alternative devices. New applications are being used that make it possible for people to do what they want to do (like exchange words or numbers) without the overhead of a big application like Word or Excel. Additionally, sales of Macintosh have re-emerged along with much greater use of Linux in many servers and even some PCs hurting sales of Microsoft products (see OS share chart here). I’m not saying that Microsoft-based PCs aren’t widely available and used, but they aren’t the growth platform they once were. The market in which Microsoft has competed has begun shifting – moving from desktops/laptops to other devices and solutions – and Microsoft is still stuck Defending & Extending its old Success Formula rather than developing the new markets like it did the old.
Even though Microsoft has continued to do what it always did – and do it well – its growth has slowed. Not because of being a poorly run company. Rather, because it is so Locked-in to continuing its past. Microsoft has dominated PCs, but we can now look to the future and see that PCs will be replaced by alternatives in many applications. Thus, Microsoft has moved into the Flats and is increasingly finding itself flailing away in the Swamp of low growth. Instead of being an exciting company, like Google, Microsoft is the company swatting at aligators and mosquitos biting away at its historic industry dominance.
The last time Microsoft faced this sort of Challenge was when the internet emerged. Stuck thinking of the PC as a truly "personal" machine Microsoft had never been a leader in networking machines for information exchange (networking was dominated by Appletalk, Banyan and Novell for many years.) But Mr. Gates was able to see the future risks, grab Microsoft’s R&D and product development budgets, then push the company towards future market needs. Mr. Gates was the company oracle who could redirect the apparatus toward a more connected internet world. He personally led the effort to license browser technology from Spyglass and create Internet Explorer – then bundle it into every sale – so Microsoft could maintain its market position.
By reviewing the past we can see that Microsoft as a company, under the operating leadership of Mr. Ballmer, has long been an organization constantly focused on optimizing products and defending product positions. The ability to identify and redirect resources toward a changing future was held by Mr. Gates. Only Mr. Gates could Disrupt Microsoft and set up White Space for new products. Instead of building an ongoing capability to develop future scenarios, focus on competitors, Disrupt itself internally and use White Space to remain evergreen, Microsoft has been a very Locked-in company that Defends & Extends while relying on its founder to occasionally "reset" direction.
So now Mr. Gates is gone. And the company is so Locked-in to its practices that it is completely ignoring everyone, from customers to competitors, as it simply refuses to ship a product the market wants (XP) – in its effort to force people to buy the product it wants to sell (Vista). This is less about upset customers than it demonstrates the kind of Lock-in which allows competitors to grow. How many potential customers will now buy a different platform from RIM and simply not buy a PC? How many will now really look hard at buying a Linux-based machine? By ignoring competitors, Microsoft is giving them opportunities to succeed.
Microsoft has a huge cash hoard. And PC sales are slowed, but not dead. So the company won’t go bankrupt any time soon. But we can expect a continuation of the kind of meaningless thrashing around the Swamp of low growth we’ve seen lately. Purchasing a tiny share of Facebook rather than Disrupting and using White Space to really understand social networking applications. Or ongoing unsuccessful pitches to buy companies in growth markets – like Yahoo! in internet ads – that fail because Microsoft brings nothing more than money and a whole boatload of negative, stifling management practices.
According to old managment theory, we should decide Microsoft is now "mature." And it is supposedly time for this market monster, which has used billions of external capital dollars to create its dominant market position, to begin paying back to investors by raising its dividend. But what we all know is that in computer technology markets shift fast. Companies that pay out their cash hoard quickly lose cash generation as customers shift to new competitors. The payout evaporates and faster than expected employees lose jobs as sales dwindle. Just look at how fast Wang and Lanier disappeared when PCs replaced word processing systems – or DEC disappeared when PCs replaced high-end CAD/CAM machines.
Microsoft without Mr. Gates is exactly will be unable to plan from the future backward. A company short on "vision" and long on execution that is happy enough to use its market position to attempt forcing customers to use products they don’t want (read article here), and thereby create greater opportunity for competitors. It’s easy to scoff at smaller competitors when a company is huge, but the kind of behavior Microsoft is now exhibiting quickly leads to trouble. Investors are already well aware that Microsoft has lost its competitive edge, as the company valuation has stubbornly remained stagnant for years (see 5 year chart here). Meanwhile, the only person able to Disrupt Microsoft and set up White Space to change the Success Formula is now gone.
Without Disruption and White Space, it is far too easy to predict what the future holds for Microsoft, its employees and investors. Microsoft is no "safe haven" for the "widows and orphans" fund. Rather, its better to put your investment dollars somewhere with growth – probably at Microsoft’s Locked-in expense.
by Adam Hartung | Jun 30, 2008 | Defend & Extend, Disruptions, In the Swamp, Leadership, Lock-in
We have a lot of signs that we are in, or on the edge of, a seriously long and painful recession. According to Merrill Lynch today (read report here) the S&P 500 was down 8.7% in June, down 18.3% from the October, 2007 peak. GM is at a 53 year low, and swap spreads price in (for both it and Ford) a 70% probability of bankruptcy in 5 years – 30% in one year. Home prices nationally are down 20%, and there is no visibility when the decline will stop. All the major banks are at multi-year lows due to the crisis in mortgage-backed securities. For the first time ever, the Conference Board survey showed more people expect their incomes to decline than there are people who expect an income increase in the next 6 months. Oil and gasoline prices are at record highs. The dollar is at multi-year lows compared to other currencies and fears of inflation are keeping bonds from increasing in price.
Otherwise, everything’s great!
So, what are your plans? Do more, better, faster and cheaper? Often, the first thought is to cut resources. Cut back and "wait it out." Hope that you can survive the recession, and live to compete again "when things return to normal." But that approach is very likely to be your end. You may not survive the recession. If it lasts longer than anticipated, or is deeper than anticipated, you could well run out of resources and that’s that! But, even if you do survive, recessions do not end by "things returning to normal." Recessions end when the economy changes creating more growth. After all, recessions are about periods of negative growth – about economic stalls – and they end when something comes onto the landscape allowing growth to return.
It is during recessions that new products have their greatest likelihood of success. Examples:
- in the 1974 recession Japanese auto manufacturers made their great launch in the USA as they positioned their smaller cars as a good replacement for quality-short, high cost American made cars. GM, Chrysler and Ford never fully recovered and have lost market share ever since.
- in the 1991 recession many data center budgets were cut. When budgets returned computer usage switched to PCs – leaving mainframe and mid-range manufacturers in decline. This change eventually wiping out DEC and Wang – and caused IBM to convert into a services company.
- in the 2001 recession companies and individuals stopped magazine and newspaper subscriptions. As we moved into the mid-2000s people turned to the web for news and now many traditional publishers are in deep financial trouble.
Many companies retrench competitively during a recession. They try to Defend & Extend their old positions while waiting for the good old days to return. They blame the recession on external events (like oil prices or government actions) and think that the end of the recession will put them back in the same competitive position they were in before. They try to maintain the business while waiting for better days. But that’s not how the world works. While they are maintaining, other competitors are gaining ground!
The economy does not return to growth magically. It returns based upon new, more productive products entering the marketplace. During recessions is when customers are incented to try new technologies and products to see how they perform. They switch to products that may have less capability, but are less costly, and then realize they perform well enough to keep using them. Simultaneously, the greater use of these new products allows them to develop into better products, eclipsing older products and technologies. What might have been a "worse" product at the recession’s outset, but cheaper, becomes better and displaces the former product by recession end. Think about hybrid or fuel cell cars today. Or web conferencing.
Great companies do not try doing more of the same, but cutting costs, during a recession. Weaknesses which were starting to show up become full-blown breakdowns in a recession. Customers hurt by the recession no longer will pay for the high cost of the product or service and start searching for alternatives. They don’t stick on the same product, but become adopters of alternative platforms. When the recession ends, they are converted and never go back to the old technologies and products, allowing old competitors to fall into the whirlpool.
As you enter this recession, what are you doing to Disrupt your Success Formula? How are you attacking Lock-ins? What White Space do you have to develop new solutions that can pull you out of the sales funk? It may feel uncomfortable at a time of struggling sales to do new things – but now is when it is most critical to move beyond Lock-ins. Those products which looked less capable, but offered 80% of the traditional product at half the cost are the ones most valuable in a recession. Those customers who you could ignore during rapid growth due to their limited loyalty are the ones at the front edge of alternatives who can be most insightful about what it takes to succeed in the future. Competitors that were leaders in old technologies can be undercut with new products or services that provide new solutions while saving money – making them vulnerable while you bring new products to market.
During recessions "Creative Destruction" is high. Becoming a better, stronger company does not mean cutting costs and surviving. Coming out of a recession stronger requires developing a focus on the future – one unencumbered by your old Lock-ins and Defend & Extend practices. Then figuring out how to undercut competitors by using new solutions for which they are unable to react. Disrupt your thinking about what works, attack Lock-ins and become committed to testing new solutions. And set up White Space to figure out the technologies, products and services which will allow you to grow again.
Recessions are not pleasant. But Phoenix Principle companies can use them to better position themselves for future growth. And in the process slingshot past long-standing competitors who are less willing to Disrupt and use White Space.
by Adam Hartung | Jun 27, 2008 | Defend & Extend, General, Leadership, Lock-in
We all say we compete to win. But really, many of us just compete to compete. Winning is a lot less important than following "the rules." But in much of life, the rules are designed to favor the current winner. To win, you have to find a way to compete differently.
Athletes have set rules to play by. And when they violate those rules, fouls are called. We like to think real world competition is the same. But there are actually a lot less rules in most worldly competitions – it’s not nearly as cut and dried as a sport. As a result there are lots of opportunities to change how you compete, in effect doing different or new things. And savvy competitors, Phoenix competitors, realize that is the easiest, fastest and best way to win. They don’t fixate on doing things the way everyone else does it. Instead they look for a new way to compete that can unseat the entrenched way of behaving.
Over the last 18 months Americans watched this be applied in the Democratic presidential nomination process. Senator Hillary Clinton entered the competition as the clear front-runner. She had access to all the party elders, all the influencers and all the money raisers. She had all the traditional advantages of not only name recognition and awareness, but having the party apparatus primed to support her. Given this advantage, she was clearly going to be hard to unseat. She had the traditional Democratic party machine ready to work for her in big states like California, Massachusetts and New York. And all the traditional competitors that tried to beat her in the nominating process by competing in the traditional way were eliminated.
But Senator Barack Obama followed a typical Phoenix Principle campaign – and beat Senator Clinton. He eschewed trying to work the traditional tools of competition, and instead developed a different approach. He didn’t try to do "more, better, faster, cheaper" of the leader. He instead used typical Phoenix Principle approach that allowed him to win – even though it upset the classical competitor to no end.
- He focused on the future, not the past. Rather than talking about how great things were in some previous era – such as when Democrats last held the Presidency – he focused on a scenario of the future. His scenarios demonstrated a connection with trends in the USA and globally. Constantly focusing on the future, he pushed voters to think about how to achieve future goals – rather than how to return to traditional ways of competing. He didn’t talk about how to get from today to the future, he talked about designing a future then developing a backward plan to reach that future.
- He focused on his competitors rather than his customers. He did what they could not, or would not, given their primary constituency. While conventional wisdom said to focus on older people because they vote in higher percentages, he realized that voting group was Locked-in to traditional candidates and he focused on the overlooked younger voters. He promoted voter registration and being their advocate. He spent little time with old-line union bosses, because unions represent a far less powerful constituency than in the time of Franklin Roosevelt – or even Jimmy Carter. While the traditional competitors focused on traditional financing tools, such as reaching out to lobbyist groups and PACs, he focused his fundraising on the internet where competitors were less willing to depend. They were used to trading influence for money – and unsure that traditional donors would appreciate them raising large sums nontraditionally thus weakening their need to aid the donors. He focused less on his customers – the traditional Democratic voter – and instead focused on competitors to find their weaknesses and exploit them.
- He was Disruptive. He talked about doing things differently. His primary message was "change." This meant different things to different people, but at no time did he stop promoting "change." He talked endlessly about doing things differently – about Disrupting "Washington", lobbyists, corporate America, health care insurers, oil companies. He never showed fear of Disruption, but instead embraced it as a way to develop a new, better future.
- He used White Space. Conventional wisdom said "fight tooth and nail to win primaries in the big states." Instead, he exploited the caucus system used in many states to win. His compaign used unconventional techniques to exploit weaknesses in the "mega-message" approach of traditional candidates. He never tired of finding new, unique places to tell his message – making tremendous use of the internet including YouTube! and other social networking sites. He did not try to identify with traditional campaign methods, but instead used unconventional as often as possible. And he talked about bringing White Space projects to Washington – by creating dialogue with enemies currently ignored, and opening doors to change communication between fractured American constituencies.
Although Senator Obama’s compaign was a long shot, it exploited The Phoenix Principle and created an enormous upset. A very junior candidate – in both age and political experience – he set out to win by doing what had to be done rather than doing what everyone always did. Rather than being cowered by the huge name recognition, political clout and funding available to Senator Clinton, former Senator Edwards and other candidates he used their Lock-in to his advantage. He could predict what they would do, and as was pointed out several times on television coverage his campaign leaders uneerily projected his competitors’ performance in every single primary more than a year in advance! By understanding his competitors so well, by recognizing their Lock-ins, and then using Phoenix Principle practices he came from far behind to win.
And it can work for you too. Focus on the future, not the past. Focus on competitors, not customers to gain insight and advantage. Be Disruptive. Use White Space to develop new approaches to competition. That’s competing to win.
by Adam Hartung | Jun 25, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
Ever heard the phrase "the last company left making buggy whips made a fortune"? Don’t believe it. Ask the person with such a claim to name the company. Better yet, ask that person to name one company that made high profits by being the "last man standing" in their business – any business.
On Monday United announced it is laying off 12% of its pilots, 950. Of course, pilots are the tip of the iceberg. Every pilot drives many more flight attendants, mechanics, gate agents and other employees so we can expect a multiplier effect across other jobs as this action trickles down. Simultaneously, Continental has announced job cots, Delta is whacking employees using early retirement deals and American has said it is finalizing details for its planned cutbacks (read article discussing these reductions here.)
United had to move fast, because if it doesn’t act quickly enough it’s cash reserves will fall, placing it in default on its debt – and triggering a Chapter 11 filing. In other words, United is skating on the edge of extinction. But an industry guru was quoted in the above article saying "There is an inherent demand out there…. as long as you can stay in the game you’ll be fine."
This is ridiculous. The largest participants in the America’s airline industry have built businesses that cannot be profitable. In the best times, when demand was growing like crazy and fuel was cheap they could barely squeak out a profit. They have never made enough money to recover their capital investment in aircraft. Their hub-and-spoke system is simply too inefficient, ignores problems created by America’s constantly fickle weather and too costly. It was a grand theory, but it was not profitable. Couple that with bad workforce practices and total disdain for customers and you have a business model that was doomed before it began. That it lasted this long is only a testament to tenacity and unwillingness to find alternatives. (Read more about how airlines themselves predict service will decline FURTHER in Chicago Tribune article "You are now free to take a flying leap" here.)
But in reality, the entire industry isn’t unprofitable. Look at Southwest. That carrier did nothing like United or American, flying point to point, no milage programs, no pre-assigned seating, etc., . So Southwest has the highest domestic carrier customer satisfaction ratings and the highest profits. It is possible to make money as an airline, you just have to use a different Success Formula. The winner won’t be the "last man standing" as if some competitor simply outlasts all the others and is left with the spoils of war. Rather, the winner will be the competitor that figures out how to provide the service in a manner that makes customers happy and turns a profit for investors. And increasingly we can see the long-term winner won’t be one of the U.S. "majors."
Take a quick look at Virgin America. After years of the "majors" using legal fights to stop this new airline from opening, it has made its debut. And nothing like Southwest or the incumbents. It flies point to point, and it focuses on profitable routes with lots of business service rather than just being big. Although it prices low, not trying to be a "business class" airline with high fares. And it has a global reach. You can fly Virgin around the world whereas the big U.S. airlines depend on you flying one of their "partners" for some of the trip.
Virgin Airlines started in England during a horrible flying downturn and when British Airways dominated the market. No one gave it a chance because it did nothing like the traditional airlines. And Cinderalla ended up the prettiest girl at the ball. Now its leaders are doing the same as they enter the U.S. market. They Disrupted traditional thinking about how to be an Ameican airline, and developed a unique approach. Simultaneously, leadership has maintained a wary eye on how to make money while mitigating risks – this is no "race to be huge." Of course, its leader is one of the more Disruptive leaders in modern times, Sir Richard Branson, who turned his former music mail order distribution company into a varied empire of multiple profitable business across industries and markets. (Read more about the Virgin America launch in Time Magazine here.)
Of course, U.S. airline deregulation did not create a "free market." You don’t see Air Canada, Lufthansa or Singapore Airlines fly between any U.S. cities. As previously mentioned, the big U.S. airlines have fought from the 1970s to keep out these other competitors. All of them make money, and are known for more reliable service and far higher customer satisfaction. If we see United or American or Delta crumble into Chapter 11, can we expect regulators to continue protecting the local industry from offshore competitors? Would that be in our best interest? Virgin’s launch is an indication that these regulators are as tired of bad service as fliers. How will the remaining "majors" survive when they have to compete with airlines that have built profitable Success Formulas in other markets they can rapidly export to U.S. customes?
Business competition is not a game of "Last Man Standing." There are all kinds of variations competitors can employ to avoid the bloody "fight-to-the-death" battle of foolish Goliaths. As a result, multiple competitors displace the fallen gladiators, but do so more effectively and more profitably. In the end, markets transition to new competition based on new services and products. Don’t expect a protected American or Continental airline to be handed the U.S. market to exploit. Instead, begin preparing for market upheaval as these behemoths falter and fail – and new competitors are allowed to enter, changing how we think about flying. For most customers, it can’t happen fast enough.
by Adam Hartung | Jun 23, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in, Quotes
Do you have any doubt that the viability of traditional newspapers is at risk? Every newspaper in America is printing fewer pages today than a year ago (and most fewer than 2 years ago). Young people (meaning under 35 – if that’s really young) never got hooked on newspapers, and older readers are abandoning subscriptions, causing advertisers to abandon newspaper advertising – leaving the newspapers with big revenue shortfalls. As ad spending on the internet keeps growing at 100%/year, and Google explodes with revenue and higher valuations as a result, is there any doubt that the typical morning newspaper will have to undergo fundamental restructuring?
Readers of this blog probably don’t have much doubt. But read this quote from the CEO of a major Chicago newspaper – the Sun Times Media Group. "The fallout of this forced downsizing of the nation’s newsrooms is not being replaced elsewhere in our society, nor is it likely to be. Hence, with our most important asset, the newsroom, we will continue to have little competition. When the economy rebounds 12 to 18 months from now, as we believe it will, the newspapers will not only survive but somehow and in some form thrive again." (Read quote in Chicago Tribune article here.)
Give me a break. Talk about putting your head in the sand. Mr. Freidham is really saying "Hey, I’m Locked-in to what I’ve always done and I don’t want to change. Just give me some time, and probably more money, and I’m sure somehow my old Success Formula will make money again. Trust me." Effectively, he’s saying investors should ignore all market information and simply hope, literally, that somehow they will again make money.
That’s probably what the CEOs of Montgomery Wards, Polaroid, Fannie Mae, Brach’s Candy and Wicke’s Furniture were saying a few months before Chapter 11 wiped away their company existence.
Meanwhile, the Huffington Post is opening an office in Chicago. Now, traditionalists might not care about this. But truthfully Ms. Huffington and a few of her 40-odd employees represent a new kind of competitor that is far less expensive, and makes a pretty good, competitive product. Rather than newspaper journalists from the New York Times or Washington Post, who told us about Vietnam 40 years ago, we have Ms. Huffington and her cadre on television almost nightly. Especially when it comes to politics, they are considered closer to the news sources than many leading newspapers, and their reporting is considerably more timely. If you want to know John McCain or Barack Obama’s next move on a vice presidential selection keep your browser on Huffington Post rather than waiting for what the Sun Times will print tomorrow. The Huffington Post may not yet be the L.A. Times, but at a fraction of the cost they are rapidly making improvement, growing readership and advertisers, and making money in the process.
All the major newspapers could have opened web sites and become the Huffington Post. Marketwatch.com, had no advantage over the Wall Street Journal. But the newspaper leaders didn’t try to embrace the web and find a new Success Formula. Instead of opening web bureaus and giving them lots of cash to figure out how to be the next CNNMoney.com they under-invested in the web environment. They tried to make the web sites just some sort of mirror of the newspaper – without knowing how to get ad revenues for the effort. And to this day, the major newspapers are still not internally Disrupting and opening White Space to redefine themselves on the web. Successful web sites are not anything like newspapers – yet they distribute news rather effectively.
I like to read a newspaper. But I don’t read every word. I like the paper because I can scan it. If I like the headline, I grab a few words. If I like the article, I go online and find the article to read later digitally. So why don’t newspapers just print the headlines, an article abstract and on-line addresses? That’s just one idea out of probably a hundred to change how newspapers operate. Why don’t they try them? Because they don’t know how to make the on-line business profitable! No major newspaper today sells on-line ads at the same time as print ads – and they don’t know how to sell on-line advertising effectively. The publishers never Disrupted their operations, realized there is real risk in avoiding change, nor created White Space in which to learn. Now the market shift to on-line is so far advanced they are without the resources and time to learn.
Newspapers need to take action, and fast. Misplaced optimism about the future is simply dreaming – yearning for the past to return. There are things newspapers do well, and digging up stories is one of them. But in a declining print readership market, they’ll lose that capability if they don’t quickly learn how to profitably monetize it. With the Sun Times near bankruptcy due to years of mismanagement and fraud, and now Tribune Corporation sailing toward the brink due to its incredible debt load, it’s possible Chicago readers and advertisers could be without an effective local news source in just a few years! It would behoove these companies to realize the newspaper of old will never return, and pour their resources into discovering a new way to compete – Pronto! Or we won’t have anybody left doing the hard work of journalism and it will be the consumers of news that suffer most.
by Adam Hartung | Jun 20, 2008 | Defend & Extend, General, Leadership, Lock-in
I was at an executive event last night where the moderator asked the audience "will this current U.S. economic downturn last 12-18 months, or more like 36 months and possibly longer?" By show of hands, clearly 90% expected a short downturn. When he asked why, the prevailing opinion was "because these things just don’t last much longer, and the press always makes things sound worse than they are." When he pursued the audience for more depth, for specifics about where the new jobs would be, where the new revenues would come from no one offered anything beyond a weaker dollar surely helping exports – which he admitted still dramatically trailed imports.
This audience had not really asked itself just what could go wrong. If we want to position our businesses for success, it’s best we ask ourselves "What if…"
Many of the airline gurus, those who have long supported industry consolidation and hub-and-spoke systems, are now saying that higher jet fuel will cause at least one major airline to disappear. That’s right, not the same old "go bankrupt, but keep operating" syndrome that we’ve seen at Continental, United, etc. over the years. They are saying one day one of these huge airlines will say "we’re out of cash – investors have lost confidence and will no longer give us money in exchange for future promises to pay – we’ve not met expectations too often – so tomorrow we are grounding our entire fleet – we’re laying off all of our pilots, flight attendents, gate agents and mechanics – tens of thousands of employees will need to file for unemployment – all of our gates will revert back to the airports – we’re done."
Now, you may think this scenario sounds improbable. But, what if……. What will happen? Airplane tickets will triple in price. As many as 200 smaller cities in the USA will lose all flight service. Airports short of payments will be unable to make municipal bond payments. What will be the impact on your business? Are you prepared, or if this happens will you "wing it"? Could you suddenly lose contact with your customers? Your vendors? How will your revenues be affected?
Or, let’s consider the auto industry. When I was young I remember when GM had almost 50% market share in the United States. Now, it has 21%. We are so used to the slow loss of share, the perpetual bad news from GM, the last 25 years of hearing how GM is struggling with its cost and providing rebates or no interest financing to sell cars, that we’ve quit listening. But yesterday, as its market value declined back to what the company was worth 25 years ago, the GM spokesperson responded to questions about the future by saying "We continue to believe we have adequate liquidity for 2008." (read article with quote here.) Get that ringing piece of confidence – they have enough cash to survive for another 6 months! That’s the best they can say?
We are so used to hearing the bad news, we keep thinking that’s the norm. But in reality, GM for the last 25 years has been selling assets to keep the car company alive. They sold EDS, Hughes, their parts business (Delphi), and their financing arm (GMAC). They’ve sold assets – like a person selling first a lung, then a kidney – to get the cash to feed the poor returns from selling cars. Now, they are running out of assets. And they are running out of cash.
Today we read that Ford, which had a combined loss of $15.6 billion in 2006 and 2007 will not turn a yearly profit in 2008 or 2009. It’s dealer lots are flooded with trucks the dealers can’t sell at profitable prices. So the leaders have turned to 91 year old Kirk Kerkorian for specialized financing such as a preferred equity to keep the company afloat. Don’t be too encouraged, Mr. Kerkorian made a run to take over GM in 2006 but was out of the deal with a fast profit for himself – and no benefit to investors or employees – in 2007. This is all about a fast buck for Kerkorian and a Hail Mary attempt to keep Ford alive by its Chairman and CEO (read article here.)
What if sometime in the next 18 months we read "Due to a collapse in investor confidence, GM (or Ford) unfortunately must announce it is filing bankruptcy today. Lacking sufficient cash, we will be idling 80% of our plants and workforce effective Friday. Our dealers should expect a reduction in output of 90%, and possibly no new car models for the next 4 years as we look for a way to reorganize the company into a much smaller but more competitive entity." What will this do to your business? As 50,000 employees go on unemployment, as unfunded pensions are exposed and the retirees see themselves fall back exclusively on Social Security, as suppliers begin declaring bankruptcy like dominos, what will happen to your business? To your customers?
We all tend to look at the future as an extension of the past. We expect things to be pretty much the same – sort of plus or minus 5%. But what if that’s not what happens?
For decades the U.S. Federal reserve held as 90% of its assets U.S. government bonds. While bailing out banks the last 6 months that percentage has declined to less than 60% – meaning that the "full faith and credit of the United States" as printed on the currency is now 40% backed by mortgage instruments or bank instruments tied to mortgages that are considerably more speculative than a U.S. bond. If you think the banking system can’t fail – like it did in the 1930s – just keep that little fact in mind. What if the dominos don’t stop falling at the banks, and the Fed can’t stop the bleeding, and the currency speculators are right and we lose our national liquidity? Could we lose the ability to borrow money for our busineses – like happened in the 1930s? What if…..
Are you considering all the possiblities? Are you preparing for the bad, as well as the good? What scenario are you planning for? The one that looks like the past, or one that might be different?
by Adam Hartung | Jun 19, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Everybody knows FedEx (see chart here). Pioneers in air delivery, before the days of email we all used Fedex to send documents quickly. For years the name was synonymous with overnight delivery. But, competitors UPS and USPS figured out what FedEx did well domestically, and began offering better service at lower rates. Internationally, DHL improved and eclipsed FedEx services as well. By 2007, FedEx was a once great brand locked into tough competition in a business that was very economically sensitive – and where FedEx had no clear advantage.
A lot of people missed it when FedEx bought Kinko’s. Another great brand, Kinko’s invented the copy center business. Those of us who grew up with carbon paper remember when Kinko’s stores made it possible for everyone to get copies cheap and fast. But, again, lots of people figured out how Kinko’s did it – and pretty quickly Staples, Office Max, Office Depot and many other competitors were offering copies just as fast and cheaper.
Both companies became desperately Locked-in to their Success Formulas. Both needed to change in order to become more competitive. They needed to eclipse competitors by finding new markets and new solutions they could use to grow. Instead, FedEx bought Kinko’s. And both kept doing the same thing. By and large, no one noticed.
Now the 3 (FedEx) plus its acquisition (1 for Kinko’s) sums to 3.5. Both are struggling to compete, trying to do more of the same better, faster and cheaper but to no avail. Now FedEx is announcing it is declaring a quarterly loss – of course blaming rising fuel cost. The fact that they didn’t ever figure out a new Success Fomula that was less fuel dependent is being ignored. In fact FedEx is taking a nearly $900million write off on the Kinko’s acquisition! (read article here) Instead of "synergy" where the combination creates its own benefits, we have value destruction.
And what is FedEx going to do? Why, change the name of Kinko’s to FedEx Offices. Somehow, by destroying the Kinko’s name they will gain some sort of advertising synergy? Maybe that 3.5 will become 3.25 soon.
FedEx needs to develop a new Success Formula. The acquisition of Kinko’s offered the opportunity to figure out something new. But instead, the "operational execution" culture at FedEx caused them to push both companies to simply further attempt maximizing existing Lock-In without much change. There were no Disruptions in FedEx saying "hey, we have to things new and differently to create growth" – nor were there any Disruptions in Kinko’s. Nor was any White Space created to develop a new Success Formula. So both companies kept focused on doing what they always did. Now, both are in growth stalls – and the future is bleak. An improved economy will not turn around FedEx – it will just help all these competitors do better while FedEx continues to struggle – and within a few years we can expect more store closings and weaker service.
