by Adam Hartung | Jun 16, 2008 | Defend & Extend, Disruptions, General, In the Swamp, Innovation, Leadership, Lock-in
Here we sit with nearly $150/barrel crude oil. In the USA gasoline is over $4/gallon, and diesel fuel is nearly $5.00/gallon. For the first time since the 1970s, adjusted for inflation we have new highs for petroleum fuels. But we can’t seem to break our reliance on petroleum. We all know that petroleum demand gives a lot of power to leaders in unsettling countries – where peace is an uncommon word and decision-making bears no relationship to U.S. or European processes. And we know that long-term the oil will run out. And we know that we all would benefit, maybe even the climate would benefit, if we used other "renewable" energy sources. But we don’t. Why not – are we all collectively "stupid."?
Quite to the contrary, we all are acting very rationally. In the 1970s oil went from $2/barrel to $30/barrel. That caused such havoc it sent the U.S. economy into a tailspin. But the major supplier of oil, OPEC, quickly got the message and began pumping more oil. It wasn’t long into the 1980s before oil restabilized at $15-$20/barrel. The U.S. businesspeople breathed a collective sigh of relief, and went on about business without much change.
How brilliant of the suppliers. When the price became so high that Americans truly started investing in alternative fuel sources they quickly lowered the price. They made petroleum competitive enough that alternative technologies, which were less effective, economically unviable. Now we hear they are looking at the world with exactly the same analysis (go to WGN TV web site here for 30 second clip.) They have kept raising price until we are at the edge of making substantial investments in alternative energy – such as reactivating our nuclear program for electicity production – and now they plan to control supply to maintain price.
We are not foolish people, we are reacting economically correctly given current market conditions. We may hate higher energy cost, but we will pay it until there is a more economic alternative. And today the alternatives, from E85 gasoline to hydryogen cars to electric cars simply aren’t as effective and are costly. These alternatives probably would have far better performance given money and time to work on them – but who wants a "less good" solution at the same or higher price?
This is the way it is for all new technologies. They are less good until they find markets where they can be developed into a more competitive solution. These new solutions are what Clayton Christensen called "Disruptive technologies" in his excellent books The Innovator’s Dilemma and The Innovator’s Solution. OPEC’s leaders are pricing to make sure that oil remains the best economic solution for as long as possible – so they raise price but not too much.
The only way to change our reliance on petroleum is to develop a replacement. But who will pay? Who will pay for the less good solution? It would be an unwise consumer to invest in an electric car when it costs more and lasts a shorter time. Or in a hydrogen car when there are no refueling stations. Or for a building developer to invest in solar panels when it drives up the total cost of rent for his tenants.
Baring intervention, we will keep using petroleum until the supply declines to the point that there is no choice but to develop an alternative. When the petroleum becomes so rare that the cost goes so high that the other solutions become relatively cheaper. That could take many more decades. And could entail more wars and other very costly societal impacts.
The only way out of this connundrum is to use either penalties for the fossil fuel (such as taxes) or to provide subsidies to the less economical solution. And these penalties/subsidies have to be implemented by the government. But in a society, like the U.S., that is Locked-in to concepts of "free markets" and "no taxes" and "no subsidies" these programs are not attractive to politicians who must stand for re-election. What politician wants to be the one who voted to raise the gasoline tax $.50/gallon? Who wants to be accused of "pork barrel politics" for providing a subsidy of $3,000 for buying an electric car (especially if made in Japan or Korea)? Or giving a real estate developer a $200million grant to install solar panels? Or paying a farmer $50million and then giving a company $1billion to build a windmill farm?
As long as we remain Locked-in to our assumptions about the benefits of free markets, low taxes and no subsidies we will continue to march down the road of continued fossil fuel dependence. Economically, it will always be cheaper to sustain petroleum than develop a new solution. The only way we can overcome this will be to Disrupt our approach to energy. Future behavior is highly predictable when we have current industry executives, who want to sustain petroleum as long as possible, setting our energy policy. They will always make the case for drilling more holes, opening new mines and building new refining facilities. That, on the margin, is currently the most economic solution. Only by Disrupting our approach to energy – then creating White Space for new solutions to develop – can we ever change. We have to create the projects to test these new solutions. To learn and make advancements in order for the new technology to become economically more effective. And that can only happen in places which are not being managed by people that benefit by sustaining the status quo.
99% of the world’s population is paying money, today, to less than 1% for petroleum. This is a vast transfer of wealth. From not only the developed markets in Japan, USA and Europe, but China and India as well. This is making those who lead the middle east and selected dictator-controlled countries in Africa and South America incredibly rich. And none of that money is being invested in an alternative to fossil fuels. If we are ever to change, it requires we address our underlying assumptions about trade and lassez faire economics – New solutions require Americans disrupt their beliefs in doing what is always most economical today – and create White Space where we can develop new solutions that will someday surpass the oil on which we are all so dependent – and tired of complaining about.
All new solutions have a cost to develop. There is an early days when they are less economical than existing solutions. They are either subsidized in the early days, or they don’t happen. At least not until the old solution becomes prohibitively expensive. We subsidize commercial ventures all the time – such as the 20 consecutive years of losses which were subsidized by investors in Federal Express. Or the consistent reinvestment made by investors in unprofitable airlines. Or the losses sustained in the early days of Amazon and eBay. But America’s current Lock-in to old-fashioned economic notions about pricing, taxes and government subsidies means that little will be done to address reliance on petroleum. We could maintain the status quo for another 50 years. And that is unfortunate. Because now is a good time to recognize the Challenge, Disrupt our thinking, and implement White Space projects that could change our energy policy dramatically in just a single decade. But only if we are willing to address our old Lock-ins to an outdated economic Success Formula.
by Adam Hartung | Jun 13, 2008 | General, Leadership, Quotes
After 30 years with Tribune company, the current publisher of The Chicago Tribune is leaving. It’s his second time in the job. Now the company is beleaguered by too much debt in the face of declining traditional readers and revenue – and without a plan to transition with market needs. He feels he’s changed all he can. But as he departs, his statement was well put (read quote here):
"If there’s one thing I’ve learned in 30 years," he said, "it’s success is determined by great people far more than great plans because plans need to change, but great people change with the times."
by Adam Hartung | Jun 11, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
How do you start your planning sessions? Do you talk about historical sales and profit results? Discuss large current customers? Discuss market segments and share? If you do these things, you’re planning from the past rather than planning for the future. These activities define where you are today, and where you’ve been. But how are these important when planning? Isn’t the objective to develop a plan to sell and be profitable in the future – not the past?
Unfortunately, all too many companies use this approach of planning from the past – and it gets them into trouble. For example, Motorola (see chart here). When in despair the Board hired a new CEO in 2004 – and he immediately focused the company on the future, getting a rash of new products out the door in a hurry. Including the successful Razr. But then, they began planning from the past. How could they sell more Razrs? How could they increase Razr share? These efforts led to widespread price discounting. The company sold more Razrs, but it ended up in terrrible shape because it didn’t launch enough new products for a rapidly evolving market.
So now Motorola is behind in "smart phones" (read article here.) This amazes me, because 3 years ago I had the chance to interview a just-left middle executive from Motorola’s handset division. He showed me a beautiful, elegant smart phone that was functional and ready to roll out. He had championed the design and launching the phone. But, Motorola didn’t launch it, and even let him go, because they "didn’t see the marketplace" for smart phones. "People want phones with text today" is what he told me, "and the top brass at Motorola are focused on selling just that." Planning from the past. It wasn’t hard in 2005 to recognize that RIM was growing fast, and all kinds of people would want email access, internet access and other applications from a single device. A little scenario planning and Motorola would have seen that they were perfectly positioned to lead the market. Instead, they kept selling the old product and ended up late to market with new ones — having only 1 smart phone on the market today.
Ford (see chart here) did the same thing. Pick-ups and SUVs were big sellers and very profitable. So Ford kept trying to sell more. And they marketed hard the "beasty" Mustang in ads showcasing the Ford-family chairman. But was it really hard 3 years ago to predict that $2.50/gallon gas would slow sales of these products? Was it hard to predict that growing petroleum demand in India and China would keep oil prices high? There was no scenario planning about what people wanted in the future – only planning for how to sell more of what they had long been selling. So now we find out (read article here) that when Kirk Kerkorian offered to buy 20 million shares of Ford existing investors tendered 1 billion (50x the allotment). Investors have lost confidence in a company that was unwilling to plan for future needs – and now says it will take another 3 years to "retool" for current market requirements.
Doing more better, faster and cheaper is what we all do every day. But when we plan, we must move beyond those activities. We have to develop scenarios for the future in order to see the impact of staying on the current course. For Motorola and Ford, staying the course has hurt them badly. They succeeded well doing more of the same, become category share leaders, technology leaders, and product leaders in what they were doing well several years ago. But the markets shifted. Mobile phone customers moved to more functionality and higher design requirements – things that were not hard to see in scenario development. Auto customers wanted better gas milage. Planning for the future – using scenarios – would have helped both companies overcome Lock-in to old practices that got them into trouble which may sink their businesses. There’s a lot of risk to planning from the past in today’s highly dynamic global markets.
by Adam Hartung | Jun 9, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
In the search for better business performance there is a management doctrine that says "measure what you want to improve, and focus on the measurement." If you chart the metric, you’ll get better results is the theory. But while measuring things tends to alter outcomes, there have been many examples of how hard it can be to measure the RIGHT thing in order to get the desired outcome.
Many years ago the U.S. federal Government Accounting Office (GAO) was concerned about how much was being paid to programmers working for "beltway bandit" consulting firms. These firms were paid by the hour for programmers, and new development could take hundreds of thousands of hours of programming time. So the GAO decided to measure the lines of code per worker per hour – and even set a standard of 35 lines/hour/programmer. What was the result? Incredibly long programs. Some so long they would abort the computer before compiling and the program wouldn’t even run. What a computer needs isn’t more code – it’s more efficient code. "Good" code. Good code gets more done with fewer computer cycles, less memory and less disc space – all really important to mainframe applications like the government was buying. By measuring lines of code the GAO made outcomes worse, not better.
Now Tribune Company is doing the same thing. The company is going to measure the "content output" per writer to determine productivity (read article here.) So what would you expect? Maybe longer stories? Doesn’t this remind you of high school when teachers said "give me 1,000 words" rather than making you write something intelligent? Do the length of articles determine the value of journalism?
Tribune Company is in a mess. Like I predicted back when the Sam Zell deal to take over the company was created, the market shift in newspaper readers – and thus advertisers – was not going to reverse. Leveraging Tribune with a ton of extra debt would hasten its demise, as the newspaper-centric company would have to cut costs even more drastically than it had in the past – and would have no resources to define a new solution for delivering news and ads to customers. But Mr. Zell and his lenders looked the other way and dove into this project full of real estate developer bravado that he could do what know one else in America had done – turn around a declining subscriptions and ad revenue.
Now, with no reversal of declines in sight, Mr. Zell is looking to whack cost. And he’s looking to do it by improving the number of words written per reporter. Really. This reminds me of the "books by the pound" banners I used to see in strip malls. Only when I went in the stores the books were nothing anyone wanted to read – and were best used as fire tinder (mostly out of date textbooks and obscure overruns of academic works.) Do I want my reporting "by the pound"?
Companies deep in the Swamp, and falling into the Whirlpool, look for anything to try and save themselves. At a time when new ideas are desperately needed, the ideas generated are usually geared toward some sort of draconian notion of cost savings – like in this instance somehow quadrupling the output of words per writer. Or, as this article even discusses, counting how many pages the paper will be and using page counts to determine the "value" a reader receives! Really! Like in the internet age we all care about how thick a book is – or newspaper. We want the important news, we want it accurately, and we want it fast. What we don’t want is a bunch of stuff we won’t read and that gets in the way. There are 4 page bi-monthly newsletters that cost $1,000/year – demonstrating it’s the value within what we read – not the quantity- which determines what we will pay.
A few years ago Reuters news syndication found itself facing financial ruin. But it got creative. The company shut down all operations in England and USA (a major Disruption) and put all of their copy editors in Bangalore (creating White Space.) Today, 100% of the releases you find on the web or in print from Reuters come from Bangalore. Reuters built an entirely new Success Formula with entirely different costs for old and entirely new internet customers. Today, Reuters is smaller but doing nicely. And that’s what companies in the Swamp, facing the Whirlpool, have to do. Completely Disrupt operations and open White Space far removed and with permission to find a new Success Formula.
Tribune Company cannot survive as it formerly existed. Today, it’s doubtful the sum of the parts are worth the debt. The company has to transition to a "new media" world where the internet is everywhere and information is medium free. No one cares if it’s print, TV, radio or internet. Information is now seemless – something Mr. Zell still doesn’t understand. And he can count words or pages all he likes – but he won’t save Tribune company by trying to whack costs within the traditional Success Formula.
by Adam Hartung | Jun 5, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
"United to park dozens of jets" (Chicago Tribune article here). "Janesville facing future without GM" (Chicago Tribune article here) [note: Janesville, WI is a 63,000 person town in southern Wisconsin employing 2,200 in a local GM truck plant]. In both instances, company management is simply lopping off its use of assets – shuttering assets on its books – because it has no profitable use for them. Imagine that, owning dozens of airplanes or complete manufacturing plants and having no profitable use for them. Not even selling them, just not using them.
Regarding United "ground dozens of its ..aircraft..as part of a sweeping round of cuts intended to help the carrier conserve cash and survive as a stand-alone company in daunting times." When journalists talking about conserving cash to survive, it tells you this is a company on the brink of failure. Imagine you’re in the desert, running out of water, no one knows where you are, and you decide to just sit and not move so you can conserve your energy and remaining water. What will the end be? Baring a miracle, you’ve decided to die on the sands.
Regarding GM "Wagoner, the chief executive of General Motors Corp., made the announcement in Delaware: Janesville and three other plants will be gone because of a dramatic market shift from large trucks to fuel-efficient cars." Now, exactly to whom was this "dramatic market shift" a surprise – and even dramatic? Fuel prices have been going up for 5 years, and hybrid cars have been the hottest ticket for 3, and the decline in large truck/SUV sales has been happening since gasoline hit $2.50/gallon. What exactly has become recently "dramatic"? How about expected? Predictable? Planned for? Obvious?
Air India, Singapore Airlines, and Lufthansa are just 3 airlines that are expanding flight capacity profitably. Toyota, Honda and Kia are all growing capacity. Explosive growth is occurring at Tata Motors. The demand for travel and cars hasn’t declined – but you’d think so if you listened to executives from United and GM. Their Lock-in to doing what they’ve always done has caused them to miss market shifts that were as predictable as – the calendar. They blame market shifts. They should blame themselves. The headlines say it all.
by Adam Hartung | Jun 3, 2008 | Defend & Extend, General, Innovation, Leadership, Lock-in
Lately, there’s been lots of press about mergers. With the economy listing, reports are rife that retailers need to merge to survive. Airlines need to merge to survive. And now we read beer brewers need to merge to survive (read article in Chicago Tribune here). Is this true? Do these businesses have to merge to survive?
Most mergers are based on the simple idea of "economy of scale." This is a very Industrial Revolution idea that the company with the biggest manufacturing plant has the lowest cost – and thus wins! Advocates claim that you keep buying competitors so you build more volume in order to spread out marketing, advertising, administrative (accounting and legal for example) costs over more volume – because these costs don’t need to rise as fast as volume (in their estimation). Similarly, within manufacturing or operations there will be costs that don’t rise as fast as volume, and thus the biggest volume competitor should end up with the lowest per-unit cost. And this supposedly leads to victory because the low cost competitor always wins. As though product differentiation, service differentiation and other factors are irrelevant.
In the case of beer, we’re now expected to believe that unless a company has the most beer volume GLOBALLY they can’t afford to stay in business – so poor Budweiser (see chart here) with its multi-million case annual production is such a small fry it’s going to become toast. Do you really believe that? Will combining Budweiser with a Belgian and Chinese brewer suddently, somehow, make Budweiser a more profitable brand? Just because its parent has more global market share?
Well, we all know we know longer compete in an industrial economy. Today, economies of scale advantages are pretty rare. Competitors can get 99% of scale advantages at pretty low volume by sharing resources – from ad buys to distribution centers to trucks and manufacturing plants. Furthermore, there are lots of people out there wanting to invest in "hard assets" so finding money to expand facilities is very cheap – leading to the lowest capacity utilization for fixed assets in American history! Plants aren’t busting with volume as they expand. Quite the contrary plants are regularly being closed to consolidate capacity into other locations! Economies of scale are a proven concept – but having them as a competitive advantage is another point entirely. We now compete in an information economy where the rules are entirely different than before.
So why all this merger mania? Firstly, because so many people believe in economy of scale advantages (which worked really well in the 1960s and 1970s) they keep believeing in them even though they no longer exist. And because merging is something a CEO can drive from his own office. If he runs a company wtih $100 revenue, and he buys another with $100 revenue, he now controls more people, more plants, more costs, more revenues – and by gosh hasn’t he done competitively well? He’s taken over the competition, and made his company bigger and doesn’t that mean competitive success? Given how we hero-worship the CEOs of large companies, and provide more hero attributes the largest of these, we demonstrate regularly that we think of a merger buyer as the "winner" and the merged company as a "loser." But is that true when the only growing beer brands are the craft beers and they are considerably more profitable than the traditional part of the business? Isn’t it time to focus on a different way to compete if we want profitable growth?
Does merger activity produce better products, lower prices, better customer satisfaction, lower cost, more jobs, better communities and higher returns for investors? Oh my, but this are tough questions. Virtally all academic studies of mergers have shown the opposite. The merger reduces product innovation and new product launches, creates higher prices (in fact that’s the objective of airline mergers), lower customer satisfaction, create little change in per unit cost (it goes up more often than down), fewer jobs as layoffs dominate, and investors of the "winning" company receive nothing for the effort.
We have to move beyond out-of-date ideas like "economy of scale advantages" if we’re going to break out of the no-growth, no-jobs economy dominating the U.S. since 2000. We need to use Disruptions to drive new ideas, and implement White Space to test them.
Illinois Tool Works (see chart here) has demonstrated that companies can be very successful with mergers. Acquisitions aren’t inherently bad. But they are if they are done for the wrong reason – like economy of scale advantages. Instead, ITW uses mergers need to make better products, improve customer satisfaction, develop more new products and launch them leading to better revenue growth and better cost/price performance leading to higher profits for investors. Mergers can be very valuable to successful strategy – but they have to be well designed, thought through and managed for those results – not merely assumed to produce lower cost because volume is being consolidated.
by Adam Hartung | Jun 3, 2008 | Defend & Extend, General, Innovation, Leadership, Lock-in
Lately, there’s been lots of press about mergers. With the economy listing, reports are rife that retailers need to merge to survive. Airlines need to merge to survive. And now we read beer brewers need to merge to survive (read article in Chicago Tribune here). Is this true? Do these businesses have to merge to survive?
Most mergers are based on the simple idea of "economy of scale." This is a very Industrial Revolution idea that the company with the biggest manufacturing plant has the lowest cost – and thus wins! Advocates claim that you keep buying competitors so you build more volume in order to spread out marketing, advertising, administrative (accounting and legal for example) costs over more volume – because these costs don’t need to rise as fast as volume (in their estimation). Similarly, within manufacturing or operations there will be costs that don’t rise as fast as volume, and thus the biggest volume competitor should end up with the lowest per-unit cost. And this supposedly leads to victory because the low cost competitor always wins. As though product differentiation, service differentiation and other factors are irrelevant.
In the case of beer, we’re now expected to believe that unless a company has the most beer volume GLOBALLY they can’t afford to stay in business – so poor Budweiser (see chart here) with its multi-million case annual production is such a small fry it’s going to become toast. Do you really believe that? Will combining Budweiser with a Belgian and Chinese brewer suddently, somehow, make Budweiser a more profitable brand? Just because its parent has more global market share?
Well, we all know we know longer compete in an industrial economy. Today, economies of scale advantages are pretty rare. Competitors can get 99% of scale advantages at pretty low volume by sharing resources – from ad buys to distribution centers to trucks and manufacturing plants. Furthermore, there are lots of people out there wanting to invest in "hard assets" so finding money to expand facilities is very cheap – leading to the lowest capacity utilization for fixed assets in American history! Plants aren’t busting with volume as they expand. Quite the contrary plants are regularly being closed to consolidate capacity into other locations! Economies of scale are a proven concept – but having them as a competitive advantage is another point entirely. We now compete in an information economy where the rules are entirely different than before.
So why all this merger mania? Firstly, because so many people believe in economy of scale advantages (which worked really well in the 1960s and 1970s) they keep believeing in them even though they no longer exist. And because merging is something a CEO can drive from his own office. If he runs a company wtih $100 revenue, and he buys another with $100 revenue, he now controls more people, more plants, more costs, more revenues – and by gosh hasn’t he done competitively well? He’s taken over the competition, and made his company bigger and doesn’t that mean competitive success? Given how we hero-worship the CEOs of large companies, and provide more hero attributes the largest of these, we demonstrate regularly that we think of a merger buyer as the "winner" and the merged company as a "loser." But is that true when the only growing beer brands are the craft beers and they are considerably more profitable than the traditional part of the business? Isn’t it time to focus on a different way to compete if we want profitable growth?
Does merger activity produce better products, lower prices, better customer satisfaction, lower cost, more jobs, better communities and higher returns for investors? Oh my, but this are tough questions. Virtally all academic studies of mergers have shown the opposite. The merger reduces product innovation and new product launches, creates higher prices (in fact that’s the objective of airline mergers), lower customer satisfaction, create little change in per unit cost (it goes up more often than down), fewer jobs as layoffs dominate, and investors of the "winning" company receive nothing for the effort.
We have to move beyond out-of-date ideas like "economy of scale advantages" if we’re going to break out of the no-growth, no-jobs economy dominating the U.S. since 2000. We need to use Disruptions to drive new ideas, and implement White Space to test them.
Illinois Tool Works (see chart here) has demonstrated that companies can be very successful with mergers. Acquisitions aren’t inherently bad. But they are if they are done for the wrong reason – like economy of scale advantages. Instead, ITW uses mergers need to make better products, improve customer satisfaction, develop more new products and launch them leading to better revenue growth and better cost/price performance leading to higher profits for investors. Mergers can be very valuable to successful strategy – but they have to be well designed, thought through and managed for those results – not merely assumed to produce lower cost because volume is being consolidated.
by Adam Hartung | Jun 2, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
We usually say we know when someone is dead. But in today’s modern world, we’ve found out that often there are people who are alive now, but we know will not survive more than a few hours or days. We see trees that have rotten roots – but look alive for another season or two before so little sap rises that no more leaves sport in spring. The arborist tells us that we might as well cut it down, before it falls in a big wind causing avoidable damage, but we keep hoping the tree will revive next year. The reality is that we tend to be very optimistic about the future even when we have no reason to be so. We want to believe things will get better right up to the very, very end.
Businesses operate that way as well. When their Success Formulas become obsolete we see signs of root rot in their lower customer satisfaction ratings, poorer performance against industry metrics, lower market share, weak reactions to competitors (especially new ones), higher prices and declining margins. But management is always saying things will get better. Even if there is no reason to believe this.
That can now be said for United Airlines. United has always been one of the "major" airlines (as if Southwest wasn’t major – but that’s not the purpose of this entry.) But as the Chicago Tribune headlined on Sunday "United up against a new reality for airlines" (read article here.) United spent 3 years in bankruptcy after the events of 9/11/01, and promised it had turned the corner when it came out of bankruptcy. But now the company is in deep trouble again with rising costs, declining ridership and no plan for how it will try to survive this very bad economy for airline travel. Customers are being hammered by rising plane ticket prices, new charges for baggage checking and the worst on-time performance ever. The employees are struggling as the company keeps trying to cut pay even more, despite the fact that no flight attendant could live on United’s new hire pay.
United developed root (or should I say route) rot a decade ago. The hub and spoke system designed during derugulation in the 1970s has proven to use lots more fuel, extend flight times for customers making layovers, and take more employees and gates (which have charges) than a point-to-point system. Likewise, a commitment to customizing aircraft for routes has led to a heterogenous and complex set of equipment that is costly to fly and maintain. Amazingly complex pricing has led customers to look at other airlines first when seeking tickets, recognizing that United’s list prices are unrealistic but the customer has no idea how to find a decent price at United when it is incredibly easy at Southwest. And rather than develop a more flexible workforce in its union contracts, United settled for arguing over pay rates leading to an unhappy workforce more focused on its bad pay than happy customers.
United had a chance to fix its problems when it launched its "low cost subsidiary" named Ted. But this wasn’t White Space to try anything new. Ted had to follow all the old United rules. Customers soon learned Ted wasn’t a bargain, it was just the south end of the UniTED mule. Then again, when the government shut down the airlines for a week in 2001 United had the opportunity to propose serious changes to its operations including route changes, renegotiating contracts with unions and vendors and simplifying its rate structure. But instead United focused on re-opening exactly as it had operated before. Which soon led to bankruptcy.
Lately we’ve heard that United needs to merge with another airline to succeed. Even the top brass at United have started to realize that simply getting bigger will not make United more successful. It could even make matters far worse. Higher fueld prices are just the last dagger into the United Success Formula causing the company to face potential failure. But the big problem is that United didn’t admit its problems, its Lock-ins to a failed Success Formula, a decade ago. Now, with the problems piling up fast, its not clear United can be saved. Despite its size, United may well go the way of Pan Am, Eastern, Braniff, Republic, Air Midwest and other failed airlines. There will remain optimists to the bitter end, but reality isn’t hard to see. United is in the Whirlpool and it’s going to take a miracle to pull the company out of it now.
by Adam Hartung | May 30, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
It was Ross Perot who made the phrase "you’ll hear a great big sucking sound" famous when he said them during his Presidential debate with Messrs. Bush and Clinton – referring to the impact he felt NAFTA would have on employment as jobs transferred from the USA to Mexico.
I’ve borrowed it today to refer to the situation at Sears (see chart here.) Hard to believe that it’s only been 3 1/2 years since Ed Lampert used his control of KMart to purchase Sears. Today the combined company is valued the same as it was then – but it’s on a fast track lower. Since the acquisition, it’s all been sucking sound around the Chicago suburbs where Sears is headquartered. Now, the most recent headline from The Chicago Tribune (read article here) says it all "A giant continues to unravel."
The amazing thing was that anyone ever believed this acqisition was going to be good for anyone. KMart had gone bankrupt, and Mr. Lampert used real estate sales (many to Sears!) during the best real estate market in 80 years to fund his takeover of the company. Somehow, people translated that experience into a big win for the struggling, dying Sears chain. Sears had been getting trounced on all sides for over a decade when Lampert took over. And neither management at Sears, nor Mr. Lampert, had any idea what they were going to do to reverse fortunes.
Smart money initially talked that Mr. Lampert would quickly repackage the Sears real estate into trusts and unload them onto the super-hot real estate investors. But he didn’t. Instead, he said he would turn around the company’s profitability. But his plan to do that was effectively doing more of what KMart and Sears had always done, only with less advertising, less marketing, less spending on merchandising, lower pay for employees, fewer open stores and more limited product lines. Uh huh.
Very quickly Mr. Lampert’s cuts produced better margins. Sales declines happened, but not as fast as the cost cuts, producing a very short-term uptick in profits and cash flow. If you sell down inventory while lowering costs you generate cash. So then the smart money then said he was turning Sears into a vast private equity firm that would milk Sears oh so adroitly of its value and invest the money in extremely high return projects – after all Mr. Lampert previously made a fortune as a hedge fund manager. But, the world was awash in liquidity and there were more hedge funds and private equity firms than deals, so the profit of such projects was declining precipitously (even Warren Buffet complained about the prices money managers were paying to do deals as he sat on his cash hoard). Meanwhile, it was Lampert’s hedge fund that had bought KMart which then bought Sears – so in practicality it was Sears that was to make the hedge fund money – not be a hedge fund. Uh huh.
Now, everyone is wondering how anyone can win at Sears. Real estate markets stink. Retailing stinks. Sears revenue per store, and number of stores, has declined for 5 years along with cash flow and profits. Sears has finally made its way from the Swamp to the Whirlpool – and thus "the great big sucking sound" that is what you hear when the last water finally swirls into the drain.
There were lots of optimistic folks all along this journey for Sears. Jim Cramer of Mad Money television fame pumped and pumped his love of Mr. Lampert. To this day the article above quotes a money manager who has recently bought 500,000 Sears shares expecting a brilliant Lampert play (although he has no idea what it will be.) We love to be optimistic. But this game is over. Companies remain in the Swamp, fighting alligators and mosquitos while making no money for investors, creating no new jobs for employees and providing no new opportunities for suppliers, only so long as they have ample resources to fund the messy swamp fights. But due to low returns, and the ongoing sale of assets to preserve the losing battle, there is no way the business can ever return to success. Woolworth’s, S.S. Kresge and Montgomery Wards are just 3 retailers that learned this the hard way. Optimism feels great, but it is unwarranted as the business heads toward its inevitable demise.
When companies are in the Swamp they are just paddling around waiting for the event that opens the drain and sucks them into the Whirlpool. They never know what that event will be – in fact almost no one does. But inevitably some event occurs which simply requires more resources than the business has and in very short order – it’s sucked away. In Sears case I’m sure Mr. Lampert will blame President Bush, Congress and the Federal Reserve for a consumer-led recession which he could not have been expected to predict 3 years ago. He’ll say his problems are their fault. Uh huh.
But in reality, Mr. Lampert could have used Disruptions and White Space to turn around Sears. He just didn’t. He left management’s old Success Formulas, believing in the power of the Sears brands (Kenmore, Craftsman, etc.) and the store locations to save the company. Uh huh. And on top of that he had ultimate faith in his own Success Formula – his financial machination skills to bleed the company of cash or forever bamboozle investors with multiple complex deals – something no one has ever done successfully. Both of these Success Formulas were out of date, and would not work. And since Mr. Lampert did not believe in Disrupting them, and creating White Space to do radically new things, this venture never had any hope.
And it still doesn’t. If your optimistic about Sears open your window and listen – I think you’ll hear a great big sucking sound coming from the mall anchored by a Sears store down the street.
by Adam Hartung | May 28, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Most businesses plan by using two very simple processes. First, managers try to extend the past into the future. Planners build a track record of data on everything from sales and market share to prices and economic variables, and then they extend that into the future. Works well if nothing changes. To consider if something might change, to fine-tune the plan, managers take out a crystal ball and guess about the future. The result? Businesses end up planning for a future that is pretty much like the past.
Then stuff happens. And the business finds itself in the middle of competitive situations they didn’t plan for, and don’t understand. Usually at that point the executives say "no one could have expected this" and make excuses for their poor performance. Not very for the investors who see their share price drop – or employees that lose bonuses, pay raises, benefits or jobs – or vendors that lose orders.
This is exactly how Ford is acting (see chart here). Ford is now saying it won’t turn a profit until 2010! After years of substandard performance, and hiring an extremely highly paid new CEO, the company is still losing money, sales continue declining and no brightness is offered for the future. And the company is blaming this all on what they claim is the unpredictable increase in the price of oil and gasoline (read article here). Full of excuses, Ford is saying that it simply could not predict the decline in large truck sales and growth in small car sales and they could not have shifted production quickly enough to meet market need. So they are going to lay off more workers, take more losses, and put the company in increasing peril of complete failure as they wait for the marketplace to turn around.
Yet, if we look at Toyota, Honda, Kia and many other auto companies they do not have this problem. Is it due to them being small-car only? Of course not. Look at the Honda Ridgeline, a full size truck, as well as the complete line-up of luxury cars offered by these offshore competitors. Somehow, for the last 35 years, these companies seem to have always been able to make the cars customers want when they want them, thus growing revenues, market share and profits.
Rather than simply extend the past, there is a better way to plan. Use scenarios. If every year business leaders sat down and thought up 10 future scenarios, they could plan for them. Would it have been unrealistic, and without merit, for the top brass at Ford in 2006 to have said, "What if the price of oil doesn’t fall or flatten, but instead keeps going up? What if it goes to $90? $100? $150? $200?" And would it have been unrealistic for them to ask "what happens if Tata Motors of India starts exporting their $2,000 auto into Europe and Asia?" Now, I didn’t say these things would happen. But what would the impact be if they did? And what would Ford be able to do if leaders seriously considered these options in advance?
Businesses need to stop trying to plan using past extensions and crystal balls. Instead, they need to create scenarios about the future. Then really explore the impact. These scenarios can open avenues to consider better plans. Plans that don’t require the past perpetuate (or return). Better options can be developed that cover multiple scenarios. And then each year, growth and profits can continue as the organization adjusts to real world conditions and tactics can be utilized based upon the scenarios discussed.
It’s too bad Ford doesn’t try this. If it did, the company might be able to walk away from the brink of disaster and start developing a set of plans that can make it more competitive. And we wouldn’t be waiting to see if 2010 brings small profits, or bankruptcy.
