by Adam Hartung | May 22, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Unfortunately, most of the time Defend & Extend behaviors don’t work. They don’t improve revenues, cash flow, profits or returns for employees, suppliers and investors. A case in point are the large U.S. domestic airlines. (This blog is focused on American, United, Delta – the hub-and-spoke "majors" – and specifically is not about Southwest and other point-to-point carriers that are doing far better with growth and profits.)
Today we’re learning that American Airlines is going to charge some fliers $15 for their first checked bag (read article here.) Locked-in to old practices, even this is more of the same airline behavior. In reality, not everyone is charged for checking, there is a complex set of circumstances that determines who pays and who doesn’t. Just like airline fares, this fee is almost incomprehensibly complex for the typical customer – another typical airline practice (unbelievable, incomprehensible complexity driven by over-analysis of data and over-segmentation when addressing a problem.) Even worse, at a time when we should be encouraging everyone to check their bags (and giving these bags very comprehensive screening) so we can smooth boarding and ease onboard congestion the airline institutes a practice that will create more problems than solution.
Why do this? Because the airlines are desperate for revenue and are turning to fees (read article here). As the cost of flying increases due to the largest cost component, jet fuel, skyrocketing their answer is to institute fees on bags, etc. Wouldn’t the obvious answer be to raise price? When your costs go up by a doubling, wouldn’t you simply say you have to charge more? That may be easy for us to say, but not to the airlines.
The airline leaders aren’t stupid (even though it may appear that way to us travelers sometimes). Instead they are Locked-in to the point they have limited their options for solutions to a very few – which may not save them. When deregulated the airlines had many options. But they very quickly Locked-in on a Success Formula – even before it was proven to make money or satisfy customers.
- They decided to use a hub-and-spoke system to move passengers rather than a more efficient point-to-point system. This was based on the notion of low variable costs (such as fuel) allowing for efficiency losses to be overcome by volume. This put all of the airlines into an intense volume-seeking game.
- They invested enormously into aircraft. In excess of demand, they purchased aircraft in order to drive volume. Very expensive aircraft that are high FIXED COSTS which then increased the demand for more volume.
- They invested heavily in airport gates, trying to get "mini-monopolies" in cities by having the most gates. This again was a high fixed cost investment requiring them to seek volume.
- They built very deep hierarchies modeled on the military. Most early airline executives, and pilots, had military backgrounds so they built their commercial operations on the Locked-in organizational systems they knew. These large and deep hierarchies again became expensive and semi-fixed costs driving the need for more volume.
- They created antagonistic relationships with unions, based on industrial-era views of how to manage employees. They treated employees like nearly fixed costs by relying on conflict-based union relationships, rather than creating a more variable cost approach being developed in most service industries.
- They relied on amazingly complex analytics (literally, the most sophisticated math available) to try finding ways to get people to purchase empty seats. This led to phenomenally complex pricing schemes which trained customers that they should shop, shop and shop to find the lowest price – because there may well be seats for $100 available when the "list" price is $1,000. Causing the complexity to only worsen.
- In the rush for volume, they relied on price as the primary competitive factor. Customer Service was ignored as the airlines Locked-in on price, price, price to try filling airplanes.
- There was no White Space to try anything new. When they launched "discount carriers" (Ted, Song, etc.) they made these subsidiaries use the same planes, gates, reservation systems, etc. as the parent, with the only change being lower pay for employees and less food for customers.
Amazingly, most of these Lock-ins were designed by extremely highly priced management consultants who used industrial-era manufacturing concepts to create the newly deregulated airlines’ business models. These consultants believed that they could treat the airline like a manufacturer, with each plane a machine on the line that needed to be utilized and the hubs as distribution systems. Neat concept, only within months it was clear this approach made no money in an information-intensive services business. It created enormous fixed costs, but negative cash flow and no profits. the airlines had to constantly go back to investors for more equity, and became enormously profitable customers for debt lenders.
With each passing year the airlines Lock-in produced no better results. Some airlines, like Eastern, Braniff, National and Republic went bankrupt. Yet, these "majors" kept doing more of the same, hoping if they just got fast enough, cheap enough and created enough volume somehow they would succeed. Only, the more they did the worse things got!
Now the leaders of these airlines are facing an entire industry bankruptcy (read article here.) Literally, we’re talking about all of the top 5 airlines running out of cash and failing in less than one year. This would be a national disaster – even a national security disaster. Yet, because of Lock-in these leaders see no options beyond hoping to save their airlines with tricks like charging for checked bags. Uhm, "get real" comes to mind. Baggage fees will not fix the horrible results of these airlines who have "been there, done that" as regards bankruptcy more than once. In the past, they cut employee pay some more, refused to pay several debts in full, and wiped out shareholders finding a way to stay alive. But this time, with their #1 cost (jet fuel) so high and showing no sign of coming down soon, they could well walk off the proverbial cliff of disaster with no solution.
D&E behavior has never worked for the airline industry. Not since the first days of deregulation. Yes, many more Americans fly than ever before. But for the airlines themselves (and their employees, suppliers, investors and customers), their Success Formula has been an unmitigated disaster. And this is far too often the result of Lock-in and D&E behavior. D&E causes businesses to do more of the same until they eventually fail.
by Adam Hartung | May 19, 2008 | Defend & Extend, In the Rapids, Innovation, Leadership, Lifecycle
I attack Defend & Extend Management a lot. Too often, managers try to succeed by just doing more of the same – often faster or cheaper. But when markets have shifted, that can produce ever declining performance instead of improvement. Then why is D&E management so popular, and so frequently taught in business school?
When a business is in the Rapids, because it is participating in a growing market, then D&E Management can produce very good results. GM in the heyday of auto sales made huge money being the largest manufacturer – and Dupont was the same during the zenith of chemicals (remember when Dustin Hoffman was given one word of advice post-college – "Plastics" – that was a good time for DuPont). More recently, first Wang then DEC did tremendously well during the growth of mini-computers. And Dell was an enormous benefactor of the growth in PC sales.
Today, Google (see chart here) is riding high practicing D&E Management. The market for searches is continuing to grow. And we’re still in the early days for internet ad placement. Google is doing well merely by doing more (read AP article about Google here.) When the market is growing at 20%/quarter, management is incredibly busy just trying to hire people, get them on staff, get them directed and keep up with customer demands. Market growth keeps Google growing and making money – and management is encouraged by analysts, and investors, to keep doing more of what it has always done. D&E Management is working – producing results.
And this will continue until the market shifts. Companies that catch these growth waves can do well for many years – sometimes decades. Recall the examples above. Dell rode high for 20 years before growth stalled – along with PC sales and tremendous increase in competitiveness of competitors. And the best leadership teams realize they can’t predict when this stall will happen. They just know it will. The cause will always be something unexpected, and thus a shock to the existing Success Formula results. So the best leadership teams in high growth markets practice D&E, and at the same time create and invest in White Space.
The best time to prepare for a market to slow its growth, or become victim of a Clayton Christensen style disruptive technology shift, is when things are going great. When growth is creating plenty of cash, and investors are throwing money at you. During this time, it’s really smart to Disrupt yourself from time to time and set up White Space projects that can focus on alternative Success Formulas. This prepares the foundation for long-term growth, rather than the boom-and-bust scenario of, say, DEC.
Cisco Systems (see chart here) is a case in point. When most internet companies were getting destroyed at the end of the 1990s Cisco relied upon the foundation for continued growth developed by investing in plenty of projects that weren’t the current fast growers during previous years. Rather than just trying to D&E what had worked (and it was working really well to sell network devices to telecom companies) Cisco had already started looking for other competitive products in other markets. As a result, the cliff fall off that lambasted Sun Microsystems, and 3Com, had a far less impact on Cisco. Cisco’s ongoing Disruptions, by constantly trying to obsolete its own products, with a never-stopping focus on looking at future scenarios, helped the company prepare for the dot.com crash. Now Cisco is as strong as ever and continuing to make tremendous returns in a very different competitive marketplace.
Google is doing great. It’s Success Formula has been Locked-in and its is creating tremendous results. And this scenario is likely to continue for years. In the Rapids, life is fun at Google. D&E Management is making money. But keep your eyes open for a market shift. Without White Space, Google could quickly be the next DEC.
by Adam Hartung | May 17, 2008 | General, Leadership, Openness
It’s been 32 years since Network emerged from Hollywood to win 4 academy awards be nominated for 6 more. At the time, CBS was #1 in broadcast news, and Walter Cronkite was a fixture on the American landscape. All Americans watched as Walter told us about the shooting of President Kennedy, and as a man first put his foot on the moon. In the late 1970s we all scoffed when Network projected a future in which news would become entertainment, when a "newscaster" could become a ranting lunatic like Howard Beal the "mad profit of the airwaves" (anyone watch Jim Cramer on CNBC lately, or Bill O’Reilly on Fox News), and ratings would be so critical that people would live or die by them.
How little did we know the predictiveness of this film. It wasn’t long before Lawrence Tisch took over CBS, drastically slashed costs in news and put the network focus on ratings over content. What that set in motion is now almost hard to recognize, as 3 decades later U.S. network news is struggling to survive in the internet age. Seperating news from comment, and fact giving from entertainment, has not only allowed "The Daly Show" to be considered news (on The Comedy Channel) but thousands of websites to get into the "news" business. Increasingly, tens of millions of Americans rely on the internet for their news – abandoning newspapers and televion as well.
And now CBS has purchased Cnet (read article here). Paying 4.5 times revenue, and over 100 times earnings. But this may well be a survival issue for modern news reporting. We will never again return to the family all watching an anchor, or even depending upon television to report an election victory or breaking item (as I write this I’ve been updated via the web that within the last 3 hours Senator Kennedy of Massachusetts appears to have suffered a stroke – something network news watchers won’t learn about for another 6 hours). CBS must find a way to evolve or watch as its ability to maintain "news" shrinks into oblivian. The price CBS paid appears high – but what is the right price for survival?
Will this work? History has warned us to be skeptical. When Time Warner of HBO, CNN and other cable TV fame bought AOL it was heralded as a change in the media landscape. But the acquisition made no difference on Time Warner’s future as AOL stopped evolving and both companies found themselves struggling to survive.
For CBS to avoid this fate it must be careful how it treats this acquisition. Firstly, CBS MUST Disrupt the existing CBS organization. Make clear that not only news, but traditional entertainment (such as prime time dramas and sitcoms) is losing audience to the web. More people watch top YouTube flicks than watch most network television programs. The people at CBS from the top all the way to the bottom have to see their Lock-ins to traditional business attacked, and made clear that the future will be very different (much as Mr. Tisch did when he took over the powerful but struggling enterprise so long ago.)
Secondly, CBS must make sure Cnet is managed in White Space. Cnet must be challenged to LEAD CBS by setting high goals and then accomplishing them. CBS must resource Cnet to succeed, operated in White Space, and then work very hard to make sure EVERYONE becomes as familiar with Cnet as we now know about Google (a lofty goal – but the one to shoot for). Traditional CBS must be guided to watch and learn from Cnet. To rapidly adopt what works in this White Space project. CBS must migrate toward the internet-enabled media future, and Cnet must be the guiding group providing insight to what will work. This is a big challenge for Cnet – but it must take on this challenge and be held accountable for results.
CBS is facing big Challenges as media goes through this wrenching change. No longer do newspapers "own" a city and therby its advertisers. No longer do networks – broadcast or cable – have a grip on viewers that virtually forces them to watch ads as well as programming. The web has changed what we can do to be informed and entertained. Google is leading this market change today, followed by Yahoo! and News Corp. Will CBS make it through the challenges? Will CBS remain a viable competitor in the media landscape of 2020? Or will it disappear like a dinosaur overtaken by a shifting environment? It depends on what CBS does with Cnet. Managed right, this could be the most powerful decision the company makes this decade. Managed wrong, and CBS could be something we have to teach in high school history as students discuss the "golden age of TV."
by Adam Hartung | May 15, 2008 | Disruptions, In the Rapids, Innovation, Leadership, Lifecycle, Openness
General Electric (see chart here) announced today it is looking at ways to sell its appliance business (see article here). Great move! Too many companies hold onto a business for all the wrong reasons, and refuse to take action to keep themselves in the Rapids.
GE needs to Disrupt. The old CEO, Jack Welch, was famous for taking Disruptions. That’s how he got the nickname Neutron Jack. Keeping his eyes on the future, he kept GE focused on new opportunities and he used White Space to develop new Success Formulas. And while he had the top job GE performed admirably, growing multi-fold. If a business didn’t meet goals, Mr. Welch sold the business and invested his management talent and money in better opportunities.
Now GE finds itself nearing the Flats. Last quarter saw a profit decline. Two in a row, and the company falls into Growth Stall from which it has only a 7% chance of returning to consistent growth exceeding 2%. So that blip in a century-old record was a very big deal. And the good news is that the current CEO seems not to be ignoring it. He looked around, and found one of the long-legacy businesses of GE with little innovation and limited growth. While competitors were re-introducing front-loading washers, low energy and low water washers, and scads of various innovations in large appliances his team was #1 in share but far from #1 in market leadership. Management was happy to blame poor performance on the bad U.S. economy, and the stagnation in U.S. new home sales, planning on a recovery some time in the future. So sell it! That’s what Mr. Welch would have done, and that’s what Mr. Immelt is now doing. There are always opportunities for innovators in all markets, and keeping around Locked-in management teams that think they are doing OK because their markets turn south only breeds ongoing poor results.
Yes, GE was in appliances for 100 years. But so what? Today appliances are only 4% of this $178billion revenue behemoth. And GE needs to maintain its growth goal of 10%. The CEO can’t accept excuses. Millions of houses are being built in India and China and South America – and with enough innovation current homeowners will replace old appliances. Insufficient growth is a management issue – not a market issue. Markets are how you define them, and if your defined market isn’t growing go into another one! GE needs to stay in the growth Rapids, and having been around a long time is no reason to coddle a management team that doesn’t know how to maintain growth. GE is in a lot of businesses, and it has gotten out of a lot of businesses, and it can get into a lot of new businesses. Congratulations to the top executives for not letting history put the company at risk of going into the Flats and then the Swamp of low returns.
Too many leaders are unwilling to Disrupt. They let ties to Lock-ins keep them trying to "fix" a business. Doing more of the same, trying to be faster or cheaper, when what’s needed is a new Success Formula. GE is showing us that if you keep your eyes on the future, and hold tight to meeting your growth goals, you can’t afford to let Status Quo Police keep you focused on Lock-ins. You can’t try to succeed by merely Defending & Extending what you always did. You have to be willing to Disrupt and do entirely new things. You have to Take Action before it’s too late. Good job GE.
by Adam Hartung | May 14, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle
Tuesday we learned that HP (chart here) is buying EDS (chart here) (read press release here, read Reuters article here). So is this a good deal? The reasons to be pessimistic outweigh the reasons to be optimistic.
What we know is that the market for computer outsourcing has slowed dramatically. Companies are realizing that the benefits of IT outsourcing are easier to talk about than achieve. Additionally, we know the margin has dropped for a decade, as very efficient and low cost competitors offshore have driven down prices while raising delivery standards. EDS almost went broke after 2000 trying to compete for new projects by pricing to market – which was money losing. And HP has struggled to grow profitably.
We also know that this is a highly fragmented market, where no one has enough share to affect price, with market leader IBM having only 7% share – and the combined EDS/HP will have only about 5% share as the #2 player. So we tie growth or profitability to size. In fact, the fastest growing and most profitable competitors are not the largest (Infosys, TCS, Cognizant, WiPro). Those making money are using global delivery models with aggressive new approaches to services – not cost cutting – to raise returns for themselves and customers. While the market is growing at maybe 10%/year, IBM, HP, EDS and CSC have not matched market growth. But the leaders are growing at more than 20% per quarter! And while the U.S. behemoths are earning margins of 2-20%, the leaders are earning over 40%! So obviouslyl success relies on utlizing innovation and new approaches to deliver higher value. Not just cost cutting.
The signs of a good acquisition are when the buyer says (a) this will change our way of doing business (b) we will operate this in a seperate environment so it can develop its own market approach (c) we will monitor progress and look to adopt learning from this new acquisition in our existing business. But the press release says the primary benefits of this acquistion are (1) size – merging revenues and (b) lower cost by cutting overhead and people. Meanwhile the business will remain headquartered in its existing location and will maintain the existing CEO from EDS as well as existing reporting structure. Ugh. Not optimistic sounding.
A year from now what are we likely to hear? HP will say that it has grown revenue by more than 10% – which will merely be the fact that they bought EDS, not that there was any "real" growth. EDS will no longer be a competitor. Cost reductions will not have occurred as quickly as hoped, thus there will be negative P&L implications that are planned to improve (given more time). Revenue growth will not meet expectations, as some customers will leave after the merger (as people leave) and some offerings will be deleted as part of the cost savings. The total market share of HP will be less than today’s combined share of HP and EDS, as the share of Infosys, TCS, WiPro and Cognizant continues growing. But HP will declare a victory, and the CEO will expect more pay, because HP will be bigger!
HP has done very well for investors since Mr. Hurd replaced Ms. Fiorina as CEO. But fixing old investments isn’t enough. HP needs to return to innovation for growth. Once HP was a market leader with its products. And it needs to be an innovator in services if it wants to grow faster than the market and earn higher margings. And that will require using more White Space with different leaders for the services business. Increasingly, HP has been improving profitability by merely being a market follower, using conventional tools to Defend & Extend businesses its already in. That does not bode well for earning above average rates of return going forward – and thus is not good news for investors who have already lost more than 10% of their equity value – and could lose more purchasing EDS and its poorly performing Success Formula.
by Adam Hartung | May 9, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle
Giant insurance company AIG (see chart here) has hit a growth stall. AIG has reported two consecutive quarterly losses, the worst in company history, and worse than the prior year (read article here). This constitutes a growth stall – and implies that the more than 50% of company valuation lost since earlier in this decade will never be recovered. Furthermore, AIG has a less than 7% chance of ever consistenly growing at a mere 2%. On the other hand, AIG has a 55% chance of declining growth and a 38% chance of revenue stagnation.
The telltale signs of this situation have been obvious since 2005 when the company’s CEO was forced out in an accounting scandal. Since then we’ve learned that rather than make money by selling and servicing insurance AIG has tried to Defend & Extend its glorious past by using increasingly complex, poorly understood and dramatically risky loans (they got neck deep in the mortgage mess) as well as relying on risky trading strategies in an effort to prop up a struggling Success Formula. These are the typical tactics of a Locked-in organization sliding into the Swamp. Due to market changes making the old Success Formula produce poorer results management attempts to prop up results with financial machinations and various opportunistic tactics.
We can now see that long ago, probably as early as 2000 when financial services of all kinds were being inextricably changed by internet competition, AIG needed to start changing its Success Formula. But the company relied on its size (a Dow Jones Industrial company) to save itself. Even after replacing the disgraced CEO, and recognizing that various accounting irregularities were hiding accurate results, AIG’s Board of Directors and senior leadership team failed to Disrupt the Lock-ins and implement White Space to develop a new Success Formula which would sustain growth. Now AIG is another "sick puppy" amongst the DJIA Locked-in on doing what it always did even though results are weaker. It’s in good company, joining Wal-Mart, Citigroup, DuPont, GM, McDonald’s, Coca-Cola, Microsoft, Home Depot and Walt Disney as companies that are going nowhere good despite being on the list of 30 "leading" industrial corporations.
by Adam Hartung | May 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Sara Lee (see chart here) missed its estimates yet again, and the CEO had no shortage of excuses for the poor performance (read article here). Let’s see, since taking over in 2005 the new CEO has made the company smaller by selling businesses for cash, yet hasn’t found any growth markets for investment. So the money’s gone, but no new businesses. She has centralized everything from headquarters to R&D to cut costs, but there has been no improvement in profitability nor new product development. She keeps talking about a turnaround, yet the equity value peaked in 2005 (when she was hired) and since has declined a third – reaching a 5-year low earlier in 2008.
What we see at Sara Lee are lots of excuses, but no real performance improvement. The CEO wants us to keep waiting for her "turnaround plan" to work, but so far – no signs. And if GE, IBM and P&G are "battleships" which are hard to turn, Sara Lee is at best a mere destroyer which should be swift and able to maneuver quickly. So saying its size has been the problem (after 3 years and several business and asset sales) is a misstatement.
I’ve predicted poor performance for Sara Lee ever since the new CEO took over (to much ballyhoo and several interviews including magazine covers). Why? Because her plan has always been to contract and rely on Defend & Extend tactics – in a company where the results clearly indicated that a new Success Formula was needed rather than trying to Defend the old broken one. As a result, every quarter we hear excuses about why she needs only a little more time, and investor patience, to reach the goals she set 3 years ago. This time the blame is all on rising commodity and energy prices. Like Roseanne Rosanadana said on Saturday Night Live over 25 years ago "it’s always something."
While she was intent to cut costs and shrink, the CEO should have been Disrupting the old Lock-ins and implementing White Space to transform the company. Without those actions, Sara Lee will remain a perpetual underperformer. Even though Sara Lee is in suburban Chicago, adopting the Cubs refrain of "wait until next year" is not good business leadership. Sara Lee needs new leadership that will create the opportunity for future success – rather than constantly trying to find past glory with D&E actions that just keep weakening the company and producing below-average performance for investors. If you’re a still an investor in Sara Lee – why? If you’re an employee, are you prepared for the next layoff or eventual take-over that will end your job? If you’re a supplier, have you insured your receivables? No business can make below-average rates of return forever, milking or selling assets to keep the company afloat. And with no signs of Disruption or White Space anywhere on the Sara Lee horizon we can only expect the ongoing demise to continue.
by Adam Hartung | May 5, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Microsoft (chart here) announced it is backing out of its offer to buy Yahoo! (read article here). We should all breath a sigh of relief.
Twenty years ago Microsoft was well on its way to taking over the desktop in corporate America – resulting in domination in homes as well. Once Microsoft won, the amount of innovation in desktops declined. As Apple (pre-iPod) fell by the wayside Microsoft became a Locked-in machine Defending & Extending its Success Formula as users had practically no option for not only operating system but the applications – such as desktop worksheets, word processing and presentations – sold by Microsoft. Microsoft developed no internal Disruption mechanisms (save for Mr. Gates’ lone effort to launch IE and turn on Microsoft to the web), nor White Space.
Microsoft’s single minded focus on the desktop meant that it never developed any skill at developing new things. Microsoft’s acquisitions always ended up in the acquirer being swallowed, and usually the people leaving as the technology was marginalized by the "not invented here" mentality inside Microsoft. If Microsoft acquired Yahoo! we can easily predict that within short order Yahoo!’s competitiveness would decline further, making life easier for Google and destroying value for Microsoft’s shareholders. Without a Disruption, Microsoft’s organization would not value Yahoo! and without White Space Yahoo! would soon disappear into the bowels of the Microsoft machine – with so many billions of dollars lost. Microsoft has no idea how to compete for ad sales, nor how to compete in the "Web 2.0" marketplace – and their acquisition of Yahoo!, which in theory might sound good, would have been a disaster leaving the market with even less competition for Google.
Yahoo! got itself into this problem by management trying to Lock-in on a Success Formula and then Defend & Extend it in a dynamic marketplace. Remember when almost all of us opened our web browser to the Yahoo! home page? But leadership frittered their early advantage away by not maintaining Disruptions and not keeping enough White Space alive to prepare for competing with Google. But combining 2 D&E organizations is not the route to success. Rather, it’s like injecting the flu into a cancer patient.
Yahoo! needs to use this Challenges as a wake up call. Leadership needs to internally Disrupt big and fast. Start talking seriously with News Corp. about some kind of relationship to grow, including possibly joint venturing with MySpace.com. Look for anything valuable left in AOL over at Time Warner. Explore new technologies and the emerging Facebooks out there. Yahoo! needs Disruption and lots of White Space, not the closed-minded D&E mentality at Microsoft which would be sure to suck all the potential life out of this struggling competitor.
And Microsoft should start paying dividends. Big ones. Microsoft is generating huge positive cash flow from its near monopoly of the desktop. But since the company won’t Disrupt (Steve Ballmer is the quintessential D&E leader), and it has no idea how to create or manage White Space, give the money to shareholders. Let them find growth opportunities. What Microsoft most needs is new leaders – people who will Disrupt and create real White Space to develop a new future. Microsoft has to overcome the powerful Lock-ins created during the Gates/Ballmer regime if it is to be a powerful competitor in 10 years. But, if the board won’t replace the leadership then at least give the money to shareholders before management fritters it away trying to pretend this is still 1988.
At least we can all breath a sigh of relief that Microsoft (at least not yet) hasn’t thrown away a ton of money on an acquisition they don’t know how to manage, and Yahoo! hasn’t lost its opportunity to evolve to a more competitive Success Formula, and we all aren’t destined to have a monopolistic controller for internet ad buying called Google. That future will leave us with about as much creativity in the Web 2.0 marketplace as we get today out of Microsoft in desktops.
by Adam Hartung | May 2, 2008 | General, Leadership, Lock-in
A colleague was bragging to me today about his company’s 3% growth. "We’re doing great" he said "given this lousy economy." Great? 3%? I looked at him and said "Great is Genpact" (see chart here.) Genpact announced quarterly results yesterday (read press release here). First quarter revenues of $234million were up 33% versus first quarter 2007. Net income of almost $20million was up almost 10X (1,000%) versus last year. Operating margin was up to 15% versus 12.2% last year. Now, that’s growth!
"Genpact?" he asked. I reminded him it was the GE company started in 1997 to do back-office operations. "Oh yeah, that’s the Indian company. That’s not a fair comparison." "You’re right I said, let’s look at what they faced developing their growth:
- The company has no sales in its local country – it is 100% export dependent
- Over 80% of sales are in the "lousy economy" U.S.A.
- The company is located in a country with terrible infrastructure problems – there is no potable water, power outages are common, bad roadways inhibit worker commuting, terrible public transit hurts commuting, the country produces no oil – so it has limits on auto usage – and almost no worker can afford a car
- Most employees cannot obtain visas to visit the country where most sales occur
- The country has one of the greatest poverty rates in the world, and struggles with education, health care and all other poverty-based problems
- It is based in a country with almost no foreign exchange, so it cannot import hardly any components, nor import managers from rich, developed countries
- The government is regulation-happy with controls and limits on practically everything
- Costs are going up faster than revenues – because the U.S. dollar keeps going down in value dropping revenues while the costs of people paid in Indian rupees keeps going up!
It really isn’t a fair comparison. Compared to my friend, he has all the advantages, and Genpact is beleagured with phenomenal problems. For most American’s facing that list of challenges (plus more) they would give up before even starting. Yet, my friend felt 3% growth was "great" – meanwhile Genpact blew the doors off almost every U.S. company last quarter – and certainly its competitors like IBM, CSC, EDS and Accenture.
When we Lock-in, we start making excuses for why we don’t grow. We blame our historical marketplace, or our historical customers, or our historical suppliers, or our historical investments – we blame all our old decisions and then say it’s OK if performance – well – sucks. To grow, to exceed expectations, requires first getting the right mindset. Instead of looking for reasons to explain bad performance the managerial mindset must be "what do I have to do to exceed expectations? What would someone looking to the future do to grow fast and make higher returns?" We have to get out of Defending & Extending our past, and being satisfied with whatever results that D&E behavior produces and instead focus on the future and be willing to do the things necessary to GROW.
Kudos to the leadership at Genpact. Quarter after quarter the company keeps growing and making better returns. If readers don’t know why they are successful, best to study them. It’s not a simple story of "they are in India". Hopefully readers realize that being in India does not create "no-way-to-lose bliss." Business as an Indian company competing offshore is cutthroat and must overcome a multitude of challenges. It’s the skill of Genpact’s management to overcome challenges while staying focused on high-growth opportunities that sets Genpact apart from competitors. The markets where Genpact competes are open to everyone – Genpact is just better at seeing the opportunities earlier, keeping themselves Disrupted to try new things and maintaining White Space to develop new solutions that allows them to keep exceeding expectations.
So the next time you want to talk about your growth – better check results at Genpact before you start bragging. And if you really want to grow, better start setting your own bar much higher and managing for the future. Succeeding is about getting out of the D&E Mindset and following The Phoenix Principle – not being in the right location.
by Adam Hartung | Apr 30, 2008 | General, In the Rapids, Leadership, Lifecycle
A lot has been recently about Rupert Murdoch’s News Corpation’s (see chart here) bid to buy Newsday newspaper in New York (read overview article here.) The officianados in media are worried about concentration of media ownership – as well as the politics of Mr. Murdoch and the implications on journalism.
These are two very different issues. Mr. Murdoch is a far-right conservative, and he makes no bones about his political leanings. Since the days of William Randolph Hearst the politics of newspaper owners has been a hot topic among media elite. But is that the determinant of who should own newspapers? Their politics? If we allow free speach, then no. Whether you like Mr. Murdoch, or not.
What’s brilliant about Mr. Murdoch is his ability to modify News Corp. to meet changing environmental requirements (see News Corp web site here). While Tribune Company is struggling to admit that newspaper circulation and advertising is never going to recover to 1999 levels, News Corp. long ago moved on. News Corp doesn’t rely on newspapers, the founding business, nor television – the media of the 1960s. News Corp is a major player in internet communications owning, among other properties, MySpace.com. This is in addition to book publishing, newspapers, direct broadcast satellite, film, cable TV, and magazines. News Corp actually HAS a strategy that addresses all of media – and its fast paced change – something almost none of its competitors has. This includes AOL Time Warner – the company that hoped to dominate the web by merging traditional news with the high growth AOL that bought Netscape – but failed miserably as the traditionalists took over.
Competitors are right to be fearful of News Corp. Mr. Murdoch is a consummate Disruptor. He’s observing Challenges in the environment and forcing his company to launch White Space allowing News Corp to adapt its Success Formula and remain at the industry’s forefront. Given how people now receive news – all the many channels – his ability to consolidate New York daily print news (including his recent Dow Jones purchase which provides him The Wall Street Journal) is really irrelevant. Dominating New York print is irrelevant in the TV, Cable TV, Satellite TV, internet world. But reaching customers through all of these channels sets News Corp. apart from its competition. While real estate developer Sam Zell is trying to figure out how to maximize sales of the Cubs and Wrigley Field (Tribune properties – as is Newsday), and simultaneously stop floundering performance from his remaining declining print properties, Mr. Murdoch is a decade ahead implementing cross-media platforms to maximize value for readers and advertisers.
Most of the media elite simply are too Locked-in. Their frameworks are based in the 1980s – not 2008. You have to hand it to the competitor that uses Disruption and White Space to define a new future for the industry – and everyone else should be paranoid. Long after we’ve forgotten the newspaper failures, mergers and buyouts News Corp. is quite likely to be providing info to people globally from any media format users desire.
