by Adam Hartung | Apr 28, 2008 | Defend & Extend, General, In the Swamp, Leadership
Thirty years ago The Steve Miller Band put out a son "Take the Money and Run" – and that’s exactly what the investors in Wrigley (see chart here) now need to do. Mars has made an offer to purchase Wrigley at a substantial premium, and investors get their money all in cash (read article in Chicago Tribune here and on Marketwatch here). Take it and run.
Wrigley is well known for its chewing gum – a no growth business at best. In 2005 Wrigley acquired the candy business from Kraft, including Altoids and Lifesavers. And it bought a Russian chocolate company. One would have hoped these acquisitions would have sparked White Space and growth for Wrigley – but the results have been nothing more than the sum of the parts. No internal Disruptions happened, no White Space developed and nothing new happened.
New things can happen in the sweets business. Do you remember in 1982-1985 when we Mrs. Field’s Cookies came along? Suddenly, cookies became a hot item and we paid lots more than before as we switched to cookies from many other sweets. But the good folks at Wrigley really didn’t push for more innovation, and nothing substantially new came out of these acquisitions. And Mars, the acquirer of Wrigley has done nothing exciting for several decades – practically since inventing M&Ms. And they have no plans for Disrupting or creating White Space with the Wrigley acquisition. All the analysts quoted in the articles talk about "industry consolidation" as the future road – with Cadbury selling its go-nowhere soft drinks business to buy Hershey, for example. Ho Hum. Who cares?
But, a smart reader may say, what about Warren Buffet buying into this deal (see Berkshire Hathaway chart here)? Isn’t he the savviest investor alive? Don’t be fooled by his personal sweet tooth, or the notion that he thinks gum is exciting. With the debt market collapsing beneath us due to the financial crisis, Mr. Buffet was able to do what banks used to do but now won’t – and that is make a $4B loan to finance the acquisition. For this he will gets the backing of Mars, and a premium rate of return taking advantage of a breakdown in the market. Second, he negotiated to acquire $2.1B of equity AT BELOW THE PRICE BEING GIVEN INVESTORS – meaning he has a guaranteed positive rate of return on his equity holding. He could be financing cow pie collection for all the difference the underlying business matters. Berkshire Hathaway just made a financial deal that none of us could do – and for returns none of us (nor even banks) could get. Yes Mr. Buffet is savvy. But not because he likes Wrigley. Rather, because he knows a great guaranteed return when he sees one.
For us mere mortals, limited to buying traditional stocks, take the money and run. Don’t buy Mars. Be glad you’re getting this windfall, and find something with substantial growth to invest in.
by Adam Hartung | Apr 25, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
This week a dozen high school seniors pulled a prank at their public high school in Zion, IL (read about the prank, with video, on Chicago NBC5 news website here). Apparently the boys thought up the idea of having 1 boy dress up like a gorilla, then the others dress up like bananas, and the gorilla would chase the bananas down the hallways and into the yard. A 4 minute prank. They weren’t very secretive about their prank, letting lots of fellow students as well as teachers in on it. And they even got their parents involved, having them call the boys home so they could change into the costumes during the school day. No one was hurt, no one injured, just a comical prank. There wasn’t even anything about the prank that anyone could think of that would have made it potentially dangerous – it was well planned to be just what it was and no more.
The boys have now been given a 7 day suspension by the administration. Right. Seven days of no school, no education. Let’s see, we take a few hundred 15-18 year old kids and put them into a closed environment. What are the odds they might think up something rambunctious to do? What are the odds they would try to express their personalities in non-traditional ways? What are the odds they would like to create some laughs, and possibly be remembered for a comical stunt? Could we expect this kind of thing to happen?
Of course. Watch movies going all the way back to silent days and you’ll find scene after scene of high school and college boys running pranks. Remember when the students opened the floor over the swimming pool during the dance in "It’s a Wonderful Life"? And remember how the top administrator, after hollering for about 1 minute for everyone to stop, held his nose and jumped into the pool himself? Seems like people have expected this behavior, and learned to accept it, for decades. It was part of "the rights of passage" that is American growing up. Harmless pranks are part of what happens, and for years good administrators learned to accept it, slap the hands of miscreants, and simply move on. It let young people behave improperly before they got too stressed, or too old to act-out inappropriately.
But not today. Now, even the slightest outside the box behavior leads to actions which can destroy a students GPA, restrict their extra-curricular participation and their efforts to move ahead. Straight A students that right fictional stories about guns -the fodder of many best selling mysteries – are expelled for discussing "taboo topics" in an educational setting (a recent experience in Mundelien, IL). In the Zion case, the administration threw the book at these boys because they violated so many rules. Let’s see, how critical were those violated rules – did they carry a gun, or knife, or dangerous object (no). Did they shout profanity and make threats (no). Did they attack anyone, or block the passage of any students or teachers (no). Did they threaten the authority of any teacher, administratory or security personnel (no.) No, they were suspended for 7 days for (a) wearing a costume to school (b) wearing a mask (c) disrupting the day. And the Superintendent was unapologetic on film saying "We’re basically enforcing our policy."
Right. And we wonder why our children are less accepting of authorities. Why they act as if schools are where "all the bad things happen." Children caught fighting in Zion’s school only get suspended for 5 days. But to expect a school administrator to act like a school is a place to learn – not only about geometry but about life – is expecting too much today. So they end up sending message such as this – that a simple prank is worse than an outright fistfight – or copying another students homework (not even a suspension, only a loss of grade). That the administrator appears arbitrary and completely unable to link the punishment to the nature of the violation is completely lost in the Lock-in to school rules. Rules which should be set by parents in the community – but are now set by administrators who have become wildly out of touch with their students needs in a global labor marketplace.
America relies on innovation and creativity to be competitive. The kind of creative innovation show often exhibited in pranks. We like pranks because they show us that someone has the ability to think outside the box, and we know that ability is often key to achieving success. But our schools no longer encourage, or even tolerate, creativity or innovation. Public school administrator Lock-in has eliminated that capacity – and made our schools second rate and far from providing students the most critical skills -including learning how to think rather than merely recite. Until we change the leaders, the American public school system is destined to continue its downward spiral. And the current leaders will never understand the need to change – because they are simply too Locked-in to consider any options, any Disruptions, or any White Space at all.
(PS – Don’t miss the comments on the NBC5 news link. You’ll find them overwhelmingly opposed to the school’s decision. Yet, we can be sure the school will pay no attention to these comments. Locked-in leaders never feel the need to listen to anyone outside their organization.)
by Adam Hartung | Apr 23, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
There’s a phrase used by stock brokers – "Don’t try to catch a falling javelin." They use this to describe a stock that has fallen recently – often a lot. Clients will ask "XY company stock has dropped Z percent, has it beome a good buy?" Brokers will warn the client that trying to catch that falling stock is not a safe way to invest your money.
This actually makes a lot of sense. Just look at Starbucks (see chart here). A high flyer, and a real Phoenix Principle company for many years, it created tremendous value for investors, employees and suppliers while creating many happy customers. There was lots of Disruption, and White Space galore as the company prepared for slowing sales. But in the last year the old CEO returned – and he’s doing exactly the opposite of what the company needs. As a result value has fallen – like a javelin – and there’s really no guessing how far down it will go.
This afternoon saw a rash of reports that Starbucks’ earnings are going to decline – not just miss expectations but actually decline – for the recent quarter and for the entire 2008 year versus 2007 (read Reuters’ release here). Even worse, same store sales have declined – meaning less is being sold in each store than last year. Starbucks has hit a growth stall, and that bodes very, very poorly for the company.
CEO Schultz is already making a rash of excuses for lousy performance – even blaming lower sales on lower home prices and a generally weak economy (read quotes here.) Even though it is leadership’s job to keep the company growing, especially when slowing sales are as easily predicted as this case. While making excuses, he’s shutting at least 100 stores and pulling products out of remaining ones – like the warm breakfast sandwiches. Let’s see, sales are down – so we’re going to remove products from the shelf. Right, that’s the ticket!
We don’t care if customers go into Starbucks to buy a coffee, latte, sandwich, muffin, coffee mug, coffee pot, CD, DVD, beans, glasses or MP3 download! What customers buy doesn’t matter – it just matters that we keep getting them into the store spending money! And that’s what the last CEO focused on. Creating new ways for Starbucks to make revenues and profits out of the existing footprint – while looking for new footprints in entertainment, grocery and liquor! Yet, when the old CEO returned he couldn’t wait to enforce his old Success Formula on the company – 25 years later – as if the world had never changed and Starbucks was again a 30 unit franchise. The repetitive Defend & Extend practices that worked to grow Starbucks 15 years ago are not what is now needed to keep it growing today. Starbucks was a flying javelin, but under Mr. Schultz it’s falling out of the sky very fast indeed. Investors had better run for safety!
by Adam Hartung | Apr 21, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Harley-Davidson (see chart here) has had one heck of a 20 years. If you put $100 in Harley stock in 1986, it would be worth $23,000 today. Profits have gone from $4.3million to $1billion in 2007. As boomers got older and richer they gained disposable income, and many spent a lot on Harley motorcycles.
In 2001 through 2005 Harley had to increase production every year. But last week Harley announced it’s revenue was declining 13%, and thus it is laying off 700 of its 9,000 employees and looking to possibly idle a plant (read article here). Of course management says this is just a short-term phenomenon created by the lack of easy credit and impending recession. Investors should just wait and things will work out. With the company value down about 50% since early 2007, leadership claims Harley will return to provide great investor returns. That would be an investment mistake.
While revenue has gone up, so has the average age of a Harley buyer (read background on Harley here). From age 35 in 1987, the typical Harley buyer today is 47 (read info on aging buyers here and here see chart on average age of buyers here). The typical customer earned $38,000 in 1987. By 1997 (almost a decade ago) the average income had risen to $83,000 (read income information here). By dealer statements, the bet is that today the average income is over $100,000. The reality is that Harley’s customers are slowly marching into retirement. These stats bode for a lot of troubles – retirement is not the best age for selling motorcycles. Just how old and wealthy can Harley hope to attract buyers? It’s not like Harley is selling a Rolls Royce.
For 25 years Harley has built its brand reputation for one type of motorcycle. Officianados will point out there are actually 4 kinds of Harley’s – but to most people all Harleys are variations on a simple theme of big V-Twin motorcycles that are – well – loud. For most motorcycle riders, Harleys are also incredibly expensive. Go to the #1 producer of motorcycles, Honda, and you can purchase a bike almost identical to a Harley for $8,000 to $12,000 – but most Harley’s cost north of $20,000 – some as high as $40,000! That sort of branding led to some incredible pricing which has created great profits. But it also priced out of the market more than 85% of all potential customers.
So what are 25-35 year old customers buying? Not Harleys. And as they age, why would Harley expect them to convert? Did boomers grow up and want to buy their dad’s Oldsmobile – or did they choose to purchase Mercedes and BMWs? So it is with younger buyers today. They are buying Hondas, Suzukis, Kawasakis and Yamahas – and they have no plans to ever buy a Harley. Harley’s CEO has felt he had to protect what Harley historically stood for, at the expense of attracting younger – and more – buyers. He chose to "milk" the brand of its value, and now that brand is about to see the udder go dry. Sure, there are a lot of older guys out there with Harley logos tattoed on their bodies – a testament to a great historical brand – but that’s not what’s getting tattooed on young people today. And Harley’s are not what they are riding when they make those first couple of motorcycle purchases.
The odds are not good that Harley will come roaring back with more volume, higher prices and more profits in 2 or 3 years as the recession wanes. They’ve had a great run, but their customers are aging, just like the technology in most of their products. Their product line is limited, their dealers are dedicated to rather out-of-date brand nostalgia, and their technology is frankly quite aged. Yes, Harley has done some things to attract new buyers, like launching its V-Rod with an engine designed by Porsche, but the company never Disrupted itself and the V-Rod has been an after-thought that has not built a following and has not kept up with competitive motorcycles in its class. There’s been no White Space in Harley, instead only efforts to Defend & Extend the old brand and products. That worked well for a long time – but all Success Formulas have a half-life. For Harley, this downturn will most likely be a permanent ratcheting down of volume – meaning negative growth. And for investors that is definitely not good news.
by Adam Hartung | Apr 16, 2008 | Disruptions, In the Swamp, Innovation, Leadership, Lifecycle, Openness
It’s hard to turn around a Locked-In company. But it sure is exciting to see a CEO try. And that’s what is happening at Allstate (see chart here.) I blogged previously about this historically staid company that has begun Disrupting and using White Space to chart a new course.
Taking a page from Neutron Jack Welch’s book about how to be a Disruptive leader, the CEO recently decided to implement the "80/20 Management Principle" which he picked up from Illinois Tool Works (read full article here). ITW, by the way, happens to be one of the most long-term successful companies in the U.S., with decades of experience Disrupting and implementing White Space to grow. So the Allstate CEO said "let’s implement this policy, and see if we can be a better company." It doesn’t matter if 80/20 is a great idea or not – the point is that it is Disrupting the old approaches and making people change they way they work. Mr. Welch used rules like "Be #1 or #2 in your business or get out" and created DestroyYourBusiness.com teams to Disrupt people at GE – and open White Space for new growth. For us as investors, suppliers and employees what’s critical is that the CEO is Disrupting people, and causing them to look for new ways to manage the business.
The Allstate CEO is also on a path to use White Space to "reinvent" Allstate (read article here.) Yes, he’s implementing product extensions intended to defend the historical business. But he’s being clear to call these "horizontal" products and he says they really aren’t "new." Meanwhile, he is simultaneously setting up teams to develop entirely new "vertical" products that he intends to use for changing what Allstate develops and sells. These White Space teams range from new insurance products, to new investment vehicles (like mutual funds) to hybrid products that offer both insurance and investment – but different from the old-fashioned "whole life" policies sold our parents and grandparents.
Kudo’s to CEO Wilson, the management team, Chairman and Board of Directors at Allstate. After reeling from the hurricanes, they could have attempted to persevere with business as usual. But even Warren Buffet has said that the old insurance business will see costs rise faster than revenues. At Allstate leadership is using Disruptions and White Space to create a new future that will reposition the company for customer needs in 2015 and beyond. Good for them. They are on the way to becoming a Phoenix Principle company with long-term above average returns!
by Adam Hartung | Apr 15, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Hundreds of years ago philosopher Hippocrates created an oath, and for years medical doctors subsribed to it. Dramatically paraphrased, it included the notion "Doctor, first do no harm." The objective was clear – if you go messing around with a bad situation you can make it worse. Make sure you know what you’re doing – and you know how you’re going to make things better.
We should tell modern businesspeople to swear by this same oath. Delta and Northwest airlines have announced their intent to merge and make one huge Delta (read article here). It is widely expected that very shortly United and Continental will attempt the same maneuver to create an even larger United. Now, do you think this means air travel is going to get any better? Will service improve? On-time performance? Less lost baggage? Happier gate agents and flight attendants? Better maintained aircraft?
No one believes that. Even the leading industry gurus claim the only merger benefit is theoretically this will somehow lead to lower cost – and less capacity (at a time when capacity utilization is around 80%) – which is supposed to raise prices. So we should expect basically the same sort of service, with fewer flights, and yet even more attempts to cut wages and maintenance spending to increase profits? The reality is that either (or both) of these mergers will lead to mass confusion as the companies try sorting out conflicting schedules, optimizing broken systems and negotiating new contracts.
This deal is just another effort to Defend & Extend the traditional hub/spoke airline system the major airlines have used – unprofitably – for 30 years. Things won’t get better if these companies merge – for customers, suppliers and investors they will only get worse. There’s no plan here to make a new, more profitable airline. They aren’t suddenly going to become Southwest.
Monday, Blockbuster said it wanted to buy Circuit City (read article here). Why? Blockbuster is getting killed by on-line music downloads, Netflix and On-Demand direct-to-home distribution, and pretty quickly movie downloads. Circuit City was eclipsed by Best Buy in 1990 and has been choking on the leader’s dust, barely making money ever since (despite being heralded as a "great" company in Jim Collins’ book Good to Great). As on-line sales of consumer electronics grows at over 30% per year, making life tough even for leader Best Buy, this merger is supposed to somehow make things better?
The bidder says it’s an opportunity to create a 9,300 unit group of stores – right as we start the worst consumer-led recession in 30 years! As retailers of all types are rapidly closing stores in order to avoid bankruptcy, the plan here is to get a bunch of stores under one name to sell products that are being displaced by on-line and direct-to-home models and consumers are becoming more price conscious. Right. This is nothing more than a move by Blockbuster to try Defending & Extending a retail model that has already proven to be obsolete.
The reality is that Southwest and Virgin have shown airlines that approach the industry differently can make money. Making a bigger company that uses a broken Success Formula only makes for larger losses – not a new airline. Everyone should be wary, because life will only get worse as we consolidate management of most of the system into fewer hands trying to make a broken model work. If you’re an investor, keep buying Southwest and Virgin because these mergers will provide more opportunities for the Disruptive competitors to win.
Likewise, Apple has shown us all that we’ll never go buy CDs in historical quantities. All media is quickly going digital. We don’t buy newspapers, magazines or books like we once did – we go to the internet. And very soon we won’t be buying DVDs either. New competitors are causing Blockbuster and Circuit City to faulter – and trying to make both bigger will only cause them to do worse.
These companies desperately need White Space to build new Success Formulas before they fail – and not just fail investors but customers, suppliers and the communities they serve as well. These merger efforts will not help any of them to be better competitors that offer better products with better service that meet customer needs with lower cost models. And that means they are only going to make things worse. It would be good if businesspeople could overcome their desire to "do something – anything" to save their old Success Formulas and instead only undertake actions based on plans to be better. First do no harm!
by Adam Hartung | Apr 11, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Microsoft (see chart here) is huge and has a lot of cash. So do you care? What made Microsoft an incredible company was how it managed to aid the growth of PC technology, making the machines every day parts of our lives. Microsoft products ranged from operating systems to desktop applications to the prolific Internet Explorer web browser. Along the way Microsoft grew incredibly fast, literally won every marketing war it engaged in, dominated its markets and made huge amounts of money. What a great past.
But what is Microsoft doing now? It’s latest operating system (Vista) took 6 years to develop, got to market almost 3 years late, and is not even adopted by half the current customers. A year after launch, Microsoft has to strong-arm PC manufacturers to load the product rather than the older version (XP). Meanwhile both Linux and Macintosh are stealing operating system share from Microsoft – a very bad sign. Users aren’t clamoring for new versions of office automation software, and growth has stymied. And after dominating the market with IE, Microsoft is now contending with Firefox in the browser market. Quite simply, Microsoft isn’t growing. It is sitting on a huge pile of cash, but can’t figure out how to invest it to generate additional growth. And investors haven’t seen any growth in company equity value the last 5 years!
So, Microsoft has offered to buy Yahoo! But why? Microsoft hasn’t offered any new insight to what it’s ownership of the #2 browser will do for customers or investors. Microsoft has merely said it has the money to spend – like a teenager with last week’s paycheck burning a hole in his pocket. If there’s no plan to launch new products, or otherwise generate growth, why spend the money on a company that is far, far behind the #1 player Google? If Yahoo! can’t maintain or grow share versus Google, what is Microsoft planning to do to change the situation? Merely owning Yahoo! won’t help Microsoft be a better company.
Microsoft slipped into the flats four years ago. Now it’s trying to Defend & Extend its past glory, but to not much success as it is losing little bits of share all over. It has a huge war chest to fight this defensive battle. But wouldn’t investors be better off if Microsoft handed out huge dividends? Why not let investors take the money and buy shares of Cisco, Google, RIMM, Oracle or other higher growth companies? Why should Microsoft management burn this cash? No one is fooled by this action – today’s Chicago Tribune headline ran with "Is Yahoo deal set up for failure?" (read article here) and the last paragraph reads "No matter who ends up with Yahoo, the people involved are not innovators" – quoting Marc Benioff CEO of Salesforce.com. "They are followers. This is not a deal about the future of the Internet. It’s about the problems of not executing in the past against Google."
If companies don’t grow, then why do they exist? Without growth, the company should be milked for maximum cash and the money given to investors who can invest in other high growth opportunities. Microsoft had a great past – but it has not maintained its focus on markets and new opportunities. It missed the networking wave – which largely went to Cisco. It missed the PDA wave (personal digital assistants) which has gone to RIMM and Palm. It missed the digital music wave which has gone to Apple. It missed the internet search and advertising wave – which has already gone to Google.
Microsoft started Defending & Extending its personal computer business, and it lost its growth. Bill Gates demonstrated a knack for developing future scenarios and identifying emerging markets. But he almost missed the web – and it took a herculean effort on his part to get the company refocused and out with IE. Mr. Gates did not build an organization that valued Disruption and invested in White Space seeking new markets early and experimenting with new Success Formulas. He relied on himself. Mr. Balmer is a classic D&E manager – not a Disruptor nor investor in White Space. So now Microsoft leadership is doing things that will just waste our time and investor money.
by Adam Hartung | Apr 9, 2008 | General, In the Rapids, Innovation, Leadership, Openness
Great companies don’t only get into new businesses, they know when to get out. Look at GE – a company that sells almost as many businesses as it buys every year. Another company following this practice is Philips (see chart here). In the U.S. few people know much about Philips – although it is a global company with many successful products in multiple businesses.
Philips sells consumer products, like radios, telephones, monitors, DVD players, cameras, webcams, Sonicare toothbrushes, Norelco razors, MP3 players and televisions. It also sells medical systems – like CT scanners, ultrasound machines and heart defibrilators. It sells lighting systems which includes everything from home light bulbs to interior designs to products for lighting the exterior of office skyscrapers or religious temples. Philips was a pioneer in developing compact disc technology and optical storage devices and is a leader in high tech plastics and printed circuit board technology. (Read about Philips at its company web site here.)
Philips generated 2007 revenues of $39billion. Founded and run out of the Netherlands, this is pretty remarkable. The Netherlands has only 16.5million people! The whole country’s population is about 2x the five buroughs of New York City – or the same as the New York metropolitan area. Yet this company is bigger than DuPont, Intel, 3M and Merck – all members of the Dow Jones Industrial Average. Founded in 1891, Philips has met the test of time, entering new markets, and growing both revenues and profits, for several decades. Well resourced, Philips has created and implemented White Space to grow for longer than almost any company in the U.S.A.
Yet, today Philips announced it was going to quit making televisions for North America (read article here). A pioneer, and leader, in flat panel televisions – a high growth product line in the consumer-centric U.S. market – Philips is abandoning manufacturing this $1.7Billion product line, shutting its Althanta headquarters. Manufacturing for the Philips and Magnavox brands will transfer to Tokyo based Funai (which makes Emerson brand as well.)
Phoenix Principle companies not only are quick to Disrupt and implement White Space, they are quick to get out as well. And here we see a large company, with big resources, walk away from manufacturing a product line that is huge WHILE GROWTH IS GOOD. Long before the business slips into the Swamp Philips is looking ahead and changing course. Rather than get trapped in a low-profit business as growth slows, they are getting out on the way up to maximize the value – while focusing precious resources on other opportunities.
All companies of all sizes can be fleet of foot. Even large and aged ones. It requires the discipline to be forward-focused on markets and opportunities rather than history focused. It requires not getting blinded to think big businesses need Defend & Extend behavior – but rather the flexibility to move fast as markets move. It requires a willingness to not rely on your own internal focus – and your own resource pool – when making decisions about future investments. It requires the skill to realize that not all White Space is worth additional investment, and there are times to get out.
Long term success requires overcoming Lock-in. Not only by consistently setting up new White Space, but knowing when to get out of White Space rather than Lock-in on its efforts. Constantly getting into new opportunities means, by definition, that not all are worth pursuing. Some get out early, and others later. It takes discipline to overcome Lock-in – and Philips has shown the knack for 10 decades.
by Adam Hartung | Apr 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Last night ABC’s Nightline program featured an article on Starbucks (see print version here). This is not the first time Nightline has discussed Starbucks. The program previously chided management about it’s competition with McDonald’s (see video on YouTube here) saying Starbuck’s coffee wasn’t any better than the fast food giant. Nightline’s recent feature was that Starbucks needs to "regain its focus" under the return of early CEO Howard Schulz. Something he was happy to support. Even Marketwatch kicked-in its review of the "retro-strategy" being taken to rejuvenate the company by launching a new coffee blend (read article here).
Wrong. Do we need a lot more Starbucks? At 15,000 units, one could easily argue that it’s sensible to expect less growth. And, as in all markets, competitors are figuring out how to duplicate Starbucks original idea – from other "shops" such as Caribou Coffee to mass chains like McDonald’s and Dunkin’ Donuts. ALL Success Formulas have a half-life. ALL Success Formulas grow tired, and lose their ability to maintain above average growth and profits. And that is happening now to Starbucks. Starbucks did the right things to grow like crazy as an early pioneer in its largest business. But doing more of the same – possibly better, faster or cheaper – is not going to get Starbucks back on the growth path. That’s just Defend & Extend activity which is already demonstrating declining marginal value.
Mr. Schulz was obviously the right guy to get things growing 20 years ago at Starbucks. Out of the Wellspring he took the coffee shop idea into the Rapids. He built systems that helped Starbucks Lock-in on all the things that could help the company grow. Imagine the skill it took to consistently open 6 new units a day!!! He was the right guy in the right place and he helped create an empire.
But that’s not what Starbucks needs today. For at least 3 to 5 years it has been obvious there would be a limit to the growth in Starbucks traditional business. Starbucks has been tailing off the Rapids, and heading into the Flats. And now it is rapidly falling into the Swamp of low growth. It was obvious the demand for shops was going to become saturated, and competitors were bound to get sharper and better. So the last CEO Disrupted Starbucks – saying the company was not just a coffee company. He got into music production, movie production, performer management, liquor production and consumer goods. He also started expanding the stores to offer sandwiches and many other products besides coffee. He actively promoted and funded White Space to find new revenue opportunities. And that is what Starbucks needs more than anything – more sources of revenue.
Starbucks is blessed with a name that does not mean anything. Starbucks doesn’t have to think of itself as a coffee company. Think about Nike – which didn’t have to be a shoe company. Only by moving beyond shoes did Nike become the megapower brand it is today. For Starbucks to now make an about-face and try to find the future in its past is lunacy. That’s trying to catch last night’s dream. The competitive market which supported rapid coffee shop growth is gone, and a new one is in its place. Focusing energy on a slugfest with its competitors will only result in price wars, lower margins, declining growth, store closings, laid off workers and lower returns for shareholders (who already know this and have knocked 50% off the company value in the last year – see chart here.)
The appeal of "back to basics" is so strong. We’ve seen too many executives fall prey to the call. It seems so logical to think that if we "focus" on "core competencies" we will somehow return to previous greatness. But that simply isn’t true. Watch old prizefighting clips, and it is amazing. Rocky Marciano looks like an out of shape thug compared to the athleticism of Joe Forman or Muhamed Ali – who look like they need another year in the weight gym compared to Mike Tyson and today’s belt competitors. Each wave of winners creates yet another round of competitors who are different – and that changes the game. Doing more may have worked for Rocky Balboa – but he had the help of a dozen script writers to make his dream come true. In the real world, we cannot capture the old glory but rather have to find new places and ways to compete as our markets become crowded from those seeking our success.
Starbucks is in for some really big trouble – worse than already seen – if Mr. Schulz stays in place and continues with his plans. For investors, its highly unlikely to be a pleasant ride. Starbucks can succeed if it realizes that its future growth is not about the coffee. It’s about finding ways to change other markets the way it changed the last one. And that means avoiding focus on past successes and instead using White Space to develop a new Success Formula that can grow and prosper – achieving past results but in new ways.
by Adam Hartung | Apr 4, 2008 | General, In the Rapids, Innovation, Leadership, Lifecycle
Today the press announced that the U.S.’s #1 music retailer is iTunes (read article here.) This is actually pretty amazing, given that Apple’s (see chart here) iTunes is only 5 years old. To reach this position Apple climbed over Target, Best Buy and finally Wal-Mart. Companies generally considered pretty good retail competitors. And iTunes did it with a handicap. Those who track the stats count songs – so iTunes had to sell 12 tunes to get the credit the traditional retailers get for selling 1 album – so as for number of music transactions iTunes clearly dominates.
You have to ask, why did Wal-Mart (see chart here) and Best Buy (see chart here) let this happen? They arent without resources, and music is profitable. Why didn’t they get out there 4 years ago with web sites that attacked iTunes offering product at great prices? If Wal-Mart is "Always low prices" why didn’t they put out digital music at a discount to Apple? With best guesses now that Apple has 19% market share, to Wal-Mart’s 15%, why didn’t Wal-Mart react to declining CD sales and invest in its own digital music site to slow Apple and get it’s fair share?
Wal-Mart and Best Buy are too busy trying to get people into the store. Those big old buildings are what management thinks about. These buildings are a testament to the company. Management is fixated on keeping people going to the stores. As retail goes on-line, and music has been an early leader, Wal-Mart isn’t about retail. Wal-Mart is about it’s stores. Rather than figuring out how to be a great retailer, thus giving customers what they want, when they want it, at a price they will pay, Wal-Mart is all about trying to get people into those stores by selling things cheap. The decor is allowed to remain lousy, the advertising looks cheap, the products in many cases aren’t stylish or alluring – and in the case of music the product isn’t even what’s growing (digital) but rather they rapidly dying CD.
Wal-Mart doesn’t care any longer about retailing. Wal-Mart is fixated on Defending & Extending its Success Formula, which it has closely tied to those incredibly ugly stores. Wal-Mart is about doing more Wal-Mart. And, unfortunately, Best Buy isn’t a whole lot better. Their approach to on-line sales is to get you to place an order, and then pick it up in the store. Again, all about the physical store – not about retailing. The goal has long been forgotten as the organization fixates on it’s stores as sacred cows they have to justify.
So Apple, which is a well run company, didn’t really have much competition the last 5 years. Apple has been allowed to grab the lions share of the market, while prime, well-funded competitors have ignored it. Not only retailers, but look at Sony – which has all the pieces (a recording company and a leading position in consumer electronics) to mount a considerable competitive attack. But Sony can’t get beyond Defending & Extending its old businesses, completely missing the opportunity to be a leader in the fast growing digital music sales arena. And Apple just keeps growing, and practically minting profits, with ease.
Southwest Airlines did the same thing 30 years ago. There was no reason Southwest should have been allowed to grow so fast, and make so much money. There were lots of airlines. But many went broke (Pan Am, Eastern, Braniff, Continental) and the others lost billions of dollars trying to Defend & Extend their business rather than simply get in and really compete with Southwest. So, like Apple, Southwest grew fast and profitably – and did it with seeming ease.
So who is threatening Apple? MySpace is jumping in, and we all know MySpace is very savvy about internet users. But note that MySpace is a division of News Corporation (see chart here). NewsCorp was once a newspaper company. But today it has interests in not only newspapers but radio, TV, cable TV and the web. Chairman Rupert Murdoch is a leader, like Steve Jobs, who is not afraid to Disrupt – nor is he afraid to invest in White Space. As a result News Corporation has flourished while other companies started as newspapers (Tribune Company, New York Times Company, McClatchey, etc.) have struggled and are floundering.
Businesses that focus on Defend & Extending their past investments become obsolete. Like SS Kresge, Montgomery Wards and Woolworths’s – Wal-Mart’s stores are not a protection against competition. D&E management likes to think big assets (like The Chicago Tribune or New York Times) make them indestructible. Instead, they can easily become albatrosses.
New competitors need not fear large, entrenched competitors. They are most often unlikely to do anything about a successful new competitor. Early entrants not only get in the Rapids, but are often allowed to stay there an amazingly long time (and they longer they continue Disrupting and using White Space the longer they can stay).
