by Adam Hartung | Jul 21, 2007 | In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
The CEO with the hottest seat in corporate America right now is probably Ed Zander of Motorola (see article here, see chart here.) And well it should be hot, as recent negative results now verify Motorola is once again in a Growth Stall (see article here). After a great couple of years, the last two quarters have been back to back negative ones. Fewer than 7% of companies recover from a growth stall to consistently grow a mere 2%.
This isn’t the first stall for Motorola. There were several before, and just 3 – 4 years ago many investors felt that Motorola may not survive. But a new CEO (Zander) came in, implemented a slew of Disruptions, opened up a bevy of White Space projects and Motorola started to really improve. He ignored analyst calls for massive, widespread layoffs and instead rapidly moved new products to market (like RAZR) and started building new businesses in Motorola. Results were stellar, and Zander was widely applauded for the changes including being named CEO of the Year by popular journals.
But these latest earnings announcements demonstrate that a post-stall recovery is very hard to maintain. Motorola was desperately Locked-in to its failing Success Formula when Zander took over. Despite all his Disruptions and White Space projects, Motorola did not fully develop a new Success Formula, nor did it complete a migration to a new Success Formula, before slips started happening in the traditional business. Profits dipped, and then Carl Icahn started a raid on the company.
Unfortunately, leadership then hiccuped. Reacting to Icahn, and the cries of stock analysts, instead of doing more Disruptions and creating more White Space to keep its focus on growth, Motorola started trying to Defend & Extend its old strategies – announcing an 11% (7,500 person) layoff would begin. The company shut down an R&D facility at the University of Illinois in Champagne (one of the top engineering schools in the world) to save money. And it began "reorganizing" (see article here) The company even took to financial machinations as it focused on engineering the P&L instead of new products – as can be seen in the latest earnings news.
From his early actions it appears Zander knows the right thing to do. And he has continued following the original path, such as the announcement early this month that Motorola has agreed to acquire Leapstone Systems, further bolstering the network division – where growth rates and profits both exceed the mobile handset business (see article here.) What Motorola needs now is not another change in CEO, but rather more Disruptions and White Space to push Motorola further away from the old behaviors and Lock-ins which got it into so much trouble in the 1990s, then early this decade, and now more recently. It’s not Zander that is the problem, but the truncated effort to use White Space to develop a new Success Formula and then mobilizing Motorola toward that Success Formula.
Motorola was an incredible turnaround story. Disruptions and White Space were allowing this Phoenix Principle company to regain flight. But right now the Phoenix is in the crosshairs of many analysts and Icahn – who are collectively calling for the CEO’s head when they should be screaming for more Disruptions leading to more growth. Motorola will not save its way to prosperity. It must develop a new Success Formula that puts Motorola back in the Rapids – and keeps the company out of the Swamp. If investors and employees aren’t careful they’ll accomplish their goal of unseating Zander, Icahn will swoop in, and then we can expect yet more heads to roll, businesses to be sold, more product development to be shuttered and after Icahn gets his cash back he’ll leave Chicago with a shell where once a great company stood.
Better to let the Phoenix take flight. If the Motorola organization and its leadership have the guts to get out of the broken down old nest and really test its wings.
by Adam Hartung | Jul 16, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Readers of this blog know I am no fan of Sears Holdings. Bringing together Mr. Lampert’s Lock-in to private equity cost cutting behavior with Sears’ out of date Success Formula was like finding out you have cancer shortly after suffering a heart attack. One very sick situation.
For months investors played along with Mr. Lampert’s story that he would somehow save his way to prosperity for investors. But now, after 6 years of declining revenue, and a recent report that same-store-sales are down for the second consecutive quarter (see article here), the company equity value is down almost 25% from it’s April peak (see chart here). True to form, Mr. Lampert has proposed propping up the stock price by increasing the share buyback. At the end of the day, this financial machination will leave Sears with only one store and only 1 share of stock, but somehow Mr. Lampert indicates magic comes from this plan.
Mr. Lampert tapped into a long-held business myth. Even though we see businesses fail every year, most of us do not really think the companies we work for, or invest in, will fail, We adopt old-fashioned notions of business lifecycles that assert "mature" companies should accept a low growth rate, and maximize profits instead of revenues. This Myth of Perpetuity allows people investing in, selling to, or working for even failing companies to have faith – long after such faith is poorly placed.
The reality is that businesses either grow or die. Businesses exist in a competitive marketplace. If they don’t grow, they get clobbered by more successful competitors. You aren’t allowed to stand still, because that makes you food for the aggressive competitor running hard to succeed. Mr. Lampert acted as if Sears could stop growing and "milk" the business. What he ignored was the fact that the lions were watching, and while he’s trying to "milk" Sears of cash Target, Kohl’s, JC Penney, Lowe’s and even Home Depot have eyeballed this "cash cow" and decided to simply kill it. They don’t see any reason to allow Mr. Lampert the time to cut costs slowly and generate cash. Not when they want those customers, the revenue and the profits they can make from increased sales — something Sears can’t produce because it’s Success Formula is so out of date.
It was clear 2 years ago that Sears was unable to succeed. Now it has hit a growth stall, and statistically it has only a 7% chance of ever again growing even 2%. Those investors that believed in Mr. Lampert believed in myth. Not just the myth of his heroic skills, but in the Myth of Perpetuity — because they would not accept that the venerable Sears company was heading straight into the Whirlpool.
by Adam Hartung | Jul 10, 2007 | Defend & Extend, In the Swamp, Leadership, Lock-in, Quotes
Do you remember the old Smith, Barney television ad where the professorial actor said “We make money the old fashion way. We EARN it.”?
More executives appear to need reminding of this. In today’s market report from Merrill Lynch (see info here, page 2) we learn that in the first quarter of 2007 the S&P 500 spent an incredible $117BILLION on share buybacks. So much was spent buying back shares that it added from a full point to 1.5 points to EPS for the quarter! In May and June IBM, WalMart and Home Depot announced share buyback plans of $50Billion (and keep in mind, just yesterday Home Depot announced real earnings would be down 18% this year! [see page 1 of same link]). Conoco and Johnson & Johnson are announcing plans to buy back $25Billion of equity between them.
When businesses are growing they spend money on hiring employees, building plants and offices, traveling to see customers and making new products. When they want to Defend & Extend their existing business they take the money out of such productive long-term uses and spend it instead on buying back their own stock. An action which does not create a single job, nor new product, nor help the business create enhanced growth in revenue or profitability. We have to be careful not to confuse financial machinations with real growth.
by Adam Hartung | Jul 8, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
When was the last time you enjoyed an airplane flight? Flying is one time when as a customer the more you consume, the less happy you become. I don’t know anyone flying commercial U.S. airlines that enjoys the experience. It’s amazing, ever since deregulation annual customer surveys point to unhappy customers – and every year satisfaction declines further.
The Locked-in airlines will tell us that customers can’t expect service and low price. And customers keep picking price. That’s not true. Customers really don’t have much choice. Airlines have Locked-in on their Success Formulas, and they pay more attention to their money-losing direct competitors than they listen to customers. When everyone (Southwest accepted) gives lousy service, can’t be on time and loses bags– and they control 90% of the gates across America — it’s not like the customer has much choice. So they blame the customers for being unhappy. Give us a break!
The Chicago Tribune ran front page articles today on just how badly the airlines are performing – looking at plane crowding, delays, lost baggage and customer complaints (see articles here and here). So what are the airlines doing about the situation? Are they creating White Space to try new solutions? Unfortunately, no. Their answer is to do More, Better, Faster and Cheaper operation of an airline system that is cracking all over the place, and producing horrid results. How will we get better service, after 3 decades of decline, by doing more of the same?
The first action the airlines promise is MORE flights. How will that improve the situation when the system is already overcapacity, causing computer breakdowns at the airlines and in the FAA? More flights have never solved the problem.
United reacted by hiring a Walt Disney executive pledging to help the airline be BETTER at customer service. Sorry, but the airlines aren’t amusement parks, and customers are trying to get from A to B on time and with their bags. The solution isn’t about trotting out Mickey Mouse to put a smile on someone’s face when they are 6 hours late, tired of the uncomfortable airport seating, and out of money for the overpriced airport food and lodging. Trying to apply a veneer of happiness on top of a broken Success Formula producing lousy results will only make investors and customers more angry.
The airlines are asking for a change in work rules so they can try to move the airplanes FASTER. When the gates are sold out, and the system is working so close to capacity that even high wind can cause 2 hour back-ups at major airports as ripples flow the system, changing the job description for a baggage handler or gate agent isn’t going to solve the problem.
And, of course, the airlines never tire of talking about ways to cut costs so they can be CHEAPER. They never grow weary of hammering on their employees (often unionized) that they have to take pay cuts – when many no longer even earn a living wage (especially in the major cities where airlines hub.) Haven’t the airlines heard customers? Prices are already low. Lower prices don’t matter when you can’t get where you want to be on time and with your bags!
More, Better, Faster, Cheaper are the 4 words of Defend & Extend managers who have no idea how to do anything other than maintain Lock-in to a broken Success Formula. And in this case vendors (except for the airplane manufacturers), employees, investors and customers are all bearing the brunt of an industry that is more interested in Defending & Extending what doesn’t work than in creating some White Space to develop a new solution.
by Adam Hartung | Jun 30, 2007 | General, Leadership, Lifecycle
I was in a heated argument this week with a stock broker. His claim was that all anyone should care about is earnings. I told him that was not true. In fact, what is most important to investors is the business growth which can lead to future cash flow.
Take WalMart for example. The company has continued to grow it’s EPS the last few years, but the stock has been mired in a trading range over the same period (see chart here). Why doesn’t WalMart stock price go up with earnings? Why does the price/earnings multiple decline? Because investors are very unsure how the existing management team will ever grow the business as it previously did, given that efforts to expand in Europe, South America and China have fallen flat. Wal-Mart is now trying to cut costs and buy back its stock in an effort to dress up earnings per share, but investors aren’t fooled as they see all the problems WalMart has faced and how the company’s old Success Formula simply isn’t as competitive any longer.
Or take a look at Tribune Company (see chart here). Just a few months ago Tribune announced it was repurchasing all its equity via a Sam Zell led leveraged buy-out, But recently the stock has fallen below the repurchase price. Investors have been made aware of how the management team manipulated earnings and cash flow last year to "dress up the pig" for market, and there is now risk if the bonds can be sold to generate the cash to buy the remaining stock (see article here.) When there is no growth in the business, such as the no growth scenario at Tribune, even debt investors realize that they cannot expect a return on their investment.
Just a week ago I quoted in this blog a Merrill Lynch daily report by David Rosenberg to be careful and not confuse financial re-engineering with business building. Rosenberg went on to quote the New York Times this week "a raft of bond offerings for recently announced deals… have been scaled back after facing resistance from investors." And "the term ‘loan covenants’ is making its way back into the investment lexicon." (see source here page 2.) Within two days Rosenberg said "there was supposed to be a $250bln corporate bond pipeline in the next few months to fund all these deals that have been announced, but in a sign this is no longer an ‘issuers market’, many are being scaled back or postponed" (see source here, page 3).
If you don’t keep growing your business, your value cannot grow. No matter if you are public, or want to be private. You must have a Success Formula that meets competitive customer needs and keeps you in the Rapids. You can’t count on unthinking debt investors to give you money, hoping you will let them "clip coupons" as you lazily sit in the Flats. Investors are wisening up, and realizing that you have to keep your business in the Rapids of business growth to create value – or you quickly lose value. And no one wants to be stuck in a ship without a current of growth pushing it.
by Adam Hartung | Jun 24, 2007 | Defend & Extend, In the Rapids, In the Swamp, Leadership, Lock-in
You know I’m no fan of McDonald’s (see chart here.) As detailed in previous blogs, the leadership is horribly Locked-in to its old Success Formula, and is expending lots of company resources to protect that Success Formula in the face of unhappy investors and competitors. Yet, when talking about competitors what do you hear McDonald’s discuss? Wendy’s, Burger King, Carl’s Jr. – other businesses focues upon hamburgers -with an occasional mention of Kentucky Fried Chicken or another traditional fast food outlet.
We all know where the big threat is though. And that’s Starbucks (see chart here). Far from a mere coffee shop, Starbucks has used White Space to unleash itself in several markets. And last week Starbucks showed its willingness to use White Space to expand into the marketplace McDonald’s has owned for decades – fast lunch – by announcing it will be launching premier salads.
McDonald’s started selling salads totally as a defensive move. McDonald’s new customers were staying away because mom or dad simply couldn’t eat a burger and fries, or preferred not to. So McDonald’s offered a second-rate salad product at a hefty price to try and keep the parents from saying "no" when the kids asked if they could have a burger. Salads weren’t intended to bring in new customers to eat salads, they were intended to Defend & Extend the old hamburger-based Success Formula by stopping client exodus.
Starbucks is taking a positive move into salads (see article here). It is an expansion of their Success Formula definition to include a full lunch entree. It is a shot across the bow of McDonald’s, which has conveniently ignored this emerging competitor for several years. And McDonald’s didn’t see it coming, and would now most likely say they don’t think of Starbucks as a competitor. After all, Starbucks doesn’t sell a burger, or fries.
The national airlines (United and American) never dreamed that Southwest would one day be national, have much higher customer satisfaction and be more profitable. Sears never imagined that a low-cost discount chain like Wal-Mart could eclipse its powerhouse status. DEC never imagined that AutoCad could drive it out of business. Lanier and Wang never perceived that Microsoft with a simple application like Word could kill the word processing marketplace. Once businesses devote their energies to Defending and Extending their Success Formula they completely miss the new competitors, and they don’t react until they are so far down the river that they can hear the Whirlpool sucking them under.
by Adam Hartung | Jun 22, 2007 | Defend & Extend, Leadership, Lock-in, Quotes
This week Blackstone, one of the world’s largest private equity firms announced it was likely to soon go public. Ironic that a business based upon taking companies private is now going public… Reflecting upon this, Merrill Lynch today ran the following quote (see page 5 of report here) in it’s daily North America Morning Market Memo by David Rosenberg. His topic is what happens after a business is purchased by a private equity firm:
"All of a sudden managment is focused and will do anything to maintain or increase cash flow. Here’s the usual list: Cut spending, workers, officeds, factories and advertising, and with tech companies now in play cut R&D, their lifeblood. Don’t mistake financial engineering for company building."
Well said Mr. Rosenberg.
by Adam Hartung | Jun 13, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Too often Locked-in companies literally race toward the exit of their business. And such seems to be the case with Ford (see chart here). Back on 3/15/07 I blogged that Ford was Defending and Extending its bad business by selling one of its good businesses, Aston Markin (link here). Now the company is following that same destructive path as it considers selling both Jaguar and Land Rover (see article here.)
From the late 1980s into the 1990s Ford started to develop a new future via acquisition of Aston Martin, Jaguar, Land Rover and Volvo. These were combined into its Premier Auto Group, which could have served as White Space for developing a new Success Formula that would effectively compete with Toyota, Honda, and BMW. But instead of letting this be White Space, with funding and resources to develop a new Success Formula, Ford tried to force its old Success Formula onto this group. Executives at Ford pushed to have these new acquisitions "leverage" Ford by using common parts, common engineering and common approaches. The result was a negative impact on Jaguar and Land Rover, as the old Ford Success Formula drove down the value of these brands. Instead of migrating Ford toward a new Success Formula, leadership tried to integrate these premier brands into the old Success Formula focused upon supply chain optimization and cost reduction.
Instead of becoming a great new company that led the market, Ford leadership turned Premier Auto Group into another Edsel. Something intended to be valuable, but not coming close to meeting anyone’s goals.
Jacque Nasser had an idea of how to transform Ford when he made several of these acquisitions and kept them outside of Ford. But William Ford, Jr. started the process of destroying long-term shareholder value when he rejected learning from these acquisitions and instead put company focus on old fashioned "big iron" – a claim he bragged about in ads for the Mustang. The new CEO appears to be a man after the Chairman’s heart as he tears apart the future opportunities of the company in search of cash to Defend & Extend the low-yielding Ford Success Formula. Too bad for investors and employees.
by Adam Hartung | Jun 11, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
My last email on WalMart prompted a comment from Barney. He asked my opinion of the 5-year, 10-year and 30-year prospects for Wal-Mart. Great question, worthy of a response to all readers.
The longer out the timeline, the more bearish I am. Strategy sees its results long-term rather than short-term, so given more time the impact becomes more evident. Predicting share prices short-term is hard, even for stock traders and mutual fund managers. But WalMart is definitely NOT a long-term buy-and-hold investment.
Five years out I believe Wal-Mart will be in a similar situation to today, but much more defensive about itself. The years of external attack will wear away the veneer and some of the barbs will lead to noticable wounds. The company will not succeed internationally, nor will the company substantially increase any new businesses. The traditional WalMart and Sam’s Club same same stores sales will not keep up with inflation, and new store growth will diminish (as management has said they intend). Management will waiver between investing in trying to maintain share, via ongoing lurches into price wars, and buying company equity stock in order to defend itself from investor attacks. There will be some ups and downs for the stock price, but it will not keep up with the market. Although WalMart will still be America’s largest retailer, it will not be competitively advantaged.
Ten years out WalMart will have taken a dramatic act, or two, to try and further Defend & Extend its Success Formula. It will start using cash to make acquisitions, in an effort to find some "retail synergy". It will buy into some area where it claims it can use its "core competency" in volume and supply chain to better serve customers – like furniture retailing. It will probably try to do something dramatic on the internet, albeit more than a decade late, like purchasing NetFlix, or Amazon, in hopes of re-positioning itself. But there will be no synergy, nor any value creation. Just lots of confusion for investors. And the company value will, again, not keep up with the economy or the market. It will have become a perennial also-ran investment.
Thirty years out, WalMart is today what General Motors was in 1977. People will talk about what once was a great company. WalMart will be trying to use size to defend itself, but finding that impossible as better competitors match WalMart’s skills with additional benefits.
WalMart is horribly Locked-in, with no signs of a meaningful Disruption on the horizon. Senior leadership is taking the opposite actions, buying back stock and otherwise using cash in efforts to Defend & Extend its outdated Success Formula. WalMart is in the Swamp, and it will stay stuck in the still water until something negative happens that pulls it toward the Whirlpool. WalMart will find lots of great retail companies there – in the Whirlpool – Woolworth’s, Montgomery Wards, S.S. Kresge, TG&Y and of course Sears and KMart.
by Adam Hartung | Jun 2, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
WalMart’s valuation has gone nowhere for more than 5 years (see chart here.)The equity today is worth 12% less than it was in 2003, meanwhile the Dow Jones Industrial Average (of which WalMart is a component) is up something like 25% (see chart here). Yesterday WalMart’s executives capitulated that their business has lower growth prospects, and the equity value jumped more than 3%. Say what?
I’ve beaten up WalMart a few times in this blog for being completely Locked In to an old Success Formula that no longer meets market requirements, allowing Target, Kohl’s, JC Penney and other competitors to eat into their growth. Yesterday the company admitted as much saying that it would scale back plans for growth (see article here). Instead of putting money into more stores, management would start buying back shares in order to reduce the size of the equity pool and thus hopefully raise its value. In other words, if the company can’t make more money for investors it will reduce the investors. Instead of growing the numerator (returns) it will decrease the denominator (investment.) This is nothing more than financial machinations intended to hide the inability to meet growth targets.
And investors said "great." With no return for several years on their investment they are happy to see someone buy them out, even if it’s just the company. The move up is not an endorsement of the company’s strategy or its leadership. It’s a sigh of relief that some investors will find it easier to get out.
WalMart is not improving its competitive position, it is further Locking-in that position. Instead of using its ample cash to open White Space and figure out new ways to compete WalMart is going to use its cash to reduce investors that aren’t happy with the current results. This does not signal a new beginning, but rather just another step in the Swamp toward the eventual Whirlpool of decline.
Interestingly, in just the last week the former head of Marketing at WalMart filed court documents (see article here.) Included are considerable allegations of insider dealing creating benefits for executives and family members of executives. Of course, amidst all the executive scandals of the last few years its doubtful if many investors would be surprised to learn that top executives were feathering their own nest using corporate power and position. It merely reinforces that the executives at WalMart are benefitted by doing more of what they’ve done, not trying to do anything new. Most telling, Ms. Roehm (the fired exec) said that "WalMart decided to fire her because executives had become increasingly uncomfortable with her ideas and cultural change adn they were looking for some way to revert back to their old, price-based approach to sales without embarrassing themselves by reversing the high-provile decision they had made to hire her just nine months earlier."
Less is not more. WalMart is horribly Locked-in and unable to meet changing market requirements. It’s growth options are slowing. It is Defending its old Success Formula with firings, lawsuits and financial machinations. All signs of a company heading toward the Whirlpool. It takes time for a ship bigger than the Titanic to sink, but there’s clearly some big gaping holes emerging in the hull of WalMart.
