by Adam Hartung | Oct 17, 2008 | General, Innovation, Leadership, Openness
Ever heard of "confirmation bias"? It’s a term that refers to how our behavior changes due to Lock-in. As we develop Lock-in we don’t see all the information around us. Instead, we start filtering information according to our Lock-ins – focusing on the things related to what we know and mostly ignoring things not related. As a result we often start missing things that could be really important. Consider someone who makes hammers (or pheumatic hammers) and nails. They can easily ignore glues, or super-powerful adhesive tape, when those solutoins might well be a greater long-term profit threat than offshore hammer and nail manufacturers!
Another example. A recent headline in The Chicago Tribune read "Abbott Absorbed with new Stent Therapy" (read article here). (See Abbott chart here) The article talks about how newly engineered dissolvable stents have been working extremely well in trials. If you aren’t in the health care industry, or being treated for a possible heart attack, or an investor in Abbott, you might well completely ignore the article. But, that would be a mistake.
Bio-engineering is going to be as important to our future as air travel and computers became. It was easy for people in 1928 riding horses, or driving a Model A, to think air travel was something exotic and only interesting for people obsessed with flight. But, we all know that by the end of WWII airplanes had changed the world, and the way we travel. Likewise, it would have been easy for people with slide rules and adding machines in 1968 to ignore computer discussions when they were mostly about mainframes in air conditioned basements. Yet, by the 1980s computers were everywhere and businesses that were early adopters figured out how to gain significant advantages. And that’s the truth about bio-engineering today. It will make a huge difference in all aspects of our lives.
Fistly, simple things. Like we’re more likely to live longer. But beyond that, injuries will be less onerous. As we learn how to engineer products that are somewhere between inanimate and living, we are able to come closer to the bionic man/woman. We’ll be able to repair major injuries in a fraction of the time. We’ll be able to regrow damaged organs – from skin to livers. We’ll regrow nerves – making paralyzation a temporary phenomenon and dramatically lowering the impact of strokes. Injured soldiers will return to the battlefield within days – instead of going home badly hurt. Senior citizens will regrow damaged or arthritic joints, instead of replacing them with major surgery making it possible for them to work much longer. Athletes will be able to increase performance in ways we’ve never before imagined – and the line between "natural" and "performance enhanced" will become impossible to define.
But think bigger. There is no computer in our bodies, yet we do amazingly complex analytics in record speed. Even a 2 year old can recognize the difference between a bird and a plane in a fraction of a second. Ask a computer to do that simple task! So we can expect a wave of bio-computers to be developed. Devices that use chemical reactions to process information rather than electrons acting in logic gates. How will we apply this technology to our lives and work? Cars that drive themselves? Super-secure baby walkers? Pens that never misspell words? Foods that never overcook? Foods that never spoil? Clothes that change to dissipate or hold-in heat depending on ambient temperature? Floors that purge themselves of dirt – pushing it to the surface for automatic removal?
When we are able to make chemicals – even cells – smart, what happens to the world around us? Do we ever need to go to a dentist if we can have smart toothpaste that eats away tarter and placque, applying flouride, without going into the enamel? Can we eat anything we want if we take products that absorb poison – or possibly fats – and discharge it through the system? Do cosmetics become obsolete if we all have skin creams that repair damage and keep skin forever young? What happens at companies like Procter & Gamble?
As you go to work and do your job, it’s easy to get focused on the industry in which you compete – and the traditional way that industry worked. You stop looking sideways at technologies in other fields not related to what you do today. And that can be a huge mistake. Because it’s often someone that takes a technology you ignored and apply it to your customers’ needs who makes you less valuable. Microsoft singlehandedly, and without much thought, destroyed the encyclopedia business by giving away what was considered a third-rate product (Encarta – for more on this story read Blown to Bits by Evans & Wurster). Encyclopedia Britannica never saw it coming as they kept trying to print a better product.
Spend some time reading ALL the headlines – and keep your eyes open for opportunities that you previously never considered.
by Adam Hartung | Oct 16, 2008 | General, In the Rapids, In the Swamp, Leadership, Lock-in, Openness
Traders help markets function. Because they take short-term positions, sometimes hours, a day or a few days, they are constantly buying and selling. This means that for the rest of us, investors who want to have returns over months and years, there is always a ready market of buyers and sellers out there allowing us to open, increase, decrease or close a position. Traders are important to having a constantly available market for most equity stocks. But, what we know most about traders is that over the long term more than 95% don’t make money. Despite all the transaction volume, their rates of return don’t come close to the Dow Jones Industrial Average – in fact most of them have negative rates of return. Only a few make money.
For investors it’s not important what the daily prices are of a stock, but rather what markets the company is in, and whether the markets and the company are profitably growing. On days like today, which saw the DJIA down triple digits and up triple digits in the same day (read article here), it’s really important we keep in mind that the value of any company in the short term, on any given day, can fluctuate wildly. But honestly, that’s not important. What’s important is whether the company can exp[ect to grow over months and years. Because if it can, it’s value will go up.
Let’s take a look at a couple of companies in the news today. First there’s Google (see chart here). Despite the recession, despite the financial sector meltdown and despite the wild volatility of the financial markets, the number of internet ads continued to go up. Paid clicks actually went up 18% versus a year ago. (read article about Google results here). Gee, imagine that. Do you suppose that given the election interest, the market interest during this financial crisis and the desire to learn at low cost more people than ever might be turning to the internet? Does anyone really think internet use is going to decline – even in this global recession? Google is positioned with a near-monopoly in internet ad placement (Yahoo! is fast becoming obsolete – and is trying to arrange to use Google technology to save itself see Yahoo! chart here]). By competing in a high growth market – and constantly keeping White Space alive developing new products in this and other high-growth markets – Google can look out 3, 5, 10 years and be reasonably assured of growing revenues and profits. And that’s irrespective of the Dow Jones Industrial Average (where Google might well replace GM someday) or whether Microsoft buys the bumbling Yahoo! brand (read about possible acquisition here).
On the other hand, there’s Harley Davidson (see chart here). Motorcycles use considerably less gasoline than autos, so you would think that people would be buying them this past summer as gasoline hit record high $4.00/gallon plus prices. Yet, Harley saw it’s sales tumble 15.5% (much worse than the heavyweight cycle overall market drop of 3%) (read article about Harley Davidson’s results here.) The problem is that Harley is an icon – for folks over 50! The whole "Rebel Without a Cause" and "Easy Rider" image was part of the 1940s post war rebellion, and then the 1960s anti-war rebellion. Both not relevant for the vast majority of motorcycle buyers who are under 35 years old! Additionally, long a company to Defend & Extend its brand, Harley Davidson has raised the average price of its motorcycles to well over $25,000 – a sum greater than most small cars! Comparably sized, and technologicially superior, motorcycles made by Japanese manufacturers sell for $10,000 and less! Worse, the really fast growing part of the market is small motorcycles and scooters that can achieve 45 to 90 miles per gallon – compared to the 30 mile per gallon Harley Davidsons – and Harley has no product at all in that high growth segment! Harley Davidson is a dying technology and a dying brand in an overall growing market. No wonder the company is selling at multi-year lows (down 50% this year and 67% over 2 years) . Even though the stock market may be down, Harley Davidson is unlikely to be a good investment even when the market eventually goes back up (if Harley survives that long without bankruptcy!)
Watching the Dow Jones Industrial Average, or the daily stock price of any company, isn’t very helpful. Daily, prices are controlled by the activity of traders – who come and go incredibly fast and mostly lose money. What’s important is whether the company is keeping itself in the Rapids of Growth. Google is doing a great job at this. Harley Davidson is Locked-in to its old image and thoroughly entrenched in trying to Defend & Extend its Lock-in – completely ignoring for the past decade the more rapid growth in sport bikes, smaller bikes and scooters. As investors, customers, employees and suppliers what we care about is the ability of management to Disrupt their Lockins and use White Space to stay in the Rapids of growth.
by Adam Hartung | Oct 10, 2008 | Defend & Extend, General, Leadership, Lifecycle, Openness
We talk a lot about evolving markets. When we use that phrase, evolving, we think of gradual change. In reality, evolutionary change is anything but gradual.
People think of change as happening along the blue line to the left. A little change every year. But what really happens is like the red line. Things go along with not much change for a very long time, then there’s a dramatic change, and then an entirely new "normal" takes hold. This big change is what’s called a "punctuated equilibrium."
What we’ve recently seen in the financial services industry is a punctuated equilibrium. For years the banks went along with only minor change. They kept slowly enhancing the products and services, a little bit each year. Regulations changed, but only slightly, year to year. Then suddenly there’s a big change. Something barely understood by the vast majority of people, credit default swaps tied to subprime mortgage backed securities, became the item that sent the industry careening off its old rails. That’s because the underlying competitive factors have been changing for years, but the industry did not react to those underlying factors. Large players continued as if the industry would behave as it had since 1940. Now, suddently, the fact that everything from asset accumulation to liability management and regulation will change – and change rapidly.
When punctuated equilibrium happens, the old rules no longer apply. The assumptions which underpinned the old economics, and norms for competition, become irrelevant. Competition changes how returns will be created and divvied up. Eventually a new normal comes about – and it is always tied to the environment which spawned the big change. The winners are those who compete best in the new environment – irrespective of their competitive position in the old environment. The one thing which is certain is that following the old assumptions is certain to get you into trouble.
I’ve been surprised to listen to "financial experts" on ABC and CNBC advising investors since this financial services punctuated equilibrium hit. Consistently, the advice has been "don’t sell. Wait. Markets always come back. You only have a paper loss now, if you sell it becomes a real loss. Just wait. In fact, keep buying." And I’m struck as to how tied this advice is to the old equilibrium. Since the 1940s, it’s been a good thing to simply ride out a downturn. But folks, we ain’t ever seen anything like this before!! This isn’t even the Great Depression all over again. This is an entirely different set of environmental changes.
In reality, the best thing to have done upon recognizing this change would be to sell your equities. The marketplace is saying that global competition is changing competition. How money will be obtained, and how it will be doled out, is changing. Old winners are very likely to not be new winners. Competitive challenges to countries, as well as industries and companies, means that fortunes are shifting dramatically. No longer can you consider GM a bellweather for auto stocks – you must consider everyone from Toyota to Tata Motors (today the total equity value of Ford plus GM is 1/10th the value of Toyota). No longer can you assume that real estate values in North America will go up. No longer can you assume that China will buy all the U.S. revolving debt. No longer can you assume that America will be the importer of world goods. How this economic change will shake out – who will be the winners – is unclear. And as a result the Dow Jones Industrial Average has dropped 40% in the last year.
To all those television experts, I would say they missed the obvious. How can it be smart to have held onto equities if the value has dropped 40%? Call it a paper loss versus a real loss – but the reality is that the value is down 40%! To get back to the original value – to get your money back with no gain at all – will take a return of 5% per year (higher than you could have received on a guaranteed investment for the last 8 years) for over 10 years! That’s right, at 5% to get your money back will take 10 years!! Obviously, you would have been smarter to SELL. And every night this week, as the market fell further, these gurus kept saying "hold onto your investments. It’s too late to sell. Just wait." Give me a break, if the market is dropping day after day, how is it smart to watch your value just go down day after day! You should quote Will Rogers and say to these investment gurus "it’s not the return on my money I’m worried about, it’s the return of my money"!!
Or read what my favorite economist, Mr. Rosenberg of Merrill Lynch wrote today "There is no indication…that the deterioration in the fundamentals is abating…all the invormation at hand suggests that the risk of being underinvested at the bottom is lower than the risk of being overexposed to equities….in other words, the risk of geing out of the market right now is still substantially less than the risk of continuing to overweight stocks…what matters now is to protect your investments and preserve your capital." (read article here)
The world is full of conventional wisdom. Conventional wisdom is based on the future being like the past. But when punctuated equilibrium happens, the future isn’t like the past. And conventional wisdom is, well, worthless. What is valuable is searching out the new future, and learning how to compete anew. Right now it’s worth taking the time to focus on future competitors and figure out how you can take advantage of serious change to better your position. You can come out on top if you head for the future – but not if you plan for a return to the past.
by Adam Hartung | Oct 5, 2008 | General, Leadership, Lifecycle, Lock-in, Openness
This blog primarily focuses on businesses. But in Create Marketplace Disruption I point out that Success Formulas exist at multiple levels – not just companies. At a higher level, Success Formulas exist for functional groups, work teams and individuals. At a lower level than companies, Success Formulas exist for industries and even entire economies. When a shift happens at any level, all levels above that have to adjust for that shift. Over the last few weeks, we’ve been witnessing the impact of shifts in economies that are having a tumultuous impact on the financial services industry – and the companies participating in that industry.
With last week’s announcement of higher expected first time unemployment claims (see article here), The U.S. is confirmed to be headed into a recession (if not already there [article here].) But beyond the U.S., the economies of the developed economies in 2009 is expected to grow .6% -the weakest since 1982. The emerging markets are expected to grow at 6.1% (weakest since 2003) – 5.5 percentage points higher – 10x developed markets – 4x the average difference in growth rates during the 1990s. This is a pretty massive change. (Read article here)
The U.S. banking crisis has been the result of lots of bad loans on everything from mortgages to autos and credit cards. As asset values (principally homes) and incomes declined, the number of unpaid loans went up. It turned out that many of these loans had been packaged and sold off, and derivative instruments were created on those assets to help increase returns, causing not only the lenders to get into trouble by defaults, but investors (like insurance companies). Sort of a "domino effect" – or some say the falling of a "house of cards." While this explains why U.S. banks and insurance companies stumbled, why are we also seeing a rash of problems across Europe and some in Asia (read article here). The governments are "bailing out" banks and other financial companies from Ireland to Iceland – while putting in place lots of additional regulations (like banning short sales [article here] – a tactic also being used in the USA.)
In the USA, banks and investment banks allowed ever-increasing risk to creep into the debt market via higher lending limits on asset values and incomes. They were seeking ways to maintain results by manufacturing ever riskier transactions dependent on fast rising asset values and incomes – even if there was no reason to believe they would happen. They were looking for ways to Defend & Extend their Success Formula. We now can see that was happening all around the developed markets. Emerging market governments were buying secure U.S. Treasuries. But everywhere else institutions were trying to find higher yields in order to Defend & Extend their Success Formulas. As a result they bought mortgaged-backed securities and other even riskier instruments. Now that those securities are defaulting, all the developed markets are seeing big financial industry problems. The unwinding of risk is causing big problems all across the developed markets where actually making things – manufacturing, IT code, services – has been declining.
At the base of the pyramid, the economy, we can now see that the markets which make things are doing a lot better than those which have been outsourcing. This had already made a big difference in many manufacturing industries. And now we can see it in financial services. What underlies these industry problems is that the relative competitiveness of the economies is shifting. Every industry, company, functional manager, work team and individual will have to alter their Success Formulas to deal with this change – or face declining returns. Some started making these changes years ago (such as GE and IBM), and others have not (such as GM and Ford).
If there is not going to be a wholesale realignment of global economic leadership, it will require the government, industry and company leaders in the developed countries to make substantial changes in their Success Formulas. The recent U.S. financial services industry bail-out bill only addressed the current debt and cash flow crisis. It did not address the fundamental changes in the economic competitiveness. We can soon expect similar requests for government bail-outs from the auto industry, homebuilding industry, appliance industry, etc. Until government leaders develop a different economic model, the developed countries will struggle. And the industries that formerly led in these countries will continue to see market dominance shift as it has done in IT services, customer service, furniture manufacturing and several others. Success Formulas must be changed from the bottom to the top – including those of the individuals who are seeing the changes in competition affect them.
What’s needed now more than ever is White Space to address these market Challenges. Just as the New Deal in the 1930s and the dramatic tax reductions of the 1980s allowed for experimentation and creation of entirely new Success Formulas to changed market conditions – similar White Space is needed in government today. And those who lead their industries and companies must begin using more White Space to find new ways to compete – rather than trying to Defend & Extend despite declining returns. Equally, functional group heads and work team leaders will find themselves having to use more White Space to address competitive needs – rather than falling back on old assumptions about what works.
Those who implement White Space and develop new Success Formulas they can migrate toward will be able to improve their competitiveness and survive – possibly thrive! Those that don’t will find the future very tough sledding. There is no doubt about the global shifts that started a decade ago and are continuing today. Trying to wind the clock backward will never happen. Old competitive models are now obsolete. The winners will be those who follow the Phoenix Principle and use White Space to migrate their Success Formulas.
by Adam Hartung | Oct 2, 2008 | General, In the Rapids, Leadership, Lifecycle, Openness
I was asked today what I thought about Berkshire Hathaway’s bail-out of GE – did it make me less of a GE fan?
No. Firstly, Warren Buffet’s $3B investment in GE is not a bail-out (read about the deal here). The U.S. bail-out package is for purchasing distressed assets that have questionable value. That is not what Berkshire Hathaway did. Mr. Buffet created one of those private equity deals you and I could only dream of getting. For his investment he gets preferred shares, which have a 10% coupon yield — that’s about 5x what you or I can get on a savings account now – and places his dividend right up there at the top of the payments G.E. will make. If GE would like to repay the money Mr. Buffet is investing they can do so in 3 years – as long as the company pays an additional 10% premium over the dividend. Thirdly, Mr. Buffet receives warrants to purchase $3B of GE stock at $22.50 a share – about half what the stock was worth a year ago, equal to its recent lows, and a price not seen by GE shareholders since the market crash of 2001 (see GE chart here). So Mr. Buffet has what would be called a real sweetheart deal. A big dividend, a buyout premium, and options to make billions if GE survives and remains a long term winner. Mr. Buffet did not simply buy GE common stock, the option available to us mere investing mortals, so we have to look at GE differently than Mr. Buffet did.
GE is the only company that has been on the Dow Jones Industrial Average since its inception. The only one. More than 100 years. But this does not mean it will remain on the DJIA. History is not a good reason to be optimistic about GE – and Mr. Buffet’s likelihood of pocketing a few billion more dollars for the Gates charity. You should be optimistic about GE because in the middle of this rather dramatic market disruption, GE is fast taking action to become a more competitive company. Not just shore up its old business, like most of the banks are doing, but rather repositioning its portfolio to be more successful in the post-crisis market.
We have already heard that the crisis is causing, and will for a goodly while cause, debt to be more expensive. And harder to come by. Long before debt becomes a problem, and long before anyone questions GE’s credit worthiness, GE is already taking action to increase its cash hoard and preserve it’s AAA debt rating. While others are contemplating what to do, GE is raising money from its businesses, Mr. Buffet, from its planned sale of another $12billion in stock. Given the currently low stock price, many CEOs would say "I won’t sell more equity until the markets recover and the value goes back up. I want to avoid earnigs dilution." But GE’s Chairman is acting now to prepare the company for competition in the post-crisis market.
Instead of worrying about dilution, Chairman Immelt admits he is raising cash because "it gives us the opportunity to play offense in this market should conditions allow." Get that – rather than being on his heals and reacting defensively, GE’s leadership is getting its act together to take advantage of low asset values during and after this crisis. It is making sure the company has the resources to continue investing in White Space – to continue being a Disruptive market player in markets that others are just now trying to figure out. GE is revamping its portfolio to be a market leader in 2012, 2015 and 2020.
GE is reporting a bad quarter – and none too good year. But the leadership has recognized the risk of falling into a growth stall. Rather than trying to wait and see what happens, and drift off into the Flats and the Swamp, leadership is taking fast action to throw GE right back into the Rapids. GE is revamping its financial services business to adjust to the market shift. And it is selling many of its long-held U.S. businesses that are facing far slower growth – like the iconic appliance and light bulb businesses. Imagine that, selling the business most closely identified with founder Thomas Edison – the light bulb. In this "nothing is sacred" attack on the existing business portfolio the company is moving rapidly into infrastructure projects like water production in developing markets China and India.
Short term GE’s equity value is subject to the whims of traders and the overall market direction. But looking long-term, it’s hard not to be optimistic about a company that’s doing such a good job of using scenarios to do its planning, keeping track of competitors, taking action leveraging market disruptions and keeping White Space alive and vibrant for future growth.
by Adam Hartung | Oct 1, 2008 | General, In the Rapids, Leadership, Openness
I’ve talked about scenario planning several times during this recent financial crisis. Scenario planning is the first step in becoming an evergreen Phoenix Principle organization that can achieve above-average long-term performance. If we overcome our tendency to focus on what we’ve always done, and what we do today, by getting our eyes set forward we can do a lot better job of providing markets what they want, when they want it and at a healthy profit to boot.
First, think about big trends. It was 3 years ago that home values flattened, and the decline in sales started. Using that information, it was possible to think ahead to what it would mean. U.S. consumer consumption would decline (which has now happened for more than a year) as home values flattened, and then declined, because there would be less home equity to be used for buying stuff. Additionally, holding on to higher mortgages meant that consumers would have less debt capacity. Further, falling prices would mean fewer new home creations, which would mean less being spent on carpeting, refrigerators, furniture, and all that other stuff. Furniture retailers and appliance retailers would struggle.
Of course, it wasn’t hard to imagine that some people on a merry-go-round of home sales would see the merry-go-round stop — leaving them with mortgages they couldn’t afford and homes worth less than they paid. That would lead to foreclosures – and then what would happen to all those packaged mortgage instruments being sold by investment bankers? And if banks couldn’t resell the mortgages, where would the deposits come from to support new mortgage creation? And if the bankruptcies rose, what would happen to those who guaranteed the mortgages (like Freddie Mac and Fannie Mae) and those who bought all those bonds (like AIG)?
OK, so it’s easy to see in retrospect. But what about going forward? Well, think about autos. We know that the consumer isn’t going to see their homes going up in value for a goodly while. Nor will there be easy credit for buying cars. So, what would you expect? Why, declining auto sales of course. The next few years are destined to be very tough for the already strapped automakers General Motors, Ford and Chrysler. So even though auto sales have been declining for 11 straight months (which is a 17 years record, and puts sales at a 15 year low [read article here]), and sales are off 26% to 34% versus a year ago for most American manufacturers (read article here) there’s really no reason to expect new car sales to start going up again any time soon. And we can see that GM bonds are now yielding a whopping 21% as people doubt their ability to repay those debts. But also, we can expect the number of auto dealers to decline. And now the news is reporting America’s largest Chevrolet dealer just filed bankruptcy, laying off 3,200 people, as the industry anticpates 600 dealer failures this year (read article here.) Tight consumer credit hurts sales, and also hurts the stocking of inventory on dealer lots.
Picking up on big trends can help us build a picture of the future. That picture doesn’t have to be completely accurate to help us plan. If we plan for the future, we can still succeed.
Back to our auto business. If we don’t buy new cars, we keep our cars longer. That means more maintenance. And more purchases of replacement tires, starters, and all those parts that wear out. It also means people will probably do more auto washing and cleaning to preserve their existing autos. And they are more likely to spend a bit to upgrade the existing car, say upgrading the stereo or the wheels, to brighten up life without the expense of buying a whole new car. And if dealerships are declining, then that maintenance and upgrage work will go elsewhere. So now would be a good time if you are a dealer to improve the maintenance departments to attract new customers, and help them with upgrade sales. And now is a good time for Pep Boys and Auto Zone to do better. The local car wash just might do OK, and if it offers various upgrades to add onto the wash they have the chance to boost the average ticket value of each wash. So while overall auto sales are dipping, this would be a good time to invest in all the support businesses for cars.
Someone once said that in business for every loser theirs a winner. I’m not sure if that is true. But what is true is that if you do your planning by looking squarely into the future, and building scenarios of most likely outcomes, you’ll do a lot better than if you keep planning for the past to continue. And once you have a good set of future scenarios, it can help you to compete a lot more effectively. Dealers that start being a lot nicer back in the maintenance area, and send out mailers to previous customers offering deals on oil changes, transmission changes, radiator tests and replacement tires will compete better than those that just keep running newspaper ads for us to buy the latest new car. Scenarios can help us to not only prepare, but compete a lot more effectively. No matter what our old Success Formula was, we can move to ones that are more profitable if we keep developing those future scenarios and implementing what future markets need.
by Adam Hartung | Sep 29, 2008 | General, Leadership, Lock-in, Openness
Today the U.S. Congress failed to pass a bail-out bill to buy up bad bank assets. Before the vote, the Dow Jones Industrial Average was down about 300 points. After the vote, the DJIA fell to close down about 700 points (read about the vote and market reaction on Marketwatch here.) So, is the end near – or is everything going to work out OK?
I’m reminded of the scene in It’s a Wonderful Life where George Bailey (played by Jimmy Stewart) is invited by the town patriarch, Mr. Potter, to take a job for Mr. Potter. As he starts the conversation Mr. Potter says something close to "George, back in the Depression when everyone lost their heads you and I kept ours. You ended up with the Building and Loan, and I ended up with everything else." The crisis happened, and lots of people got hurt. Some came out OK, and some did very well. On the other side of a crisis, there are winners. It’s just that often those winners are not the same people who were winners going into the crisis.
Over the last several months we’ve seen some big changes in financial services. We’re seeing some losers already. But we’re also seeing some plays being made that could become winners. It was the announced losses at Citibank, which led to the firing of their CEO Mr. Prince, that first alerted people to the reality of this crisis. Today, Citi announced it is buying Wachovia bank in its play to be a long-term winner. The new CEO says this is a rare opportunity for huge gain with almost no risk. It was JPMorganChase that first took a play to expand in this crisis with the acquisition of Bear Sterns, which many people at the time thought was done for a remarkably small amount of money. Later JPMC bought Washington Mutual for a fraction of its asset value. And Bank of America has moved aggressively, buying up the very troubled Countrywide Financial that was the first mortgage institution to fall, and later taking over Merrill Lynch the weekend when Lehman Brothers went bankrupt.
Will Jamie Dimon of JPMC be the next Mr. Potter, taking over control of his local market during a crisis? Some of these may become big winners. On the other hand, all 3 may falter.
What we know is that the demand for loans (the product that banks sell) is not going to disappear. That market may hiccup, but demand will continue to grow. Government, corporations and individuals all will continue to need loans. As the standard of living rises in China, India and elsewhere demand for loans will go up. And the winner will be the business that develops a solution to the future market need. You can’t judge the value of these actions by looking at how these businesses did in the past – because that past is gone. It’s all about the future. So, what should be the scenario for 2015?
- Will the dollar continue to be the world currency – the source of denominating oil and other commodities as well as most transactions? Or will we see a change to the Euro, or perhaps a basket of currencies put into some sort of as yet unavailable currency instrument?
- Will people continue to save their money in currencies, as deposits in banks, or will there be a re-emergence of keeping stores of value in silver, gold, and other commodities (in India, many people still carry their savings as jewelry on their arms).
- Will U.S. based companies dominate the equity markets, or will companies from the "emerging tiger" countries become relatively more powerful?
- Will the primary source of deposits be in the USA, Europe, China, India, or elsewhere?
- What rate of return will depositors require on their investments? Will this vary by region?
- Will real estate values in the USA, Britain, France, Germany, Japan, Brazil, Russia, Taiwan, Hong Kong, Singapore, Taiwan, China and India go down? Go up? Will there be big differences between regions? How will the differences vary?
- Where will deposits, regulations and legal devices converge to be the primary source of loan origination? The USA? Elsewhere?
Who wins depends on who has a good set of scenarios about the future. Not because they can predict, but because they are prepared for different potential outcomes, and they can shift to meet Challenges. And if you are an investor, your pick between the 3 mentioned – or possibly ICBC, HSBC, Banco Santander, Mitsubishi, ABN Amro, BNP Paribas, UBS or Royal Bank of Scotland? How will the big U.S. banks compare in a global market – and one that is less dominated by the USA?
Too many investors don’t have future scenarios when they invest. They buy equities, or make loans (buying bonds), on the basis of company history. But the value you receive for investing has nothing to do with what the company did in the past – it’s all dependent upon the future. When an industry crisis occurs, like the one in financial services today, those who survive – and those who thrive – do so because they have a good set of scenarios about the future. There is no doubt some will come out of this crisis as winners. They may be players who had nothing to do with the past – or they may be companies people in the USA know very poorly. But if you are going to invest in financial services, you better have a good set of scenarios – and you better watch closely to see how things develop.
Note: Looking at the 3 companies referred to here, one is acting quite differently than the others. While Citibank and Bank of America are moving fairly slowly to change, JPMC is moving very, very fast with its acquisitions. Within 3 months of buying Bear Sterns, JPMC had dismantled the company, consolidated its assets and let go its employees. After acquisition many companies spend months trying to work their way toward some sort of "merged" solution – only to spend huge quantities of cash and end up with higher costs and lower revenues. At JPMC we see one company forcing its Success Formula onto its acquisitions – no belabored effort. Rather fast moves taken to consolidate assets and keep the Success Formula in place. Whether the JPMC Success Formula is the right one for the future is yet to be seen. But the leader’s actions at JPMC are far more likely to be effective for shareholders than the actions being taken at the other institutions. Especially if JPMC is able to shift with the marketplace.
by Adam Hartung | Sep 25, 2008 | General, In the Rapids, Leadership, Lifecycle, Openness
General Electric (see chart here) today announced earnings will decline (read article here). Its very large GE Capital unit, which produced 45% of last year’s corporate earnings, is seeing its unit earnings hit hard in this financial crisis. With its admission of the expected decline, many analysts are angry and say the senior leadership has no credibility (read article here). They are crying for heads to roll. So, should you sell GE stock if you own it?
First, look at the announcement. In addition to saying earnings are going to decline, the company has said it intends to diminish its financial business and grow its global industrial business. While it is cutting the dividend the financial unit pays to the parent, it is also cutting the debt in the financial unit. And, most importantly, GE is halting its stock buyback. "We have suspended the stock buyback to reduce GE Capital leverage, while still being able to pursue opportunistic acquisitions" is what Chairman Immelt said.
This is great news for investors. This management team has said it is less interested in manipulating earnings per share by buying back stock, and instead wants to make sure it has cash to make acquisitions at a time when many business values are declining. GE is preparing to keep its growth going, primarily outside financial services, by making sure it has cash and continuing its hunt for acquisitions. Meanwhile, its actions allowed the rating agencies to re-affirm GE’s triple A credit rating – making it a company able to raise debt from around the globe as this crisis continues.
This is exactly what you want to see in a Phoenix Principle company. GE is a portfolio of businesses, which it works aggressively to keep growing. Selling things that don’t grow, and buying things that do. It keeps moving people around in the company to challenge them, and thus help both employees and their units grow. It isn’t stuck in its old business, but is ready to keep moving forward. And it is planning to move forward by admitting it intends to make acquisitions if the markets remain troubled and asset values keep falling. Rather than pulling back to protect its core – especially its core financial services unit – GE leadership is taking action to move forward with less emphasis on financial services and a plan to invest in other businesses with better return potential.
If you are an employee, a vendor, a customer or an investor in GE – could you ask for more? With its eyes firmly on the future, a passion for beating competitors, a willingness to Disrupt even during turbulent markets and the willingness to continue creating and maintaining White Space GE will continue to be a long-term survivor with above average performance long term. Preparing to grow, regardless of market conditions, is part of what makes GE stand out – despite its critics.
by Adam Hartung | Sep 24, 2008 | Disruptions, General, In the Rapids, Leadership, Lifecycle, Openness
Yesterday, amidst all the brouhaha over the dissolving of America’s financial system, Google (see chart here) launched a new phone (read article here.) This would have surely been the #1 front-page news, except – again – the Congressional effort to deal with a trillion dollar investment decision in bad loans. So, is this a big deal that was given short shrift, or is it an announcement we can ignore?
There is debate about whether the Google phone is a game changer or not. And that debate cannot be resolved by phone gurus. Quite simply, mobile phones are no longer simply phones. All the new products are built with new operating systems which let them operate various applications making them quasi-personal computers with mobile telephony capability. There are now several players in the game, and to assess the likely winner’s you would be best served to read Geoffrey Moore’s book The Gorilla Game in which he chronicles the requirements for success when launching technology products. So, does this mean we should reserve opinion about the importance of this launch until more is observed about sales and market share generation?
Hardly. I’ve blogged a fair bit about Google lately – and it’s been positive – and once again I think you should be impressed with this launch. It shows Google getting into yet another growing market, and with yet another new technology. Once again Google has chosen not to sit on its laurels in search or ad placement and invest big money in White Space with permission to do what’s necessary to succeed. One thing Google has a lot of right now is money – and instead of hoarding it the company is creating and maintaining White Space which can keep Google in the growth Rapids. I doubt that everything Google does will make money, and I doubt all its products will succeed. But the fact that Google is investing its ample cash in projects inside growing markets which can sustain the growth is the best move the company could take now.
Also, it’s impressive that Google made its launch knowing that it wouldn’t get the top headline. This shows an organization more intent on White Space than headlines. Instead of creating a "splash" about itself the company put out a new product, using new technology, that operates on a new network, with new functionality – and did it during a very uncertain time for most investors and the economy. Obviously, Google is looking forward and sees it must get into the market now and compete to learn how it will succeed. While many other companies which are less cash rich are forced to pull back their horns, or with management that prefers to be conservative because of shifting markets, Google is keeping its eyes squarely on the future and sees that getting in now, during a period of great uncertainty, only increases its odds of success. When markets shift it most benefits the new entrant willing to create marketplace disruptions – and that’s what we see Google doing now.
We all were impressed with how IBM practically monopolized the mainframe computer business. We were impressed with how Wang dominated word processing. And how Digital Equipment dominated engineering mini-computers. We were impressed that Microsoft took total domination of the desktop market, Dell created domination in selling and distributing PCs, and Sun Microsystems garnered huge share in Unix servers. But each of these got into trouble when markets shifted and they weren’t part of the market shift. As they tried to "milk" their market position and disparage upstart competitors, they fell into Defending & Extending their outdated Success Formulas – until they either (a) had a big, dramatic turnaround, or (b) went out of business, or (c) saw their growth slow and their value plummet. What’s impressive is that Google is showing us the willingness to Disrupt what made them great and enter dispirate new markets with new solutions using White Space to develop new Success Formulas around those markets. With this behavior, they are much more likely to demonstrate long-term value creation than the companies listed above.
And for customers who recognize the value in new technology, as well as employees looking for ways to grow, and vendors ready to support the effort, as well as investors, this is a very good sign.
by Adam Hartung | Sep 18, 2008 | General, Innovation, Leadership, Openness
After my blog on Tuesday, I was bashed by a number of folks as a pessimist – or worse. Some have said my willingness to discuss America’s financial crisis in a negative light based on the assessment it is likely to worsen, as well as the loss of America’s manufacturing base and jobs, is far too negative. I’ve also been accused of being Chicken Little and claiming the sky is falling – when we’re only in for a patch of rough weather. Some have quoted presidential candidate John McCain and said that our best days are surely ahead of us, and I should be less gloomy. So are my detractors right?
I don’t know what the future will bring. I have no crystal ball. I have no ability to time travel. I cannot foresee the future. And that was not my point. Rather, what I’m recommending is that we all use scenario planning to help us create a strong future for our lives, our work teams, our functional groups, our businesses, our industries and our economies. Whether our futures are bright or gray has everything to do with what actions we now take – and those must be based on our scenarios of the future. If our actions prepare us to be more competitive in the future, we can be far more successful than we were in the past. Yes, our best days will lie ahead for all of us who are preparing for the shifted marketplace – who are moving to implement based on future scenarios that are different from the past. What these news headlines are telling us is that markets have shifted, and the future will not be like the past.
The risk is that our planning is not effective. Too often planning is based on extending the past. "This is what it was always like, and I’m sure things will return to the old ways soon enough." When we build plans based on the past we start using confirmation bias to help us believe our extension planning is the most likely case. After all, up until a market shift the planning has been right – hasn’t it! Recently one fellow told me that while several of America’s largest and most powerful financial institutions were failing he wasn’t worried because a local bank he knew was doing quite well, according to its leaders. His bias that things will work out allowed him to take this piece of information and use it to discount all the information in the news that America’s financial system is in crisis. He’s not stupid or foolish – he just allows his Lock-in to the past to permit using data in a way that confirms what he wants to believe. We all do this, and often it’s no big deal. But, when market shifts happen, confirmation bias that allows us to keep faith in a future similar to the past can be deadly.
The folks running Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, Freddie Mac, Fannie Mae and Washington Mutual were/are some of the smartest people in business globally. (Add up the incomes of the "C" level execs in these companies and you’d have enough money to operate several state governments). But their belief that "things would work out" allowed them to keep following a plan which did not meet market reality. Shifts were happening in the worlds of real estate, manufacturing, commodities and finance that were preparing to upset their proverbial applecarts in a major way. They weren’t stupid, but they also weren’t prepared. Their scenarios of the future did not account for these shifts, and as a result they have been struck down. For them, there best days definitely don’t lie ahead. For some of them, there is no future. Not for the companies, and not for their employees or customers. Not only are the shareholders being wiped out, but those customers that depended on these institutions for financing are now scrambling to figure out what to do next. A lot of people are finding life very tough this week because these organizations had plans based upon extending the past – rather than cold assessments of what might happen in the future.
There will be winners coming out of this financial crisis. Some will be in the USA. Some will be elsewhere. Those who will succeed will be those who compete based upon where the markets are headed – not where they have been. While some analysts are recommending people invest in Coke, Pepsi, General Mills and Kraft, the reality is that those recommendations are nothing more than looking for a life raft (any raft, no matter the quality) so you can escape the sinking ship (and ignores that the best life raft is simply cash or treasury bills). The winners will be those competitors that build on the underlying factors which created this crisis, implementing new solutions. Because there will be loans tomorrow, and there will be banks, and there will be a need for financing. But the market will be different. And those who are prepared for this difference, for this new market, will do much, much better than those who are not. A situation like we’re seeing now in American finance is only a problem if you aren’t prepared.
Those competitors that perform well year after year after year after year are the ones who don’t simply plan by extending the past. They build scenarios that take into account many factors – including factors which can doom their Success Formula. They don’t ignore the scenarios that put them at risk. In fact, they invite outsiders to their planning (advisors, consultants, investors, lost customers, etc.) who will point out confirmation bias. They invite the creation of scenarios that require a different Success Formula – so they can understand what they will have to do if they are to continue succeeding regardless of market shifts.
I’m not pessimistic about the future. I’m optimistic. Creative Destruction (see Joseph Schumpeter here) means that out of every failure you have the creation of a new opportunity. I can only be seen as pessimistic by those who want the future to be like the past. Only if you are wedded to past extension do you find this "crisis" something to ignore, avoid or hope simply isn’t going to really happen. If you are committed to a successful future then this is an opportunity. It is an opportunity for those who are willing to Disrupt their Lock-in and use White Space to develop new Success Formulas that take advantage of the market shift.
Smoothing out the ups and downs is all about effective scenario planning. If you are willing to use big trends to develop scenarios of the future you can prepare for almost any circumstance. And those who are prepared find market shifts the time to take advantage of competitor weaknesses and grow. Are you planning for the past to return, or are you developing scenarios of the future that could be very different from today? If you’re the former, it’s going to be a rocky ride. If you’re the latter, you could be the next Google. The DJIA can fall 1,000 points, and that is immaterial if your plans are based on the market requirements of the future. Those companies which are focused on the future scenarios are the ones to invest in.
