by Adam Hartung | Feb 9, 2014 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, Leadership, Lifecycle, Lock-in
There is a definite trend to raising the minimum wage. Regardless your political beliefs, the pressure to increase the minimum wage keeps growing. The important question for business leaders is, “Are we prepared for a $12 or $15 minimum wage?”
President Obama began his push for raising the minimum wage above $10 a year ago in his 2013 State of the Union. Since then, several articles have been written on income inequality and raising the minimum wage. Although the case to raise it is not clear cut, there is no doubt it has increased the rhetoric against the top 1% of earners. And now the President is mandating an increase in the minimum wage for federal workers and contractors to $10.10/hour, despite lack of congressional support and flak from conservatives.
Whether the economic case is provable, it appears that public sentiment is greatly in favor of a much higher minimum wage. And it will not affect all companies the same. Those that depend upon low priced labor, such as retailers like Wal-Mart and fast food companies like McDonald’s have a much higher concern. As should their employees, suppliers and investors.
A recent Federal Reserve report took a specific look at what happens to fast food companies when the minimum wage goes up, such as happened in Illinois, California and New Jersey. And the results were interesting. Because they discovered that a higher minimum wage really did hurt McDonald’s, causing stores to close. But….. and this is a big but…. those closed stores were rapidly replaced by competitors that could pay the higher wages, leading to no loss of jobs (and an overall increase in pay for labor.)
The implications for businesses that use low-priced labor are clear. It is time to change the business model – to adapt for a different future. A higher minimum wage does not doom McDonald’s – but it will force the company to adapt. If McDonald’s (and Burger King, Wendy’s, Subway, Dominos, Pizza Hut, and others) doesn’t adapt the future will be very ugly for their customers and the company. But if these companies do adapt there is no reason the minimum wage will hurt them particularly hard.
The chains that replaced McDonald’s closed stores were Five Guys, Chick-fil-A and Chipotle. You might remember that in 1998 McDonald’s started investing in Chipotle, and by 2001 McDonald’s owned the chain. And Chipotle’s grew rapidly, from a handful of restaurants to over 500. But then in 2006 McDonald’s sold all its Chipotle stock as the company went IPO, and used the proceeds to invest in upgrading McDonald’s stores and streamlining the supply chain toward higher profits on the “core” business.
Now, McDonald’s is shrinking while Chipotle is growing. Bloomberg/BusinessWeek headlined “Chipotle: The One That Got Away From McDonalds” (Oct. 3, 2013.) Investors were well served to trade in McDonald’s stock for Chipotle’s. And franchisees have suffered through sales problems as they raised prices off the old “dollar menu” while suffering higher food costs creating shrinking margins. Meanwhile Chipotle’s franchisees have been able to charge more, while keeping customers very happy, and maintain margins while paying higher wages. In a nutshell, Chipotle’s (and similar competitors) has captured the lost McDonald’s business as trends favor their business.
So McDonald’s obviously made a mistake. But that does not mean “game over.” All McDonald’s, Burger King and Wendy’s need to do is adapt. Fighting the higher minimum wage will lead to a lot of grief. There is no doubt wages will go up. So the smart thing to do is figure out what these stores will look like when minimum wages double. What changes must happen to the menu, to the store look, to the brand image in order for the company to continue attracting customers profitably.
This will undoubtedly include changes to the existing brands. But, these companies also will benefit from revisiting the kind of strategy McDonald’s used in the 1990s when buying Chipotle’s. Namely, buying chains with a different brand and value proposition which can flourish in a higher wage economy. These old-line restaurants don’t have to forever remain dominated by the old brands, but rather can transition along with trends into companies with new brands and new products that are more desirable, and profitable, as trends change the game. Like The Limited did when selling its stores and converting into L Brands to remain a viable company.
Now is the time to take action. Waiting until forced to take action will be too late. If McDonald’s and its brethren (and Wal-Mart and its minimum-wage-paying retail brethren) remain locked-in to the old way of doing business, and do everything possible to defend-and-extend the old success formula, they will follow Howard Johnson’s, Bennigan’s, Circuit City, Sears and a plethora of other companies into brand, and profitability, failure. Fighting trends is a route to disaster.
However, by embracing the trend and taking action to be successful in a future scenario of higher labor these companies can be very successful. There is nothing which dictates they have to follow the road to irrelevance while smarter brands take their place. Rather, they need to begin extensive scenario planning, understand how these competitors succeed and take action to disrupt their old approach in order to create a new, more profitable business that will succeed.
Disruptions happen all the time. In the 1970s and 1980s gasoline prices skyrocketed, allowing offshore competitors to upend the locked-in Detroit companies that refused to adapt. On-line services allowed Google Maps to wipe out Rand-McNally, Travelocity to kill OAG and Wikipedia to kill bury Encyclopedia Britannica. These outcomes were not dictated by events. Rather, they reflect an inability of an existing leader to adapt to market changes. An inability to embrace disruptions killed the old competitors, while opening doors for new competitors which embraced the trend.
Now is the time to embrace a higher minimum wage. Every business will be impacted. Those who wait to see the impact will struggle. But those who embrace the trend, develop future scenarios that incorporate the trend and design new business opportunities can turn this disruption into a big win.
by Adam Hartung | Jan 30, 2012 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
For the last decade, Wal-Mart has been "dead money" in investor parlance. After a big jump between 1995 and 2000, the stock today is still worth less than it was in 2000. There has been volatility, which might have benefited some traders. But for most of the decade Wal-Mart's price has been lower. There has been excitement because recently the price has been catching up with where it was in 2002, even though there have been no real gains for long term investors.
Source: YahooFinance 1/30/12
What happened to Wal-Mart was the market shifted. For many years being the market leader with every day low pricing was a winning strategy. Wal-Mart was able to expand from town to town opening new stores, all pretty much alike, doing the same thing and making really good money.
Then competitors took aim at Wal-Mart, and found out they could beat the giant.
Eventually the number of towns that both needed, and justified, a new Wal-Mart (or Sam's Club) dried up. Wal-Mart reacted by expanding many stores, making them "bigger and better," even adding groceries to some. But that added only marginally to revenue, and even less marginally to profits.
And Wal-Mart tried exporting its stores internationally, but that flopped as local market competitors found ways to better attract local customers than Wal-Mart's success formula offered.
Other U.S. discounters, like Target and Kohl's, offered nicer stores with more varieties or classier merchandise – and often their pricing was not much higher, or even the same. And a new category of retailer, called "dollar stores" emerged that beat Wal-Mart's price on almost everything for the true price shopper. These 99 cent stores became really popular, and the fastest growing traditional retail concept in America. Simultaneously, big box retailers like Best Buy expanded their merchandise and footprint into more locations, dramatically increasing the competition against local Wal-Mart's stores.
But, even more dramatically, the whole retail market began shifting on-line.
Amazon, and its brethren, kept selling more and more products. And at prices even lower than Wal-Mart. And again, for price shoppers, the growth of eBay, Craigslist and vertical market sites made it possible for shoppers to find slightly used, or even new, products at prices lower than Wal-Mart, and shipped right into the customer's home. With each year, people found less need to buy at Wal-Mart as the on-line options exploded.
More recently, traditional price-focused retailers have been attacked by mobile devices. Firstly, there's the new Kindle Fire. In just one quarter it has gone from nowhere to tied as the #1 Android tablet
Source: BusinessInsider.com
The Kindle Fire is squarely targeted at growing retail sales for Amazon, making it easier than ever for customers to ignore the brick-and-mortar store in favor of on-line retailers.
On top of this, according to Pew Research 52% of in-store shoppers now use a mobile device to check price and availability on-line of products as they look in the store. Thus a customer can look at products in Wal-Mart, and while standing in the aisle look for that same product, or comparable, in another store on-line. They can decide they like the work boots at Wal-Mart, and even try them on for size. Then they can order from Zappos or another on-line retailer to have those boots shipped to their home at an even lower price, or better warranty, even before leaving the Wal-Mart store.
It's no wonder then that Wal-Mart has struggled to grow its revenues. Wal-Mart has been a victim of intense competition that found ways to attack its success formula effectively.
Then Wal-Mart implemented its "Shoot Yourself in the Head" strategy
What did Wal-Mart recently do? According to Reuters Wal-Mart decided to transfer its entire marketing department to work for merchandising. Marketing was moved from reporting to the CEO, to reporting into Sales. The objective was to put all the energy of marketing into trying to further defend the Wal-Mart business, and drive up same-store sales. In other words, to make sure marketing was fully focused on better executing the old, struggling success formula.
The marketing department at Wal-Mart does all the market research on customers, trends and advertising – traditional and on-line. Marketing is the organization charged with looking outside, learning and adapting the organization to any market shifts. In this role marketing is expected to identify new competitors, new market solutions that are working better, and adapt the organization to shifting market needs. It is responsible to be the eyes and ears of the organization, and then think up new solutions addressing these external inputs. That's why it needs to report to the CEO, so it can drive toward new solutions that can revitalize the organization and keep it growing with new market trends.
But now, it's been shot. Reporting to sales, marketing's role directed at driving same store sales is purely limiting the function to defending and extending the success formula that has produced lackluster results for 12 years. Marketing is no longer in a position to adapt Wal-Mart. Instead, it is tasked to find ways to do more, better, faster, cheaper under the leadership of the sales organization.
When faced with market shifts, winning companies adapt. Look at how skillfully Amazon has moved from book seller to general merchandise seller to offering a consumer electronic device.
Unfortunately, too many businesses react to market shifts like Wal-Mart. They hunker down, do more of the same and re-organize to "increase focus" on the traditional business as results suffer. Instead of adapting the company hopes more focus on execution will somehow improve results.
Not likely. Expect results to go the other direction. There might be a short-term improvement from the massive influx of resource, but long term the trends are taking customers to new solutions. Regardless of the industry leader's size. Don't expect Wal-Mart to be a long-term winner. Better to invest in competitors taking advantage of trends.
by Adam Hartung | Mar 30, 2011 | Current Affairs, In the Swamp, Innovation, Leadership
Summary:
- Too many leaders spend too much effort minimizing uncertainty
- Stock buybacks reflect fear of uncertainty, but are a losing investment
- Good performing organizations invest in new markets, products and services
- Success comes from not only investing, but in learning quickly what works (or doesn’t) and rapidly adapting
“If you don’t ever do anything, you can never screw up” my boss said.
I was 20 years old working in the blazing Oklahoma July sun at a grain elevator. I had asked the maintenance lead to modify a tool, thinking I could work faster. Unfortunately, my idea failed and my production started lagging. Offload production was slowing. I had to ask that the tool be put back to original condition, and I apologized to the elevator manager for my mistake.
That’s when he used my opening line, and went on to say “Don’t ever quit trying to do better. You’re a clever kid. Sometimes ideas work, sometimes they don’t, but if we dont’ try them we’ll never know. That’s why I agreed to your idea originally. I’ll accept a few well-intentioned ‘mistakes’ as long as you learn from them. Now go back to work and try to make up that production before end of day.”
Far too few leaders today give, or follow, such advice. The Economist recently waxed eloquently about how much today’s leaders dislike any kind of uncertainty (see “From Tsunami’s to Typhoons“). Most very consciously make decisions intended to reduce uncertainty – regardless of the impact on results! Rather than take advantage of events and trends, doing something new and different, they intentionally downplay market changes and diligently seek ways to make it appear as if things are not changing – amidst massive change! The mere fact that there is uncertainty seems to be the most troubling issue, as leaders don’t want to deal with it, nor know how.
This fear of uncertainty manifest itself in decisions to buy back stock, rather than invest in new products, services and markets. 24/7 Wall Street reported $34B in announced share buybacks in early February (2011 Stock Buybacks on Fire), only to update that to $40B by end of the month. Literally dozens of companies choosing to spend money on buying their own shares, which creates no economic value at all, rather than invest in something that could create growth! And these aren’t just companies with limited prospects, but include what have been considered growth entities like Pfizer, Astra-Zeneca, Electronic Arts, MedcoHealth, Verizon, Semantec, Yum! Brands, Quest, Kohl’s, Varian and Gamestop to name just a few.
All of these companies have opportunities to grow – heck, all companies have the opportunity to grow. But there is inherent uncertainty in spending money on something that might not work out. So, instead, they are taking hard earned cash flow and spending it on buying back the company stock. The real certainty, from this investment, is that it limits growth — and eventually will lead to a smaller company that’s worth less. Don’t forget, the only investment Sara Lee made under Brenda Barnes the last 5 years was buying back stock – and now the company has shriveled up to less than half its former size while the equity value has disintegrated. Nobody wins from share buybacks – with the possible exception of senior executives who have compensation tied to stock price.
At the Harvard Business Review Umar Haque admonishes leaders today “Fail Bigger Cheaper: A Three Word Manifesto.” Silicon valley investors, deep into understanding our change to an information economy, are far less interested in “scale” and more interested in how leaders, and their companies, are learning faster – so they see where they might fail faster – and then being nimble enough to adjust based upon what they learned. And not just to do more of the same better, but in order to identify bigger targets – larger opportunities – than originally imagined. Often the “failure” can direct the business into grander opportunities which have even higher payoffs.
That’s why we don’t see companies like Google, Apple, Netflix, Virgin, or Cisco buying back their own stock. They see opportunities, and they invest. They don’t all work out. Remember Google Wave? Looked great – didn’t make it – but so what? Google learns from what works, and what doesn’t, and uses that information to help it develop newer, more powerful growth markets.
Long ago Apple let its lack of success with the Newton PDA cause it to retrench into strictly Mac development – which took the company to the brink of disaster by 2000. Since then, by investing in new markets and new products, Apple has grown revenues and profits like crazy, making it more valuable than arch-rival Microsoft and close to being the most valuable publicly traded company.
Source: Silicon Alley Insider of BusinessInsider.com
Virgin used its success in music retailing to enter the trans-atlantic airline business (Virgin Atlantic). Since then it has launched dozens of businesses. Some didn’t work out – like Virgin Bridal – but many more have, such as Virgin Money, Virgin Mobil, Virgin Connect – to name just a handful of the many Virgin businesses that contribute to company growth and value creation.
Nobody wants to screw up. But, unless you do nothing, it is inevitable. No leader, or company, can create high value if they don’t overcome their fear of uncertainty and invest in innovation. But, hand-in-glove with such investing is the requirement to learn fast whether an innovation is working, or not. And to adapt. Some things need time for the market to develop, others need technology advances, and others need a change in direction toward different customers. It’s the ability to invest in uncertain situations, then pay attention to market feedback in order to recognize how well the idea is working, and constantly adapt to market learning that sets apart those companies creating wealth today.
Update 4/1/2011 – AOLSmallBusiness.com reminds us of another great adaptation story, based upon entering an unknown market and learning, in “Yes, Even Apple Screws Up Sometimes.” When personal computers were all text-based machines Apple introduced the Lisa as the first commercial computer to utilize on-screen icons, and a mouse for navigation, as well as other key productivity enhancers like the trash can. But the Lisa failed. Apple studied the market, kept what was desirable and modified what wasn’t, re-introducing the product as the Macintosh in 1984. The Mac was a huge success, creating enormous value for Apple which was undeterred by both the uncertainty of the fledgling PC market and its initial failure at various changes in the user interface.
by Adam Hartung | Jul 22, 2010 | Current Affairs, Lock-in, Web/Tech
“You are Not Your Vendor” is the title of my most recent column published in CIO magazine and Network World magazine. You’ll read in the article why it is critical you never rely too heavily on a vendor. As much as we’d like to say we’re “partners,” reality is that the vendor/customer relationship is adversarial. It’s up to everyone to constantly try new solutions, because lock-in to a vendor can cost you dearly when a competitor moves to a better solution that might be faster and/or cheaper. Your competitiveness relies not only on your adaptability, but that of those who supply you. This is extremely true in IT, where product lifecycles are often very short. But it’s true in all vendor relationships. It’s important all businesses overcome vendor Lock-in to avoid carrying too much legacy cost, and to continuously explore better solutions that can help you enhance – possibly redefine – your Success Formula.
Along this line, I thought it might be fun to list the top 10 Vendor Lies I’ve heard in my career – often ignored at great cost:
- Of course our application is 100% compatible with that
- That feature was in the demo, and will be available to you in just 3 weeks after purchase
- Our customer service people are some of our best trained engineers
- That problem only exists in the demo – it won’t happen in your installation
- Your installation will be on-time and on-budget
- We never point our finger at another vendor if you have a problem
- Working with an outsourcer is easier than doing the work yourself
- Our prices are firm, we never discount at end of quarter
- We can seamlessly integrate into your business – you’ll never see a glitch
- With our product strength, we’ll never go out of business
by Adam Hartung | Jul 21, 2010 | Current Affairs, Food and Drink, In the Rapids, Innovation, Leadership
“I Failed Fast and Completely Re-invented My Company” is the BNET.com article title. Pixability.com of Cambridge, Mass. started out as a video conversion and editing business for families. Unfortunately, it cost more than most families could afford. Lacking revenue, the entrepreneurs thought up making highlight reals for youth athletes competing for college scholarships. Neat idea, but only 3 sales in 3 months was less than covering costs. Despite the original plan, and a desire to raise more money, it hit the founders that if they “stuck to their core” business plan they weren’t going to survive. More money or not. That’s when they realized that turning down corporate work might not be such a great idea – even though such work wasn’t in the plan. Turning to what the market wanted, editing corporate videos, the company is now growing fast and making a profit.
Same song, different verse, for Blue Buddha Boutiques of Chicago as reported in “Small Businesses Have Flexibility to Make Big Changes” at The Chicago Tribune. The company started out making chain mail jewelry sold on the internet. Not much sales. But when the entrepreneur listened to customers she heard there was more demand for jewelry supplies – so customers could make their own jewelry – than for the finished product. A quick shift in the business, aligning it to market needs, and the company shot up to a half million dollars revenue.
Far too often entrepreneurs hear “find your passion, and go with it.” “Write a business plan, stick with it, persevere, fight for success.” “Do what you’re good at.” Of course, most entrepreneurs fail. Why, because this is such lousy advice. Nobody cares about your passion, nor your plan, or your ability to persevere. Customers care about you selling them what they want. If your products or services don’t align with market needs, all the passion, business planning, fighting and perseverance isn’t worth spit.
Of course, this flies in the face of “Built to Last” author Jim Collins. To him, all winners are those who persevere. Looking backward, he can say entrepreneurs he studied were passionate and hard working. Maybe they wore white shirts, and enjoyed Juicy Fruit gum as well. The point is, that isn’t what made them successful – even if their personality traits were as he described. What’s important is that you find a market with growth, and more customers than suppliers, so you can readily sell something at a profit. Adaptability is the hallmark of great entrepreneurs. They have no product or service religion – no commitment to “excellence” – no predefined notions of how to succeed in business. Rather, they have a keen ear for the marketplace and the mental flexibility to rapidly shift into what customers want!
I beg you to be careful about listening to gurus – and especially Jim Collins. I was appalled by his column “Tuned in to four New Realities” published on Leadership Academy. Still unable to explain why companies he glorified in “Good to Great” such as Circuit City, Freddie Mac and Fannie Mae were such horrible failures – he tenaciously sticks to his guns. To him, all leaders must persevere. His new realities:
- “Define your business according to core values”. Values are great, but if they aren’t somehow intricately linked to delivering a product or service the market wants, and wants in enough demand to produce a profit, it doesn’t matter. Simple. I don’t say give up your soul. But values are not where you start. You must be flexible to align with the market. If your values won’t let you do that you need to do something else.
- “Organize by freedom of choice.” Honestly, how you organize should relate to meeting the market requirements. Whether its hierarchical or matrix or some other form – it must meet the critical market needs. Freedom is great – as long as it supports meeting the market need. You are free in America to do whatever you want, but if you don’t sell enough stuff at a high enough price you don’t eat. And for all its benefits, “freedom of choice” in the workplace is less important than positive cash flow.
- “Lead without using power.” Whether you use carrot or stick, people have to deliver what markets want. And companies have to adapt quickly to shifting wants. Sometimes it happens naturally, and leaders can just guide the process. Sometimes Lock-in to old assumptions get in the way, and then leaders have to get out a 2×4 and redirect attention to where the market wants it. It’s good to be kind and a servant-leader, but employees appreciate a good paying job with some clear guidance (at times dictatorial) to unemployment from “such a nice guy.”
- “Walls are dissolving.” I haven’t even figured out what this one means. But it’s clear that any walls which keep you from seeing the real market need is a bad thing. After that, aligning to market needs is “job #1” as Ford ads once touted quality.
Are you flexible to go where the market leads you? Or are you adamant about doing what you want to do? Are values something you use to help align to market needs, or a crutch you use to defend doing what you’ve always done? Are you able to change your management style, and organizational design, to meet market needs – or do you prefer to remain Locked-in to old management ideas and business models? Whether your company is big or small, old or young, does not matter. Lock-in will kill you when markets shift. Whether it’s structural Lock-in to an existing business, or mental Lock-in to a business plan. Adaptability to meet shifting market needs separates the winners – like Apple, Google, Facebook and Twitter – from the market losers – like Microsoft and Dell.
If you have any doubt, just ask the folks at Tasty Catering in Chicago. While others are still complaining about he recession, crying about lower sales, and food service businesses (including restaurants) are half full or closing shop — the folks at Tasty Catering are challenging the monthly revenues they set in peak years of 2007 and 2008. Instead of doing what they always did, the leaders – from the CEO to the 20-something managers talking to customers – are listening to the market and opening new businesses that meet market needs. While most employers are cutting staff, employees at Tasty Catering are working overtime – and in some businesses second shifts are being added. What was once a hot dog stand has been turned by the leaders into the winner of Best Caterer in the USA more than once – and a business that is thriving even in this “Great Recession.” Because they know how to adapt.
PS – Tasty Catering is one of the most value-responsible companies in America. Filled with employees that listen and care, and managers that want their employees to succeed. That’s because the leaders don’t see a trade-off between values and giving the market what it wants. If they keep the business moving forward, through keen connection to the marketplace, everyone wins – and values are not an issue. By being market-savvy, and flexible, Tasty Catering is considered one of the Top 10 employers in Chicago, and in its industry. And if you cater from anybody else in Chicago, or buy your delivered baskets or trays of cookies and muffins from anyone else, you simply don’t know what you’re missing!
