by Adam Hartung | Jun 28, 2013 | Current Affairs, Defend & Extend, In the Rapids, In the Whirlpool, Innovation, Leadership, Web/Tech
The last 12 months Tesla Motors stock has been on a tear. From $25 it has more than quadrupled to over $100. And most analysts still recommend owning the stock, even though the company has never made a net profit.
There is no doubt that each of the major car companies has more money, engineers, other resources and industry experience than Tesla. Yet, Tesla has been able to capture the attention of more buyers. Through May of 2013 the Tesla Model S has outsold every other electric car – even though at $70,000 it is over twice the price of competitors!
During the Bush administration the Department of Energy awarded loans via the Advanced Technology Vehicle Manufacturing Program to Ford ($5.9B), Nissan ($1.4B), Fiskar ($529M) and Tesla ($465M.) And even though the most recent Republican Presidential candidate, Mitt Romney, called Tesla a "loser," it is the only auto company to have repaid its loan. And did so some 9 years early! Even paying a $26M early payment penalty!
How could a start-up company do so well competing against companies with much greater resources?
Firstly, never underestimate the ability of a large, entrenched competitor to ignore a profitable new opportunity. Especially when that opportunity is outside its "core."
A year ago when auto companies were giving huge discounts to sell cars in a weak market I pointed out that Tesla had a significant backlog and was changing the industry. Long-time, outspoken industry executive Bob Lutz – who personally shepharded the Chevy Volt electric into the market – was so incensed that he wrote his own blog saying that it was nonsense to consider Tesla an industry changer. He predicted Tesla would make little difference, and eventually fail.
For the big car companies electric cars, at 32,700 units January thru May, represent less than 2% of the market. To them these cars are simply not seen as important. So what if the Tesla Model S (8.8k units) outsold the Nissan Leaf (7.6k units) and Chevy Volt (7.1k units)? These bigger companies are focusing on their core petroleum powered car business. Electric cars are an unimportant "niche" that doesn't even make any money for the leading company with cars that are very expensive!
This is the kind of thinking that drove Kodak. Early digital cameras had lots of limitations. They were expensive. They didn't have the resolution of film. Very few people wanted them. And the early manufacturers didn't make any money. For Kodak it was obvious that the company needed to remain focused on its core film and camera business, as digital cameras just weren't important.
Of course we know how that story ended. With Kodak filing bankruptcy in 2012. Because what initially looked like a limited market, with problematic products, eventually shifted. The products became better, and other technologies came along making digital cameras a better fit for user needs.
Tesla, smartly, has not tried to make a gasoline car into an electric car – like, say, the Ford Focus Electric. Instead Tesla set out to make the best car possible. And the company used electricity as the power source. By starting early, and putting its resources into the best possible solution, in 2013 Consumer Reports gave the Model S 99 out of 100 points. That made it not just the highest rated electric car, but the highest rated car EVER REVIEWED!
As the big car companies point out limits to electric vehicles, Tesla keeps making them better and addresses market limitations. Worries about how far an owner can drive on a charge creates "range anxiety." To cope with this Tesla not only works on battery technology, but has launched a program to build charging stations across the USA and Canada. Initially focused on the Los-Angeles to San Franciso and Boston to Washington corridors, Tesla is opening supercharger stations so owners are never less than 200 miles from a 30 minute fast charge. And for those who can't wait Tesla is creating a 90 second battery swap program to put drivers back on the road quickly.
This is how the classic "Innovator's Dilemma" develops. The existing competitors focus on their core business, even though big sales produce ever declining profits. An upstart takes on a small segment, which the big companies don't care about. The big companies say the upstart products are pretty much irrelevant, and the sales are immaterial. The big companies choose to keep focusing on defending and extending their "core" even as competition drives down results and customer satisfaction wanes.
Meanwhile, the upstart keeps plugging away at solving problems. Each month, quarter and year the new entrant learns how to make its products better. It learns from the initial customers – who were easy for big companies to deride as oddballs – and identifies early limits to market growth. It then invests in product improvements, and market enhancements, which enlarge the market.
Eventually these improvements lead to a market shift. Customers move from one solution to the other. Not gradually, but instead quite quickly. In what's called a "punctuated equilibrium" demand for one solution tapers off quickly, killing many competitors, while the new market suppliers flourish. The "old guard" companies are simply too late, lack product knowledge and market savvy, and cannot catch up.
- The integrated steel companies were killed by upstart mini-mill manufacturers like Nucor Steel.
- Healthier snacks and baked goods killed the market for Hostess Twinkies and Wonder Bread.
- Minolta and Canon digital cameras destroyed sales of Kodak film – even though Kodak created the technology and licensed it to them.
- Cell phones are destroying demand for land line phones.
- Digital movie downloads from Netflix killed the DVD business and Blockbuster Video.
- CraigsList plus Google stole the ad revenue from newspapers and magazines.
- Amazon killed bookstore profits, and Borders, and now has its sites set on WalMart.
- IBM mainframes and DEC mini-computers were made obsolete by PCs from companies like Dell.
- And now Android and iOS mobile devices are killing the market for PCs.
There is no doubt that GM, Ford, Nissan, et. al., with their vast resources and well educated leadership, could do what Tesla is doing. Probably better. All they need is to set up white space companies (like GM did once with Saturn to compete with small Japanese cars) that have resources and free reign to be disruptive and aggressively grow the emerging new marketplace. But they won't, because they are busy focusing on their core business, trying to defend & extend it as long as possible. Even though returns are highly problematic.
Tesla is a very, very good car. That's why it has a long backlog. And it is innovating the market for charging stations. Tesla leadership, with Elon Musk thought to be the next Steve Jobs by some, is demonstrating it can listen to customers and create solutions that meet their needs, wants and wishes. By focusing on developing the new marketplace Tesla has taken the lead in the new marketplace. And smart investors can see that long-term the odds are better to buy into the lead horse before the market shifts, rather than ride the old horse until it drops.
by Adam Hartung | Dec 2, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
"Henderson Never Fit In At GM Helm" is the Detroit Free Press headline. Imagine that – the CEO of GM has been asked to leave. Industry sales are down about 24%, and GM is down 32%. Meanwhile, Mr. Henderson had proposed selling 4 divisions (Saab, Opel, Hummer and Saturn) – which were the most interesting divisions in the company – and none of those deals have closed. In fact, 3 have fallen apart completely. Only the Hummer sale to a Chinese firm is potentially going to happen. In fact, it's hard to find anything good that's happened at GM since Mr. Henderson took over. Including closing Pontiac.
When the government invested in GM this year the existing Chairman/CEO, Rick Waggoner, was forced to resign. Imagine that, after puting several bilion in a company the investor's transition team replaced the CEO who got the company into bankruptcy, almost out of cash, with no plan for recovery. Also, the Board, which had allowed GM to get into such a mess without even raising tough questions, was replaced. All seems remarkably sensible given the sorry state of the company.
The goverment led transition team, which rocketed GM through bankruptcy, cleaned the ceiling, but then selected Mr. Waggoner's hand-picked successor (Mr. Henderson) to replace him. The claim was they'd need 6 months to search for somebody new and didn't want to take the time. And they put in a lifetime monopolist, Mr. Whiteacre of AT&T, as Chairman. And a 40+ year industry veteran was made head of marketing (Mr. Lutz.) And a 40+ year company employee was kept as CFO. And we're supposed to be surprised that things aren't going well?
The Chairman and replacement CEO says of the company says "Whiteacre: GM On the Right Path," also in the Detroit Free Press. But do you believe him? What does he know about competing successfully against intense foreign led competitors who move fast? The AT&T that trained him early in his career failed horribly, never succeeding in any market outside the U.S. and getting cleaned by offshore competitors in hardware and mobile telephony. And as head of Southwestern Bell, all he did was rebuild the old "Bell system" of land-line companies – without effectively taking a leading position in any new telephony business. Or any other business. Broadband, mobile phones, digital television – can you think of any market where today's AT&T is a technology, product development, innovation or other market leader? He may have bought up a bunch of the old spun out businesses, but those are on their last legs as people give up land lines and transition to a different sort of connected future.
What's surprising is that GM isn't doing worse. But it's unlikely Mr. Whiteacre, or Mr. Henderson's replacement, will do much better. Several candidates are from inside GM – all with the same Lock-ins that allowed Messrs. Waggoner, Henderson and Lutz to perform so abysmally – despite incredible pay packages for many years. In "Selling GM's CEO Job to be Tough Task" (Detroit Free Press) headhunters claim that the industry is so complex they'll have a hard time finding someone talented who will work for the pay. Balderdash. That's only true because they are so Locked-in to traditional thinking about who should lead GM that they keep trying to recycle already overpaid CEOs who have done little for shareholders. That's not what's needed at GM.
Give us a break. Who would want an industry veteran in the job at all? And why would a recruiter hunt for somebody with a lot of industrial-era Lock-ins. GM's investors (that's the citizens of the USA and Canada,) employees and vendors need somebody who's ready to move beyond the old industry and company Success Formulas and do something very different. Willing to develop entirely new scenarios of the future which alter the competitive playing field and then Disrupt the organization in order to start doing new things. Before Tata Motors and China's Chery auto join the other companies ready to put GM into the grave.
It's amazing how "inside the box" the people who are leading GM, and advising the company, remain. Why not try to recruit somebody from Tesla to take over? The long-delayed electric Chevy Volt might well get to market faster – and in a more desirable form – if that were to happen. Or how about an heir apparent at fast growing Cisco Systems? Those people know how to pay attention to the market and move quickly to give customers what they need – profitably.
Turning around GM requires leadership that will change the Success Formula. Not try to Defend it, or Extend it with slowly evolving variations and minimal change. The whole house needs to be cleaned. The investor representatives who led the transition pulled up short of finishing their job. Only by bringing in new managers who are willing to see a very different future, unbounded by the GM legacy, can GM's competitive position be changed – and if GM tries to keep competing the way it has Toyota, Honda, Hyundai, Kia, Tata Motors, et. all will eat GM's dinner. And only by Disrupting the old Lock-ins, using White Space teams to develop new solutions, can GM regain viability.
by Adam Hartung | Oct 5, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Whirlpool, Leadership, Lifecycle, Lock-in
"Saturn Done in Four Months" is the Autoweek.com headline. The next time somebody brings up the short life cycle of tech products, remember Saturn. GM started the company, grew it, and now is shutting it down on a timeline that roughly corresponds with the life of Sun Microsystems. Clearly manufacturing companies can do just as poorly as techs.
When Penske lost itsmanufacturing deal, the purchase of Saturn fell through. And GM leadership can't wait to clear out inventory. Production has already stopped. Soon, the products and dealers will disappear. Along with the brand name. Another experiment that failed. So it is very important our post-mortem teaches us the right lessons from Saturn.
I was appalled when Harvard Business School Publishing posted "Why Saturn Was Destined to Fail." According to the author, Saturn was an anchor that drug down a hurt GM!!!! Reporting that the successful Saturn launch came at the loss of $3,000 per car sold (a new factoid I've never before heard), he claims that GM should have been more focused on fixing its old business. The implication is that GM wasn't trying to fix its old business, instead being diverted by the very successful operations at Saturn! Pretty illogical. GM was doing everything it could to compete, but improving its old Success Formula simply wasn't enough given the market shifts already in place. To meet changing market requirements GM needed to develop a new Success Formula, and that was the purpose of Saturn!
Saturn was the best chance GM had to succeed! The Success Formula at Chevrolet and the other GM divisions had been created in the 1950s when GM dominated the industry. But by 1980 the market had shifted dramatically. Design cycles had dropped, customer tastes had changed, production methods had moved from long assembly lines to just-in-time, quality requirements were redefined and rising, and impressions of auto dealers had tanked. Saturn was established to teach GM how to compete differently.
The reason Saturn lost money had everything to do with accounting. GM forced all kinds of costs onto GM – which were not representative of a normal start-up. Without those costs, Saturn would have been much leaner and profitable. Further, after Saturn proved it could move faster and outsell expectations, GM quickly moved to force Saturn to act like other GM divisions. Forced sharing of components severely hampered the design cycle and flexibility. Union contract consistency pushed Saturn into old employee agreements which the union had previously agreed to wave. And forcing Saturn to allow traditional GM dealers to sell the Saturn brand tarnished the changed customer relationship Saturn worked hard to create.
When Roger Smith created GM he set it up seperately. His scenario of the future demanded GM figure out a new way to compete. Saturn, was a White Space project with permission and resources to figure out that new way. But Chairman Smith did not Disrupt the old GM auto management. He did not replace the Division presidents with leaders from EDS or Hughes (businesses he had acquired) who were willing to move in a new direction. He did not change the resource allocation system to give Saturn more clout over its own decisions and those at other divisions. Thus, when he left the larger divisions moved fast to change Saturn into their mold – rather than vice-versa. Instead of Chevrolet learning from Saturn, Saturn managers were forced to adopt Chevrolet practices.
Saturn proved that even a stodgy, Locked-in company can use White Space to develop new solutions. And it also proved that if you aren't willing to Disrupt the old Success Formula – if you aren't willing to attack old Lock-ins – White Space (regardless of its success) is unlikely to convert the company into a better competitor. The lesson of Saturn is NOT that it diverted GM's attention, but rather that GM was unwilling to Disrupt its Success Formula to learn from Saturn.
As investors, the question is pretty easy. Would you rather own Saturn, Pontiac and Hummer – the divisions of GM that had loyal customers and some reputation for innovation, quality and customer satisfaction – or Cadillac, Buick and Chevrolet? Would you rather have businesses that are looking forward with early plans for hybrids, and exciting cars like the G8, or a high volume business in cars that most people find ho-hum, at best? Do you want designers that take chances and bring out cars quickly, or that move slowly seeking the "lowest common denominator" in design? If you were an entrepreneur, would you rather be given pemission to lead Saturn, or Chevrolet?
Learning the right lessons from Saturn is important, or else our business leaders are doomed to repeat the GM mistakes. If you don't challenge your Success Formula, White Space project will be met with great resistance by the organization. They will be saddled with unnecessary costs and requirements that strip them of permission to do what the market demands. And they will not achieve the goals which they established to accomplish, including acting as a beacon for migrating a business forward.
For a deeper treatment of this topic please download the free ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes."
by Adam Hartung | Jun 24, 2009 | Current Affairs, Disruptions, General, Leadership, Openness
"Reborn Chrysler gets a European makeover" is the headline at the Detroit Free Press. Now that Fiat is in charge, can we expect Chrysler to turn around?
There is no doubt Chrysler has been severely Challenged. But that alone did not Disrupt Chrysler – you can be challenged a lot and still not Disrupt Lock-ins. On the other hand, the new CEO appears to have stepped in and made significant changes in the organization structure, as well as the product line-up at Chrysler. We also know that bankruptcy changed the union rules as well as employee compensation and retirement programs. These are Disruptions. That's good news. Disruptions precede real change. No matter the outcome, the level of Disruption ensures the future Chrysler will be different from the old Chrysler. Step one in the right direction.
But, the Fiat leadership under Sergio Marcchione appears to be rapidly installing the Fiat Success Formula at Chrysler. The organization, product, branding and manufacturing decisions appear to be aligned with what Fiat has been doing in Europe. So this makes our analysis a lot trickier. Companies that effectively turn around align with market needs. They meet customer requirements in new, better ways. For Chrysler to now succeed requires that the American market needs are closely enough aligned with what Fiat has been doing to make Chrysler a success.
If this gives you doubts, you're well served. It's not like Fiat has been a household name in America for a long time. Nor have I perceived Fiat was gaining substantial share over its competitors in Europe. Nor do I have awareness of Fiat being noticably successful in emerging auto markets like China, India or Eastern Europe. They aren't doing as badly as Chrysler, but are they winning?
The new management is rolling in like Macarthur's team taking over Japan. They clearly have already made many decisions, and are now focused on execution. What worries me is
- what if the product lineup isn't really what Americans want?
- what if dealers don't make enough margin on the new lineup?
- what if the cost/quality tradeoffs don't fit American needs?
- what if competitors match their product capabilities?
- what if competitors have lower cost?
- what if competitors have measurably better quality?
- what if competitors bring out new innovations, like electric, hybrid or diesel, change the market significantly from what Fiat has to offer?
- what if customers simply have doubts about Fiat quality?
- what if customers like the Charger, Challenger and 300 more than they like the new Fiat products?
I don't have to be right or wrong on many of these questions and it portends problems for the new Chrysler/Fiat. And that's the problem with having such a tight plan when you start a turn-around. What if you get something wrong? How will you know? What will tell you early you need to change your plan fast, and possibly dramatically? Nowhere in the article, nor elsewhere, have I read about White Space projects being created that would produce an entirely new Success Formula. Only how Chrysler is being converted to the Fiat Success Formula.
I want the best for the new owners, employees and vendors of Fiat. I'm really happy to see the level of Disruption. But until we see White Space, more discussion of market testing and experimentation, as well as greater discussion of competitiors, I'd reserve judgement on the company's future.
If you read about White Space at Chrysler/Fiat please let me know. This is a story worth watching closely. Americans have a lot riding on the outcome – good or bad. So if you read about Disruptions or White Space share them with me or here on the blog for everyone.
PS – Don't forget to download my new ebook "The Fall of GM" for additional insight on managing Success Formulas in the auto industry.
PPS – There have been a lot of great comments related to recent blogs. I appreciate the personal notes, but don't hesitate to blog directly on the site. Also, keep up the comments. I don't feel compelled to re-comment on them all. Suffice it to say that the quality is excellent, and comments make the blog all that much more powerful. So please keep up the responses.
by Adam Hartung | May 29, 2009 | Current Affairs, In the Whirlpool, Leadership, Lifecycle
GM will file bankruptcy next week ("GM reaches swap deal, but bankruptcy still lies ahead" Marketwatch). It's likely historians will look back on this event as a major turning point in the change away from an industrial world (away from making money on "hard" assets like factories). GM was considered invincible. As were all the auto companies. The reorganizing of Ford, and bankruptcy of Chrysler will be remembered, but not likely with the impact of GM filing bankruptcy. Pick up any book on America post WWII and you'll find a discussion of General Motors. The quintessential industrial company. Destined to live forever due to its massive revenues and assets. After next week, history books will change. Altered by the previously unimaginable bankruptcy of GM. If "What's good for GM is good for America" is no longer true, what does it mean for America when GM declares Bankruptcy?
None of America's car companies will ever again be strong, vibrant auto companies. They are in the Whirlpook and can't get out. It's simply impossible. GM is now worth about $450million (at current prices of about $.80/share). It already owes the federal government $20billion – which is supposed to be converted to equity, with more equity owned by employees and converted bondholders. For most of the time since the 1970s, the average value of GM has been only $15billion (split adjusted average price $25). To again become viable GM wants the government to increase its investment to $60billion ("GM bondholders may recoup $14Billion" Marketwatch.com. That means for GM to ever be worth just the amount being supplied by the government bailout it would have to be worth $116/share – which is $20/share more than it was worth at its peak in the market blowout of 2000! (Chart here).
That means it is impossible to conceive of any way GM could ever be successful enough to achieve enough value as a car company to repay the government – and thus it has no future ability to provide dividends to private investors. Even though GM says it will be repositioned to be healthy, that simply is not true. It's no more healthy or attractive than Quasimodo, the hunchback of Notre Dame, could have ever hoped to be – or the elephant man. Helping them is charity, not a business proposition. When a company has no conceivable hope of making enough money to repay its investors it cannot attract management talent, or additional capital as assets wear out, and it eventually fails. It won't be long before the people running GM realize their future are as bureaucrats in a non-profit – but with far less psychic value than working at, for example, the Red Cross.
Meanwhile, Chrysler is downsizing dramatically as it looks for its way out of bankruptcy. As it tries to give the company to Italians to run, the company is dropping obligations it has carried for years. Even the venerable Lee Iacocca, who literally saved the company 20some years ago, will lose his pension and even his company car ("Iacocca losing pension, car in Chrysler bankruptcy" Reuters).
Ford, which restructured before this latest market shift, has not asked for bailout money. But its market share is dropping fast. Its vendors (including Visteon) are going bankrupt and Ford is guaranteeing their debt to keep them in business – with an open-ended cost not yet reflected in Ford's P&L. Even though it restructured, Ford's balance sheet is shot ("What About Ford?" 24/7 Wall Street). It has no money to design a new line of competitive vehicles.
None of these 3 companies have the wherewithal as operating businesses to replace assets. And they are competing with Japanese, Korean and Indian companies that have lower operating costs, lower fixed asset investments, higher quality and newer product lines, better customer satisfaction rates, higher profits and stronger balance sheets. Without competition it's hard to expect America's car companies to do well. When you look at competitors you realize this game can still have several more moves (especially with market intervention by government players with public policy objectives) – but the end is predicatable. Only for reasons of public policy, rather than business investment, would you continue to fund any of these American competitors.
Even though the switch from an industrial economy to an information economy began in the 1990s, historians will likely link the switch to June, 2009. (I guess that's fair, since the shift from an agrarian economy to an industrial economy began in the 1920s but wasn't recognized until the late 1940s.) Just as GM was the company that epitomized the success of industial business models, it will be the company that becomes the icon for the end of industrial models. It failed much faster, and worse, than anyone expected.
If "What's good for GM" (as in the government bailout) isn't good for America any longer – what is? For many people, this is shift is conceptually easy to understand – but hard to do anything about. They don't know what to do next; what to do differently. They fully expect to continue focusing on balance sheets and assets and the tools we used to analyze industrial companies. And those people will see their money drift away. Just like you can't make decent returns farming in a post-agrarian economy, you won't be able to make money on assets in a post-industrial economy. From here on, it's all about the information value and learning how to maximize it. It's not about old-style execution, its about adaptability to rapidly shifting markets built on information.
Let's consider CDW – a 1990s marvel of growth shipping computers to businsesses around America. CDW has pushed hardware and software onto its customers for 2 decades in its chase with Dell. But every year, making money as a push distributor gets harder and harder. And that's because buyers have so many different sources for products that the value of the salesperson/distributor keeps declining. Finding the product, the product info, inventory, low shipping and low price is now very easily accomplished with a PC on the web. Every year you need CDW less and less. Just like we've seen distributors squeezed out of travel we're seeing them squeezed out of industry after industry – including computer componentry. If CDW keeps thinking of itself as a "
;push" company selling products – a very industrial view of its business – it's future profitability is highly jeapardized.
The market has shifted. For CDW to have high value it must find value in the value of the information in its business. Perhaps like the Chicago Mercantile Exchange they could create and trade futures contracts on the value of storage, computing capacity or some other business commodity. The information about their products – production, inventory and consumption – being more profitable than the products themselves (everyone knows more profit is made by Merc commodity traders than all the farmers in America combined). Or CDW needs to develop extensive databases on their customers' behaviors so they can supply them with new things (services or products) before they even realize they need them — sort of like how Google has all those searches stored on computers so they can predict the behavior of you, or a group your identified with, before you even type an internet command. CDW's value as a box pusher is dropping fast. In the future CDW will have to be a lot smarter about the information surrounding products, services and customers if it wants to make money.
A lot of people are very uncomfortable these days. Since the 1990s, markets keep shifting fast – and hard. Nothing seems to stay the same very long. Those trying to follow 1980s business strategy keep trying to find some rock to cling to – some way to build an industrial-era entry barrier to protect themselves from competition. They try using financial statements, which are geared around assets, to run the business. Their uncomfortableness will not diminish, because their approach is hopelessly out of date. GM knew those tools better than anyone – and we can see how that worked out for them.
To regain control of your future you have to recognize that the base of the pyramid has shifted. How we once made money won't work any more. Value doesn't grow from just owning, holding and operating assets. Maximizing utility of assets will not produce high rates of return. We are now in a new economy. One where outdated distribution systems (like the auto dealer structure) simply get in the way of success. One where a focus on the product, rather than its use or customer, won't make high rates of return. With the bankruptcy of GM reliance on the old business model must now be declared over. We've entered the Google age (for lack of a better icon) – and it affects every business and manager in the world.
The future requires companies focus on markets, shifts and adaptable organizations. Successful businesses must have good market sensing systems, rather than rely on powerful six sigma internal quality programs. They have to know their competitors even better than they know customers to deal with rapid changes in market moves. They have to be willing to become what the market needs – not what they want to define as a core competency. They have to accept Disruptions as normal – not something to avoid. And they have to use White Space to learn how to be what they are not, so they remain vital as markets shift. So they can quickly evolve to the next source of value creation.
