Attacking Culture to Address Problems – British Petroleum

I weighed in late on the Gulf Coast disaster – and my impressions of British Petroleum.  I wanted to be thoughtful, as the ramifications of this will be with us for decades.  Compared to the hurricane that wrecked New Orleans this situation is far worse.  Many more businesses are being shut down, the ecological disaster is far worse, and the clean-up will take much longer – even though New Orleans is far from a full recovery from hurricane Katrina.  And there was lots (lots) of finger-pointing going around.  It is going to take a lot of money and energy to deal with this mess – and lots of blame-laying (lawsuits) are inevitable

But I'm always the guy looking forward, and that's why my Forbes article, "BP's Only Hope for Its Future," focused on what BP needs to do now to recapture the more than $100B of lost value its investors have suffered – not to mention out-of-pocket cash costs still rolling up.  

There is a raging debate about what investors can expect, as typified by the SeekingAlpha.com article "Where is BP Headed:  $70 or $0?" Unfortunately, most of these articles focus on 2 factors: (a) what are the estimates of cash out to fix the mess and legal battles compared to historical cash inflows from revenues, and (b) contrarians typically think no situation is ever as bad as it initially looks so surely BP is worth more than it's currently depressed value.

Addressing the latter first, I'd recommend investors look at GM, Chrysler, Lehman Brothers and Circuit City.  Things definitely can get worse.  Problems created across years of sticking to an outdated Success Formula, remaining Locked-in to following historical best practices, wiped out their investors.  Things can definitely get worse for BP.  It will not be acceptable for the company to remain focused on "business as usual" hoping to "weather the storm" and allow "things to get back to normal."  That scenario is a death sentence.  We haven't yet seen what new regulations, taxes and restrictions – nor the eventual cost of 20 years of dead seas charged to BP and its industry brethren – will cost.  BP has to make changes if it wants to regain growth – and most likely if it wants to survive.  

And this leads to item (a).  Nobody knows the long-term costs chargeable to BP.  Nor do we know what the future cash inflows will look like.  We don't  know the brand impact.  Nor do we know how changes in regulations or industry practices will hurt cash flowing in the door.  It's the inability of the past to predict the future that makes efforts at cash flow planning mute.  Lots of number crunching isn't the answer – it's understanding that the assumptions could well be seriously changing. There are more unknown variables than known right now.  Which makes it all the more important BP realize it must change it's Success Formula to make sure it not only avoids another disaster, but finds a way to profitably grow in the aftermath of this event and its changes on the industry.

Many are calling for firing the CEO, as 24×7 Wall Street does in "BP Can Deny CEO Departure Story; But Fate Already Set."  I call this the hero and goat syndrome.  Americans like to think that the CEO should be lionized as a hero when results are good, and blamed as a goat when results are bad.  Unfortunately companies rely on lots more than CEOs (despite their pay) for results.  The problems at BP are with the Success Formula – now some 100 years old – and the inability of the total management team to attack old Lock-ins in order to develop something new.  As my last blog pointed out, even HBR doubted there was any reality in the "Beyond Petroleum" headline.

BP must attack its historical ways of doing business.  This isn't just a short-term crisis.  The Gulf disaster is the result of pushing an old Success Formula too far.  Of going into deeper and deeper water, at greater and greater risk, for less and less yield in order to keep finding oil.  Unfortunately BP seems to be viewing this not as an example of what happens when marginal economics keeps you doing the same thing, over and over, even as returns decline.  Too bad, because this is the kind of event that highlights a serious change is needed in BP's future direction.

I was impressed with a Harvard Business School Working Knowledge survey result in "How Do You Weigh Strategy, Execution and Culture in An Organization's Success?"  Respondents overwhelming voted that success requires managing "culture."  And that is largely what BP now needs to do.  The Beyond Petroleum strategy was clearly enunciated, but execution remained focused on the old direction because the culture did not change.  And that's what attacking Lock-ins and implementing White Space is designed to do – move an organization's culture forward by addressing behaviors, decision-making structures and old cost models.

When I was a boy I'd see a tree show foliage problems and my father would say "we might as well cut it down, that tree is dead."  I'd be shocked, the tree looked fine.  But my father, a farmer, knew that the roots had been damaged.  We were just seeing the slow process of death, that might take a year or two.  Fortunately, BP isn't a tree. And although its Success Formula roots are in trouble, unlike a tree they can be changed.  Let's hope the Board takes action to make changes quickly so BP's future doesn't remain completely imperiled.

For more on using Disruptions to address problems listen to my radio Interview "Disrupt to Win." Or listen to a short podcast on how to "Drive Innovation by Disrupting the Status Quo." Or read my CIOMagazine column on how to "Use Disruptions to Move Beyond Legacy" in thinking and planning.

The Myth of Market Share – Motorola vs. Apple

The Myth of Market Share by Richard Minitar is one of those little books, published in 2002 by Crown Business, that you probably never read – or even heard of (available on Amazon though).  And that's too bad, because without spending too many words the author does a great job of describing the non-correlation between market share and returns.  There are as many, or possibly more, companies with high profitability that don't lead in market share as ones that do.  Even though the famous BCG Growth/Share matrix led many leaders to believe share was the key to business success.  Another something that worked once (maybe) – but now doesn't.

"Moto Looks to Sell Set-Top Box Unit" is the Crain's Chicago Business headline.  Motorola's television connection box business is #1 in market share.  But even though Motorola paid $11B for it in 1999, they are hoping to get $4.5B today.  That's a $6.5B loss (or 60%) in a decade.  For a business that is the market share leader.  Only, it's profitability + growth doesn't justify a higher price.  Regardless of market share.

Kind of like Motorola's effort to be #1 in mobile handset market share by cutting RAZR prices.  That didn't work out too well either.  It almost bankrupted the company, and is causing Motorola to sell the set top box business to raise cash in its effort to spin out the unprofitable handset business.

On the other hand, there's Apple. Apple isn't #1 in PCs – by a long shot.  It has about a 14% share I think.  Nor is it #1 in mobile handhelds, where it has about a 2.5% market share.  But Apple is more profitable than the market leaders in both markets.  Today, Apple's value is almost as high as Microsoft – historically considered the undisputed king of technology companies.

Apple valuation v MS
Chart source Silicon Alley Insider 11/12/09

While Microsoft has been trying to Defend & Extend it's Windows franchise, its value has declined this decade.  Quite the contrary for Apple.

Additionally, Apple has piled up a remarkable cash hoard with it's meager market shares in 2 of 3 businesses (Apple is #1 in digital music downloads – although not #1 in portable MP3 players). 

Apple cash hoard
Chart Source Silicon Alley Insider 11/11/09

"While Rivals Jockey for Market Share Apple Bathes in Profits" is the SeekingAlpha.com headline. Nokia has 35% share of the mobil handheld market.  It earned $1.1B in the third quarter.  With its 2.5% share Apple made $1.6B profit on the iPhone.  While everyone in the PC business is busy cutting costs, Apple has innovated the Mac and its other products – proving that if you make products that customers want they will buy them and allow you to make money.  While competitors behave like they can cost cut themselves to success, Apple proves the opposite is true.  Innovation linked to meeting customer needs is worth a lot more money.

Bob Sutton, Stanford management professor, blogs on Work Matters "Leading Innovation: 21 Things that Great Bosses Say and Do."  All are about looking to the future, listening to the market, using disruptions to keep your organization open, and giving people permission and resources to open and manage White Space projects.

If your solution to this recession is to cut costs and wait for the market to return – good luck.  If you are trying to figure out how you can Defend & Extend your core – good luck.  If you think size and/or market share is going to protect you – check out how well that worked for GM, Chrysler, Lehman Brothers and Circuit City.  If you want to improve your business follow Apple's lead by developing thorough scenario plans you can use to understand competitors inside out, then Disrupt your old notions and use White Space to launch new products and services that meet emerging needs.

Look beyond numbers to grow – Chief Marketing Officers

"The Evolving CMO" is the Brandweek headline.  According to this article, increasingly CMOs (that's Chief Marketing Officers) are becoming quite nerdly.  Whereas top marketing folks were once seen as "big idea" folks, now recruiters like Heidrick & Struggles (quoted in the article) are looking for top marketers to be analytical types who pour through on-line data to discern ad effectiveness and response rates.

It's not at all clear this is a good trend. 

Ever since marketing has been around it's been an easily derided function.  Unlike Sales, which has hands on daily contact with customers, marketers were considered more staff-like.  And much more easily let go.  Especially in companies that aren't consumer goods oriented, the first people let go in a downsizing are usually marketers.  Some companies, like Computer Sciences Corporation in services and many manufacturers of industrial products, don't have any marketers at all!  There are a lot of executives that believe marketing is a waste of money – you just need to focus on Sales.

So how should marketers deal with this lack of respect?  Increasingly, they are turning to numbers.  It appears that marketers want to overcome their Rodney Dangerfield position by being more like other parts of the company.  Product Development and engineering tend to be loaded with engineers, who like to push around numbers.  Operations folks like to analyze the plant output and quality numbers to death.  And everybody in finance tends to use numbers to make their argument.  Strategists and planners obsess over trend numbers.  Even salespeople talk about salescalls, orders, total revenues, margins – numbers.  So it seem marketers are starting to think that to gain respect they need to adopt personal, or role, Success Formulas much like others in the organization.

The problem is that numbers tend to focus you on the past, not the future.  Yes, on-line ads and click-throughs offer us a bounty of new numbers on the efficacy of ads, placements, messages, hits – all kinds of things we can run through the same analytical tools used by the rest of the company.  But does studying the recent behavior, upon which we have numbers – such as ad clicks – or of links to facebook pages – or the volume of tweets – or the respondents to a Linked-in group query — do these things tell you what big trends are emerging?  Do they tell you whether your product line could be made obsolete by a new competitor?  That is far less likely to happen. 

All this number crunching may make marketing look more scientific, but the important question is whether it helps the company grow.  Unfortunately, most trend numbers tell us what worked well in the past.  Yet knowing that still doesn't tell you what will work in the future.  Number crunching is great for execution of a designed plan.  Midway through an ad program, analysis can help you tweak it in order to catch more viewers and grab a few more sales.  Midway through a promotion, analysis can help you understand the impact of a price change, or a product pairing, or a sales blitz so you can tweak it for maximum results.  Analysis is great for understanding what to do right now.  But we have to run our business not just for right now.  We have to run businesses to position the company where the market will be in a year, two years, five years and beyond.

There's a tendency to think that the person who has the most numbers, or does the most analysis, is the better businessperson.  I don't know how this proclivity developed, but it did.  The desire to "engineer" a business so that it has no risk, and will generate ongoing growth and profits is a powerful desire.  But reality is that we live in a highly dynamic world.  We cannot predict the future.  Most 3 to 5 year forecasts aren't off by 2% or 5% – they are off by 50%!   Having all the numbers imaginable about the past won't give you much help for dealing with a market shift.  And that's the big problem in business today – dealing with these radically shifting markets and the changes they bring so quickly.  Analysis depends too much on the future being like the past, and that just isn't so.  The world keeps changing.

Lehman Brothers, Merrill Lynch, Bank of America, Chrysler and GM were/are full of peoples deeply skilled in how to "run the numbers."  Business training the last 30 years has given us thousands of skilled analysts, deeply ingrained in how to dig up and analyze vast amounts of data – using newer and more powerful computer tools every year.  Yet, for all this analytical skill we aren't producing more revenue growth, nor more profits.  Throughout the last 30 years growth rates have declined, and profit rates have dropped.  And recently we fell off a business cliff into an amazingly deep recession.  Yet, we're drowning in a sea of data and Powerpoint slides full of analysis.  The link between running numbers and improving performance appears broken – if it ever existed at all.

Marketers should be all about growth.  And growth comes from moving beyond executing static promotional programs on existing products.  To grow you have to be flexible to enter new markets, pioneer innovation and generate new solutions.  Somebody has to lead the charge to do scenario planning that opens the collective vision to doing new things – things not visible in the numbers.  Somebody has to understand the behavior of competition to recognize the holes they are unable to address because of their Lock-in to past practices.  Somebody has to reach beyond the numbers to offer Disruptions which allow the company to move from making computers to making consumer electronics (like Apple), or from making cars to making airplanes (like Honda).  Somebody has to be willing to manage market tests that teach you how to create new markets where you have fewer competitors and higher profits as growth takes off.  And all of this work is well beyond analyzing the numbers.

I advocate that all executives pull their heads out of the numbers to undertake these tasks for growth.  Many CEOs of now defunct companies  could memorize pages and pages of financial and market numbers.  They could recite market shares, product margins, product variable costs, plant fixed costs, employee costs and segment profits from the top of their heads.  Yet, the businesses are now gone (Multigraphics, AB Dick, Wang, Digital Equipment, Western Auto and TG&Y are just a few that no longer exist).  Having a deep understanding of the numbers means you know the past.  But unless you use that to be adaptive, to prepare for and launch Disruptions, all those numbers simply get in the way of being successful.  You can know all the trees, but end up unable to save the forest.

Marketers are not given their due.  Usually they see market shifts before anyone else.  They are able to generate scenarios that are possible, but often ignored because they require change.  They know the limits of a product, and they realize when the variations and derivatives are getting long in the tooth – causing margins to
slip as the cost of sales and new launches keeps rising.  They also know the company weaknesses and how they must be addressed if the company is not to become irrelevant.  They shouldn't retreat to the bastion of numbers to try and make themselves more likable.  Rather, they should lead the charge to make sure planning is about the future, not the past.  They need to keep executives paranoid about competitors.  They need to constantly bring up company shortcomings left vulnerable due to Lock-in.  And they need to champion test after test after test to keep the company growing.  In these roles, they are more important than anyone else in the company.  And vital to growth and viability.  Without marketers and the application of their skills all companies become out of step with shifting markets and inevitably fail.

Too big to fail? Overcoming size disadvantages – JPMorgan Chase

"The Need for Failure" is a recent Forbes article on why it is bad – really bad – to prop up failing institutions. The author is an esteemed economics professor at NYU. He says "too big to fail is dangerous.  It suggests there is an insurance policy that says, no matter how risky your behavior, we will make sure you stay in business."  Rightly said, only it creates a conundrumLarge organizations are not known for taking risky actions.  Large organizations are known primarily for lethargic decision-making which weeds out all forms of risk – right down to how people dress and what they can say in the office.  When you think of a big bank, like Bank of America or Citibank, you don't think of risk You think just the opposite.  Of risk aversion so great they cannot do anything new or different.

What I'd add to the good professor's article is recognition that large organizations stumble into risk they don't recognize, by trying to do more of the same when that behavior becomes risky due to market changes.  My dad said that 100 years ago when my grandfather was first given pills by a doctor he decided to take the whole bottle at once.  His logic was "if one pill will help me, I might as well take the whole lot and get better fast."  Clearly, an example where doing more of the same was not a good idea.  Then there was the boy who loved jumping off the railroad bridge into the river.  He did it all the time, year after year.  Then one month there was a draught, the river level fell while he was busy at school, and when he next jumped off the bridge he broke his leg.  He did what he always did, but the environmental change suddenly made his previous behavior very risky.

Big corporations behave this way.  They build Lock-ins around everything they do.  They use hierarchy, cultural norm enforcement, sacred cows, rigid decision-making systems, narrow strategy processes, consistency in hiring practices, inflexible IT systems, knowledge silos and dependence on large investments to make sure the organization cannot flex.  The intent of these Lock-ins is to make sure that historical decisions are replicated, to make sure past behaviors are repeated again and again with the expectation that those behaviors will consistently produce the same returns.

But when the market shifts these Lock-ins create risk that is unseen.  Bankers had built systems for generating their own loans, and acquiring loans from others, that were designed to keep growing.  They designed various derivative products as their own form of insurance on their assets.  But what they did not recognize was that pushing forward in highly unregulated product markets, as the quality of debtors declined, created unexpected risk.  In other words, doing more of the same did not reduce risk – it increased the risk!   Because the company is designed to undertake these behaviors, there is no one who can recognize that the risk is growing.  There is no one who challenges whether doing more of the same is risky – only those who would challenge making a change by saying change is risky! 

Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and AIG all created a much higher risk than they ever anticipated.  And they never saw it.  Because they were doing what they always did – and expecting the results would take care of themselves.  They were measuring their own behaviors, not the behavior of the market.  And thus they missed recognizing that the market had moved – and thus doing more of the same was inherently risky. 

(The same is true of GM, for example.  GM kept doing what it always did, refusing to see  the risk it incurred by ignoring market shifts brought on by changing customer behaviors, rising energy costs and offshore competitors.)

That's why big company CEOs feel OK about asking for a bail-out.  To them, they did not fail.  They did not take risk.  They did what they had always done – and something went wrong "out there".  Something went wrong "in the market".  Not in their company.  They need protection from the marketplace. 

Of course, this is just the opposite of what free markets are all about.  Free markets are intended to allow changes to develop, forcing competitors to adapt to market shifts or fail.  But those who run (or ran) our big banks, and many of our big industrial companies, haven't see it that way.  They believe their size means they are the market – so they want regulators to change the market back.  Back to where they can make money again.

So how is this to to be avoided?  It starts by having leaders who can recognize market shifts, and recognize the need for change.  In an companion Forbes article "Jamie Dimon's Straight Talk Has A Good Ring" the author takes time to review J.P. Morgan Chase's Chairman's letter to shareholders regarding 2008.  In the letter, surprisingly for a big organization, the JPMC Chairman points out market shifts, and then points out that his organization made mistakes by not reacting fast enough – for example by changing practices on acquiring mortgages from independent brokers.  He goes no to point out that several changes have happened, and will continue happening, at JPMC to deal with market shifts.  And he even comments on future scenarios which he hopes will help protect investors from the hidden risk of companies that take actions based on history.

Mr. Dimon's actions demonstrate a willingness to implement The Phoenix Principle.  For those who don't know him, Mr. Dimon has long been one of the more controversial figures in banking.  He is well known for exhibiting highly Disruptive behavior, yet he has found his way up the corporate ranks of the traditional banking industry.  Now he is not being shy about Disrupting his own bank – JPMC. 

  1. His discussion of future scenarios clearly points to expected changes in the market, from competitor shifts, economic shifts and regulatory shifts which his bank must address.
  2. He sees competitors changing, and the need for JPMC to compete differently with different sorts of institutions under different regulations.  Mr. Dimon clearly has his eyes on competitors, and he intends for JPMC to grow as a result of the market shift, not merely "hang on."
  3. He is espousing Disruptions for his company, the industry and the regulatory environment.  By going public with his views, excoriating insurance regulators as well as unregulated hedge funds,  he intends for his employees and investors to think hard about what caused past problems and how important it is to change.
  4. He keeps trying new and different things to improve growth and performance at the company.  It's not merely "more of the same, but hopefully cheaper."  He is proposing new approaches for lending as well as investing – and for significant changes in regulations now that banking is global.

Very few leaders recognize the risk from doing more of the same.  Leaders often feel it is conservative to not change course.  But, when markets shift, not changing course introduces dramatic risk.  People just don't perceive it.  Because they are looking at the past, not at the future.  They are measuring risk based upon what they know – what they've failed to take into account.  And the only way to overcome this problem is to spend a lot more time on market scenarios, competitor analysis and using Disruptions to keep the organization vital and connected with the market using White Space projects.

“Cash Cows” are like unicorns, a myth – GM, Chrysler

"Chrysler delivers the bad news to 789 dealers" was yesterday's headline.  Today the headline read "GM notifies dealers of shutdowns" as the company sent 1,100 dealers the notice they would no longer be allowed to stay in business.  Thousands are losing jobsChrysler is bankrupt, and GM looks destined to file shortly.  But wait a minute, GM was the market share leader for the last 50 years!!  These big companies, in manufacturing, were supposed to be able to protect their business and become "cash cows."  They weren't supposed to get beaten up, see their cash sucked away and end up with nothing!

About 30 years ago a fairly small management consultancy that was started as a group to advise a bank's clients hit upon an idea that skyrcketed its popularity.  The fledgling firm was The Boston Consulting Group, and its idea was the Growth/Share matrix.   It created many millions of dollars in fees over the years, and is now a staple in textbooks on strategic planning.  Unfortunately, like a lot of  business ideas from that era, we're learning from companies like GM and Chrysler that it doesn't work so well.

The idea was simple.  Growth markets are easier to compete in because people throw money at the companies – either via sales or investment.  So it's easier to make money in growing businessesMarket share was considered a metric for market power.  If you have high share, you supposedly could pretty much dictate prices.  High share meant you were the biggest, which supposedly meant you had the biggest assets (plant, etc.) and thus you had the lowest cost.  So, low growth and low share meant your business was a dog.  High growth and low share was a question mark – maybe you'd make money if you eventually get high share.  High growth and high share was a star.  And low growth but high share is a cash cow because you could dominate a business using your market clout to print money – or in the venacular of the matix – milk the money from this cow into which you put very little feed.

In the 1970s/80s, looking at the industrial era, this wasn't a bad chart.  Especially in asset intensive businesses that had what were then called "scale advantages."  In the industrial world, having big plants with lots of volume was interpreted as the way to being a low-cost company.  Of  course, this assumed most cost was tied up in plant and equipment – rather than inventory, people, computers, advertising, PR, viral marketing, etc.  The first part of the matrix has held up pretty well; the last part hasn't.  We now know that it's easier to make money in growth.  But it doesn't turn out that share really gives you all that much power nor does it have a big determination in profitability.

We know that having share is no defense of profitsThe assumption about entry barriers keeping competitors at bay, and thus creating a "defensive moat" around profits, is simply not true.  Today, companies build "scale" facilities overnight.  They obtain operating knowledge by hiring competitor employees, or simply obtaining the "best practices" from the internet.  Distribution systems are copied with third party vendors and web sites.  Even advertising scale can be obtained with aggressive web marketing at low cost.  And so many facilities are "scale" in size that overcapacity abounds – meaning the competitor with no capacity (using outsourced manufacturing) can be the "low cost" competitor (like Dell.).

Thus, all markets are overrun with competitors that drive down profits any time growth slows.  As GM learned, even with  more than 50% share (which they once had) they could not stop competitors from differentiating and effectively competing.  Not even Chrysler, with the backing of Mercedes, could maintain its share and profits against far less well healed competitors.  When growth slows, the cash disappears into the competitive battles of the remaining players.  Unfortunately, even new players enter the market just when you'd think everyone would run for the hills (look at Tata Motors launching itself these days wtih the Nano).  Competitors never run out of new ideas for trying to compete – even when there's no growth – so they keep hammering away at the declining returns of once dominant players until they can no longer survive.

Competition exists in all businesses except monopolies, and threatens returns of even those with highest share.  Today it might be easy to say that Google cannot be challenged.  That is short-sighted.  People said that about Microsoft 20 years ago – and today between Apple, Linux and Google Microsoft's revenue growth is plummeting and the company is unable to produce historical results.  People once said Sears could not be challenged in retailing.  Kodak in amateur photography.  And GM in cars.  Competitors don't quit when growth slows – until they go bankrupt – and even then they don't quit (again, look at Chrysler).  High share is no protection against competition. 

And thus, there is no "easy cash in the cow" to be milked It all gets spent fighting to stay alive.  Trying to protect share by cutting price, paying for distribution, advertising.  And if you don't spend it, you simply vanish.  Really fast.  Like Lehman Brothers.  Or Bennigans. 

The only way to make money, long term, is to keep growing.  To keep growing you have to move into new markets, new technologies, new services – in other words you have to keep moving with the marketplace.  And that produces success more than anything else.  It's all about growthForget about trying to have the "cash cow" – it's like the unicorn – it never existed and it never will.