by Adam Hartung | Jul 20, 2010 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
According to Crain’s Chicago Business “Sara Lee Looks to Sell Bread Business.” Large investors seem to support the sale, hoping this will expedite a take-over by a larger consumer goods company or a privage equity firm. They hope the sale of this laggard company will finally bail them out of a bad investment. Should either takeover happen, Sara Lee would likely cease to exist as a company. Most employees would lose their jobs, more products “streamlined” into the dustbin, and another Chicago headquarters would disappear.
Since taking the helm in 2005 CEO Brenda Barnes has systematically dismantled Sara Lee. Then a $19B company, Sara Lee has shrunk by almost 50% to just over $10B. From 2005 to 2009, as asset sales dominated management attention, value declined by 75%, from $20/share to $5. On the hope of high values for the asset balance as the company is shopping its very existence, value has risen to $15/share – a 25% decline from the starting point. Hard to call that “excellent” CEO performance.
Sara Lee leadership was so focused on trying to Defend & Extend legacy business models that when they didn’t improve the business was sold. Year by year, Sara Lee got smaller. And the end of the road looks to be the end of Sara Lee. Customers lost many products, with almost no new product introductions to replace them. Employees had almost no growth opportunities as the company shrank. Suppliers saw margins shrink as they were beat upon to lower prices. And investors have suffered losses. There is no “winner” at the end of the road for Defend & Extend Management. When the company moves into the Whirlpool little is said as the remnants slip away.
Today we are fascinated by BP’s effort to cap the Deepwater Horizon oil leak in the Gulf of Mexico. Will it work? Everyone certainly hopes so. But what will it mean for BP if the leak is capped? Unfortunately, precious little.
The New York Times reported recently “In BP’s Record: A History of Boldness and Costly Blunders.” In classic Defend & Extend behavior, Tony Hayward early on implemented a “back to basics” campaign to “refocus” BP on its “core strengths.” These are all warning signs. When management looks backward, it is not looking forward. Taking “bold action” to “do what the company has always done best” is simply using euphemisms to ignore added risk in effort to protect a Success Formula with declining value. People feel pushed to improve performance by constant optimization – including a lot of cost cutting. And cost cutting leads to blunders.
BP is far from the Whirlpool. But things don’t look good for BP. As Forbes published in “BP’s Only Hope for Its Future” BP has to change its direction pretty remarkably or it’s employees, investors, suppliers and customers could find out BP has a long way yet to fall. Drilling ever riskier wells, in riskier places, for less reserves is not a long-term viable Success Formula.
by Adam Hartung | Jul 12, 2010 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
What do Tony Hayward, Jeff Skilling and Bernard Ebbers possibly have in common? They all might end up convicted felons.
While this may sound ridiculous, and very, very scary to corporate CEOs, nobody expected Skilling, the CEO of Enron, or Ebbers, the CEO of Worldcom, to go to jail. They were hailed as heros, and admired for their leadership of large, high growth companies. Yet, Ebbers is waiting out a 25 year sentence, convicted of acting illegally in the value destruction at Worldcom (CNNMoney.com “Ebbers Gets 25 Years.”) And Skilling is working on a 24 year sentence for the downfall of Enron (CNNMoney.com “Skilling Gets 24 Years.”)
Now, BusinessWeek.com is asking if the same fate awaits Tony Hayward in “The Oil Spill: Will BP Face Criminal Charges?“ As the spill goes on and on, and the damages increase, the public sentiment against BP is increasing. If the spill goes around Florida to the east coast there will be millions more citizens, and businesses, affected. It is clear that many laws were broken, as the article lays out. So it’s not a mute question that an aggressive prosecutor would go after imprisoning Hayward.
As reprehensible as many may find each of these 3 men, how did they end up facing criminal prosecution? Even The Washington Post has asked “Did Jeff Skilling Do Anything Illegal?“ A Harvard MBA and former McKinsey partner, Mr. Skilling calmly described the practices at Enron completely unapologitically. He was certain he’d done nothing wrong. Mr. Ebbers was a devout Christian and Sunday School teacher who claimed all through the trial and to reporters on the way to jail he’d done nothing wrong. I’m sure Mr. Hayward believes similarly.
What all 3 did was simply push the Success Formula too far. Worldcom, Enron and BP were wildly successful companies. They created Success Formulas that earned billions of dollars. For years they grew. But unfortunately, they kept trying to push the Success Formula to better results when market shifts left that formula earning lower returns. Rather than recognize that lower returns were an indication of a Success Formula needing change, they dug in their heals and “got creative” in Defending & Extending it. They used “best practices” to lower costs, and to seek out financial machinations which would allow the business to look more profitable – even as they undertook more, and more risk.
To them, taking risk rather than change the Success Formula wasn’t thought of as risk. They were out to protect something they felt had to be protected, at all cost. The Success Formula that had made money for years, enriching not only themselves but investors, employees and suppliers. They were blind to the added risk, because it was assumed that doing incrementally more was the “right thing to do” for the company. They were doing what they believed were “best practices” for the “health” of their companies.
Defending a Success Formula can become very risky, as I wrote in Forbes “BP’s Only Hope For Its Future.” Years of doing the same thing, only more, better, faster, cheaper, makes it harder and harder to do something different. The culture and decision-making systems are designed, and modified — Locked-in — to push employees to make the same decision over and over, regardless of risk. In BPs case we now know that cheaper parts and practices were employed to improve profitability – something each employee felt was in the company’s best interest. Only, in the end, it served to layer risk upon risk – and lead to an eventual disaster.
Are you “doubling down” on risk in your business? Are you investing more and more into trying to improve returns in a business that is earning less and less – and growing less and less? If so, you could be setting yourself up for disaster as well. Let’s hope in doing so you don’t run afoul of the law. 25 years in prison is a hefty price to pay for spending too much energy “focused on your core” business at a time when you should be looking for new ways to expand and grow where the risks are less.
by Adam Hartung | Jun 29, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Science
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.
