by Adam Hartung | Mar 25, 2006 | Disruptions, In the Rapids, Innovation, Leadership, Lifecycle
In my presentations I impress upon people the need to look into the future to recognize Challenges and unearth opportunities. Don’t let Lock-in keep you projecting the future from the past.
A great example showed itself recently. The Chicago Tribune (see article) wrote about an emerging new jet (as in airplane) that was smaller, cheaper to buy and cheaper to operate. Now, you might say "but I don’t need a jet" and pass this article by. That is Lock-in; the decision to fly by the ariticle was created by what you do today, not what you could do tomorrow.
We all know that air travel has become grueling in recent years. Long gone are the days when flying meant you were treated well, with good service and a nice meal. Today, the airline charges for everything from pillows to potentially an aisle seat. Free meals are a thing of the past. And overworked, underpaid flight attendants struggle to keep a smile as they herd passengers, like so much cattle, onto and off the plane as fast as possible in an effort to drive up usage — and maybe someday create a profit for the lackluster industry.
And all that is after you deal with the struggle of simply getting your ticket, boarding pass, checking bags and clearing that long TSA security line (where you got to take off your belt and shoes, while tearing apart your handbag to place items in separate bins for x-ray screening.)
The whole process of air flight is simply not glamorous – not fun. In fact, it is stressful, and tedious. And for business travelers, the grief and cost have become so great that it’s harder and harder to justify those trips to customers and vendors that you know you really should make.
That’s today. Does it need to be the future? Several new firms – air taxi services – have emerged that offer flight service the way we use taxis – "Take me to there, and maybe back again." They provide the equipment, the pilots, everything to make the trip. They fly from very convenient, small airports nearer to more offices (as well as the large airports). The pre-flight screening is a comparative breeze, the stress of missing flights is gone, flexibility grows immensely, and you can get more done since you aren’t hanging around airports and struggling with the crowds.
You’ll say that sounds good, but isn’t it expensive? And that’s where the Tribune article comes in. While we weren’t watching, lots of these new taxi and charter services have brought on-line aircraft that are cheaper and more fuel efficient. They also have streamlined their business processes to make the system more efficient. The result is much lower cost to use a taxi plane than most of us imagine.
Could the future have business travelers bypassing United and American to visit customers? Maybe. And that makes this a trend worth watching, and considering. If a salesperson makes twice as many calls as her competitor, or is first on-site to deal with a customer problem by using this service it just might lead to more revenue. It could be a competitive edge. And as more people use these services processes will improve and technology will be applied, and who knows what the future opportunity will be in just 10 years?
We have to avoid defining the future by looking in the rear-view mirror. We all have a tendency to project the future off our past. We fall into the mode of extending our old Success Formulas. But, innovations appear that change the environment. And we need to be looking for them. We have to keep our eyes on the windshield if we are to identify Challenges to old ways and start looking for White Space opportunities to test new ideas.
Maybe next time you want to visit a vendor in Omaha, or a customer in Wichita, you should hit the web, find some air taxi services, and find out just what the possibilities are. And keep your eyes open for these new jets – they potentially might change our whole view of personal travel.
by Adam Hartung | Mar 20, 2006 | General, Innovation, Leadership, Lifecycle
Chipotle’s Mexican Grill went public last week. The stock shot up in price, and ended the week posting a whopping Price/Earnings multiple of 36! As you probably know, Chipotle’s has been a subsidiary of McDonald’s. Now, it is it’s own company – albeit with most of the stock still owned by McDonald’s.
McDonald’s, meanwhile, has about an average market multiple of 17. Why is Chipotle’s P/E roughly double McDonald’s? Analyst views are mixed as to the exact future of the stock, but what all agree upon is that Chipotle’s has a great growth path in front of it. While McDonald’s is struggling to find opportunities to grow stores, Chipotle’s is expected to expand at double digit rates for several years. And profit growth is expected to match.
Now that it’s outside of McDonald’s, Chipotle’s has the opportunity to explore new opportunities for growth. It can expand in new ways, and develop new solutions. It has the opportunity to create, and sustain, White Space to prolong it’s growth. And the result is a 2x market multiple.
Some would say this is a win/win. Chipotle wins, and McDonald’s wins – because MCD shareholders keep ownership in Chipotle’s. I would say that is a back-handed compliment. Why couldn’t McDonald’s use Chipotle’s to attract new talent? Why couldn’t McDonald’s let Chipotle’s manage White Space to create growth avenues while inside McDonald’s? Why couldn’t Chipotle’s be a growth vehicle to help McDonald’s provide new opportunities for not only employees, but suppliers and investors?
It’s too bad that McDonald’s is so Locked-in to its Success Formula that it had to resort to letting Chipotle’s go outside. Yes, this is better than holding Chipotle’s back. But, it would have been best if McDonald’s would learn to Disrupt itself, create and manage White Space. That would insure McDonald’s of a long and viable future. Now, the future growth at McDonald’s remains clouded, while Chipotle’s appears loaded with upside opportunity.
by Adam Hartung | Mar 20, 2006 | Defend & Extend, Innovation, Leadership, Lock-in, Openness
Success Formulas are nested. We have personal Success Formulas, which interact with Work Team Success Formulas, which connect with Functional and B.U. Success Formulas, which tie to Industry Success Formulas those are impacted by Success Formulas within the larger economy. Whew! That’s a lot of Success Formulas. But, in fact, achieving superior results mean these Success Formulas all line up. When they are misaligned, resources are spent ineffectively and results suffer.
We frequently focus on the Success Formulas at the top of the pyramid. But, big Challenges occur when changes happen deep. At the deepest are changes in the economy – which we tend to ignore – and yet they create the biggest Challenges.
Just a decade ago the emergence of all the linked PCs across the world wide web created a change in the economy. It challenged Success Formulas throughout the pyramid to align with the new capabilities. We all had to learn how to move faster, and more effectively to keep pace competitively. And it opened the door for international trade on a previous unheard of scale, as we discovered we could use the web to manage work anywhere, from Indiana to India (as detailed in the book The World is Flat).
Now, there’s a new Challenge emerging. And we need to find White Space to identify new solutions.
Any business watcher knows that complaints are high about the cost of health care. Estimates are that $1,500 of every car’s cost is worker health care. And the auto companies are fighting with their unions to cut this cost. The same has happened with health care cost in the airlines, steel, and most other industries. For those of us working in America, we’ve all seen our employers raise our contribution to the insurance premiums, while watching the dreaded co-pays go up and the services offered go down. According to a 2004 Harris poll, a majority of Americans actually favor price controls!
U.S. employers are learning that in a new, no-barriers world they have to compete with companies that effectively have no health care cost. In most other countries, the cost of health care is handled dramatically differently – with the result that employers do not pay for their worker’s plans. As a result, a manufacturer in the U.S. finds the marginal cost of health care actually causes him to lose sales against a global competitor – such as China. And the same with a U.S. services vendor competing with Indian companies.
What’s happening is that we no longer can look just to how we manage the American economy when we compete. We’re now on a world stage. We have to compete with countries which standardize health care, recover much of the cost through various taxing systems, and leave the employer largely out of the equation. The Challenge to American employers – and thus to all of us who work – is very real.
The issue is no longer becoming "what’s the right answer." Instead, we have to realize that Americans are Locked-in to a system that is globally unique. It is affecting our competitiveness – on a company-by-company basis. This system of employer funded private insurers worked well when constructed as part of our Success Formula post Depression. But now it’s hurting our competitiveness. The world has changed.
So far, we’ve been pretty unwilling to recognize this Challenge. We’ve remained Locked-in. Governmental programs to change have been met with attacks from not only insurers, but by most Americans. What’s needed is White Space for us to test some new approaches. Americans are unlikely to change just because they see merits (and deficits) to programs in Canada or the U.K. Instead, we have to develop our own solution. And that will require us giving ourselves permission, and dedicated resources, to experiment with different solutions.
We compete now globally. Thus the requirement becomes aligning our industries, companies and ourselves with changes in the economy. EVen where such alignment can be wrenching. Where will this White Space occur? Probably not in government, that’s not our way. But rather through some form of private approach where we can experiment and learn. The sooner we create this White Space, fund it and put talented people in it the better. And the businesses that pioneer these solutions have the opportunity to generate enormous value, and wealth for investors.
by Adam Hartung | Mar 15, 2006 | General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you’ve read this BLOG for a while you know I am no fan of Sears. Since the merger of KMart and Sears the combined company has done nothing to change its competitiveness versus better managed companies like Target, Kohls and WalMart.
Today Sears stock jumped almost 13%. Oh my, should I reverse my position? After all, the company said (Marketwatch reported) it doubled fourth quarter profitability since a year ago when the companies merged. And revenues are up to $16Billion, from last year’s $5.95billion – wow! And Kmart stores eeked out a .9% same store sales increase during the holidays – the first such increase since 2001! Yeah!
Let’s see… Let’s read a bit more.. what else did they say? "Competitor’s are opening more stores and spending on promotions and marketing – which Sears Holdings isn’t" … Oh, let’s see, these results don’t compare today with combined results from a year ago… Revenues of the combined companies actually declined by 4.5%… well, well… For the year, same store sales at Sears fell 8.4%, while KMart same store sales dropped 1.2%…. oh, the solution — the management is "adjusting its apparel strategy to better meet customer demand" and therefore "expects declines will moderate"…
Those positive headlines, as they said in Oklahoma when I was young, is putting lipstick on a pig.
Sears is still Defending and Extending two completely broken Success Formulas. And the financial heads that put this deal together still haven’t internally Disrupted the operating practices, nor have they created effective White Space to develop a new, more competitive, solution (see previous BLOG on the failure of Sears Essentials). Without those two actions, these results are just financial reporting shenanigans – and those who invest in them deserve the risk they take.
by Adam Hartung | Mar 15, 2006 | General, In the Swamp, Leadership, Lifecycle, Lock-in
Today I got a call from a friend, asking me my opinion of DuPont. I worked for DuPont from 1987 to 1990, and of course DuPont is one of those large and historically great American companies. An early manufacturer of gunpowder for our war efforts, the company went on to innovate such great products as Nylon, Teflon and Kevlar. In The Graduate the famous recommendation to Dustin Hoffman to think "Plastics" is often credited as a plug for DuPont.
But, innovation has been slack at DuPont for quite a few years. They haven’t brought forward one of those great products for a long time. And, their returns have suffered as the company shrunk – through a combination of selling businesses (they owned, and then sold in the 1990s, Conoco for example, and spun off their pharmaceutical business in a joint venture to Merck) and declines in some "core" markets – like printing and other films. Their stock price has suffered.
Today, however, Dupont’s stock broke out to a short-term high after announcing expectations for better earnings. Several technicians said that with only a small additional move upward the stock could jump another 20%. Is this a juicy investment opportunity?
When I read the Marketwatch release, I was disheartened. DuPont didn’t jump up on an announcement of new products. Nor a breakthrough innovation. Nor was there any sign of any major Disruptions happening to their Lock-in, or new White Space projects being created. Instead, I learned that earnings are predicted to rise from closing several labs, shuttering plants and laying off more people. That, plus they think a horrible European market will finally take a turn for the better – no thanks to any new products from Dupont but rather just because enough time has passed while the marketplace stunk to expect an upturn.
It’s hard for me to get excited about DuPont. Even though their history is undeniably great. They keep cutting capacity, cutting jobs, taking restructuring charges and waiting for an economic turnaround. Their improved profits are short-term financial machinations. What would excite me would be to hear about some Disruptions in their internally focused Lock-in. Or to hear about new joint ventures, or other White Space projects intended to spark innovation and create new markets. Without those signs, I’d worry that the short-term stock improvement will just be short-term.
by Adam Hartung | Mar 7, 2006 | General, Lock-in
Did you ever wonder why Sony doesn’t dominate the digital music market? After all, they are historically strong in consumer electroncis (i.e. walkman). And they own a recording studio. Yet, Apple dominates and the word "I-Pod" is synonymous with digital music. Sony was locked into different divisions with differing goals, and a desire in those divisions to fight digital music in order to extend the life of CDs. They didn’t see the I-Pod coming. They were blinded by their Lock-in to their old Success Formula, so even though they could observe MP3 technology, and Napster’s first inroads into their market, they waited way too long to effectively react.
This week’s Oscars is a showcase for recognizing Challenges. The event was dominated by movies from small production houses, and best picture was won by "lowly" Lions Gate – best known for low budget slasher movies, urban films and documentaries.
It’s easy to discount this experience. You may not have enjoyed many of the movies which dominated the nominations, and the wins. After all, for best song to to be the urban rap "It’s Hard Out Here for a Pimp" is more than a bit jarring for many people over 40. It’s easy to say "I don’t connect with these movies, and this doesn’t make any sense to me" and then walk away. As a viewer, no problem.
But, if you work for Universal Pictures, you should think again. The early stages of change look just like this. A market shifting Challenge looks exactly like the 78th Academy Awards. A bit odd, easy to discount and explain away. But the fact is, films made differently, and for a fraction of what the big studios spend, just ran away with all the awards.
Lions Gate is a different sort of company from Paramount, et.al. These companies represent the front edge of a shifting marketplace. They demonstrate a new Success Formula for filmmaking. Larger competitors will ignore them at their peril, for they could well do to movie companies what Apple first did to large computers (such as DEC and Wang), and then later what a struggling Apple did to analog music.
by Adam Hartung | Feb 28, 2006 | General, Innovation, Leadership, Lifecycle, Lock-in
I’m a midwestern guy – born in Oklahoma, college in Kansas and now a long-time resident of Illinois. I love Chicago. But, I have to admit, some things have been concerning me lately.
Illinois lost jobs last year. In fact, Illinois has had a net job loss since 2000. That’s a Telltale of problems. The marketplace is shifting, and it’s not clear Chicago is creating an effective new Success Formula.
Across the business landscape, there are lots of signs of problems. Former bellweather Kraft has been locked in a turnaround for 5 years, without much progress. In 2004 the company closed 20 plants and laid off 5,500. Recently it’s announced plans to shut another 20 plants and lay off 8,000 more. Crosstown, Sara Lee has been struggling as it has sold off business after business in search of "focus," yet it has not been able to improve results. Revenues are predicted to halve over the next 5 years in this prolonged turnaround effort – apparently in plans to shrink itself into success.
Sears has shown misstep after misstep since being acquired by K-Mart. It announced in 2005 it would convert 400 KMart stores into Sears Essentials – but as sales fell 20% in the first 40 conversions that decision has now been abandoned. Sears can’t even buy it’s own Canadian operations, having had its offer turned down by the Canadian Board! And McDonald’s is under attack for everything from bad fat in its food, to unannounced ingredients causing asthma attacks and a 30-something hedge fund manager trying to force management to restructure its operations in order to add value to a stuck stock.
For years, I’ve heard people talk about "midwestern paternalistic companies," "mature management in mature industries," and "old fashioned values exemplified by careful management" when talking about Chicago. Unfortunately, these are a pleasant veneering over of unpleasantly Locked-in management teams. Too many companies are blaming a "midwestern culture" for an inability to Disrupt their failing Success Formulas and implement White Space. Too few new products are being created and introduced, and too few new innovations are being introduced into operations.
Do midwesterners lack innovation? Of course not. Go to any of a number of Chicago area angel investing groups, or entrepreneur groups, or venture clubs and you’ll see, literally, dozens of new ideas for businesses of all types. Ask those entrepreneurs where they go for corporate support and you hear "the coasts. None of these big Chicago companies want to get involved with local innovators." And, alas, you don’t see these companies sending representatives to any of these networking events. These venerable laggards keep looking inward for all the answers, instead of looking outward – where White Space creates a flourishing market of innovation.
I would think that the apparent Challenges – the loss of jobs, or the declining stock prices, or the frustration of limited growth – would lead these company executives to do something different. To Disrupt their ineffective operations. But so far, they have remained Locked-in to those old Success Formulas – and the price is being paid (quoting a famous line from It’s a Wonderful Life) "by those people who do most of the working, and eating, and living, and dying in this town."
by Adam Hartung | Feb 22, 2006 | Leadership
HP‘s CEO Mark Hurd is making a difference at the company. The turnaround since his arrival has been large and successful. I’m often asked what a leader should do when their company is in need of change. As BusinessWeek recently reported, you should do what Hurd is doing if you want to turn around a failing Success Formula.
Many leaders have been convinced that their role was to establish a vision for the companay. Or setting strategy and mission. Yes, these are roles of senior leaders. But, more than that, leaders have to be Disrupters. Nothing will change unless the leaders step out and actively Disrupt the old Success Formula.
As reported, Mr. Hurd has been going all over HP engaging directors and managers in reviews. This has some detractors accusing him of being "nuts and bolts" and "pragmatic" or without a vision for the future. A better view is that Mr. Hurd is helping his company recognize its Challenges and Disrupt the Lock-ins so the managers can define new solutions. In a nutshell, he’s doing exactly what he needs to do to change the behavior, and results, of HP.
Some of our greatest leaders are great disrupters. Jack Welch, sometimes called "Neutron Jack," was a great disrupter who helped keep GE in front of competitors for nearly 2 decades. John Chambers, of Cisco, is also a great disrupter as he constantly brings in new technologies and products which obsolete what already exists. To keep you business ahead of competitors, it’s best that you become the Disruptor – and not wait to fall behind.
by Adam Hartung | Feb 22, 2006 | General, In the Swamp, Leadership, Lock-in
Recently GM announced with pride that it had reduced it’s IT expenditures by 25%. The company’s IT spend to sales ration has dropped from 2.4% to 1.6% – a 33% decline. This was held up as a sign of great progress. But, as Baseline recently reported, because GM is looking at the wrong metrics this fact doesn’t matter much.
During this same period, GM’s employment declined by nearly 50%. And the amount of work outsourced (as a percent of revenue) increased from 67.7% to 75%. As a result, the number of transactions undertaken at GM declined markedly. So, while IT costs declined, at the same time the business supported by IT declined even faster. The net? IT costs per transaction actually INCREASED by almost 74%.
Businesses tend to Lock-in on the metrics used, just like they lock-in on behaviors and processes. If they keep looking at the old metrics, they miss the changes necessary to actually improve the business. Often one of the most critical Disruptions is Disrupting the metrics used. In the case of GM, they were caught bragging about peformance on an out-of-date metric. Another demonstration of Defending and Extending a broken Success Formula when what’s needed are entirely different measures to drive new behavior.
by Adam Hartung | Feb 22, 2006 | In the Swamp
McDonald’s has been in the news a lot lately. There is a hedge fund operator pushing the company to spin out its company owned stores. They just had to re-evaluate the fat content in their products, and discovered that "bad fat" is greater than previously reported. Then they had to report that there were other foodstuffs in their fries, which has led to lawsuits from allergy sufferers. And, while all this is happening, McDonald’s management is saying "hold the course, all is moving smoothly."
Welcome to the Swamp. "It’s always something" Roseann Rosanadana used to say on Saturday Night Live. And so it is in the Swamp. Even though management keeps saying things are fine, there is in fact a never ending litany of problems. Some appear small, and some appear large. But the fact is there are lots of unanticipated problems developing – and management seems to be forced to react from one problem to the next. Regularly on the defensive.
The Success Formula is in trouble. It’s no longer able to produce the desired results. Yet Lock-in is keeping the company implementing the same formula, seemingly unable to get ahead of problems. Because management is spending its time Defending and Extending the broken Success Formula, it’s not able to see that these problems will just keep coming and coming.
McDonald’s desperately needs to Disrupt its Lock-in and create a new Success Formula. That’s the only way to renew itself and get away from all these problems. It’s impossible to predict what the next problem will be, but it’s clear that from Mad Cow to bad fat they will simply keep coming. And for investors, the best thing is to steer clear of management trying to Defend and Extend what isn’t working.
