by Adam Hartung | Jun 29, 2009 | Defend & Extend, In the Whirlpool, Leadership, Lock-in
In May "The Largest U.S. Bankruptcies" was published in BusinessWeek – and since then we've added General Motors to the list. From biggest down:
- General Motors
- Lehman Brothers
- Washington Mutual
- Worldcom
- Enron
- Conseco
- Chrysler
- Thornburg Mortgage
- Pacific Gas & Electric
- Texaco
Did you notice that only 1 of these happened prior to 2001 (Texaco)? As I pointed out in Create Marketplace Disruption, the number of bankruptcies has been skyrocketing from historical norms. And the number of bankruptcies of truly huge companies has been growing at an unprecedented rate.
Ever since the modern corporation was born, the theory has been that being large gave a company lower risk. Since the 1940s people have believed that their jobs, and careers, are safer in big corporations. But today big corporations are failing at a truly alarming rate. What's changed?
Very large companies usually have a Success Formula, locked into place with hierarchy, decision-making processes, narrow strategy programs, consistent hiring processes, tight employee review processes, rigid IT infrastructure and very large investments designed to provide economies of scale. Their approach to success was driven by the notion that with size they would create entry barriers which would protect them from competitors, allowing for years of ongoing profitability. These practices were designed to focus the business on its core technology, products, customers and markets. Management theorists believed that with focus came ongoing success. They did expected businesses to be stable. With limited change.
But today we're seeing dramatic market shifts. And locked-in Success Formulas are literally failing because the company, and leadership, is unable to adapt to these shifts. During the 1950s, '60s, '70s and '80s competition was relatively stable. But that is no longer true. Success no longer comes from Defending & Extending what you used to do.
Dramatic improvements in telecommunications connectivity, computer assisted data accumulation and analysis, and global access to resources has changed the basis of competition. Now businesses must adjust to an extremely dynamic marketplace. Scale is meaningless when a new competitor can access your customers with a web page, achieve global distribution with a logistics partner, access a low-cost outsourced manufacturing plant via telephone, and provide 24×7 service with an Indian-based service contractor. When a new technology can go from invention to market in weeks, adaptability becomes far more important than size.
The marketplace has been shifting dramatically since 2001. In everything from manufacturing to financial services to commodities. Yet, far too few companies are adjusting to the new competitive requirements. Too many analysts and business leaders still seek market segments, market share and developing entry barriers. To succeed today businesses have to overcome Lock-in to Success Formulas in order to Disrupt their old approaches and remain vital to customers through the use of White Space to develop, test and implement new solutions. During periods of dramatic shift, those who follow these practices are far more successful. Regardless of size.
Don't forget to download the new ebook "The Fall of GM" for more on how the world's largest auto company failed to adjust to market shifts – and how you can avoid the GM fate by taking actions to make your business more adaptable.
by Adam Hartung | Jun 26, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Swamp, Innovation, Leadership
"Retailers cut back on variety, once the spice of marketing" is the Wall Street Journal.com headline. It seems one of the unintended consequences of this recession will be forced consumer goods innovation!
For years consumer goods companies, and the retailers which push their products, have played a consistent, largely boring, and not too profitable Defend & Extend game. When I was young there was one jar of Kraft Miracle whip on the store shelf. It was one quart. This container was so ubiquitous that it coined the term "mayonnaise jar" – everybody knew what you meant with that term. Now you can find multiple varieties of Miracle Whip (fat free, low fat, etc.), in multiple sizes. This product proliferation passed for innovation for many people. Unfortunately, it has not grown the sales of Miracle Whip faster than growth in the general population.
Do you remember when you'd go to Pizza Hut and they offered "Hawaiian Pizza?" Pizza Hut would concoct some pretty unusual toppings, mixed up in various arrangements, then give them catchy labels. Unfortunately, what passed internally as an exciting new product introduction was recognized by customers as much ado about nothing, and those varieties quietly and quickly left the menu. Like the Miracle Whip example, it expanded the number of choices, but it did not increase the demand for pizza, nor revenues, nor profits.
Expanding varieties is too often seen by marketers as innovation. I remember when Oreos came out with 100 calorie packs, and the CEO said that was an innovation. But did it drive additional Oreo sales? Unfortunately for Nabisco, no. It was plenty easy to count out the number of cookies you want and put in a baggie. Or buy fewer cookies altogether in these new, smaller packages.
These sorts of tricks are the stock-in-trade of Defend & Extend management. Clog up the distribution system with dozens (sometimes hundreds) of varieties of your product. Try to take over lots of shelf space by paying "stocking fees" to the retailer to put all those varieties (package sizes, flavor options, etc.) on his shelf – in effect bribing him to stock the product. But then when a truly new product comes along, something really innovative by a smaller, newer company, the D&E manager uses the stocking fees as a way to make it hard for the new product to even reach the market because the small company can't afford to pay millions of dollars to bump the big guy defending his retail turf. The large number of offerings defends the product's position in retail, while simultaneously extending the product's life to keep sales from declining. But, year after year the cost of creating, launching and placing these new varieties of largely the "same old thing" keeps driving down the net margin. The D&E manager is trying to keep up revenues, but at the expense of profits.
Simultaneously, this kind of behavior keeps the business from launching really new products. The previous CEO at Kraft said in 2006 that the best investment his company could make was advertising Velveeta. His point of view was that protecting Velveeta sales was worth more than launching new products – and at that time the last new product launched by Kraft was 6 years old! Internally, the decision-support system was so geared toward defending the existing business that it made all marginal investments supporting existing brands look highly profitable – while killing the rate of return on new products by discounting potential sales and inflating costs!
This D&E behavior isn't good for any business. Consumer goods or otherwise. And it's interesting to read that now retailers are starting to push back. They are cutting the number of product variations to cut the inventory carrying costs. As I mentioned, if you now have 6 different stock keeping units (SKUs) for Miracle Whip in various sizes, flavors and shapes but no additional sales you more than likely have doubled, tripled or even more the inventory – and simultaneously reduced "turns" – thus making the margin per foot of shelf space, and the inventory ROI, poorer. Even with those "shelf fee" bribes the consumer goods manufacturer paid.
For consumers this is a great thing! Because it frees up shelf space for new products. It frees up buyers to look harder at truly new products, and new suppliers. The retailer has the chance of revitalizing his stores by putting more excitement on the shelves, and giving the consumer something new. This action is a Disruption for the individual retailer – pushing them to compete on products and services, not just having the same old products (in too many varieties) exactly the same as competitors.
This action, happening at WalMart, Walgreens, RiteAid, Kroger and Target according to the article, is an industry Disruption. It impacts the manufacturers like Kraft and P&G by forcing them to bring more truly new products to the market if they want to maintain shelf facings and revenues. It alters the selling proposition for all suppliers, making the "distribution fees" less of an issue and turning those retail buyers back into true merchandisers – rather than just people who review manufacturer supplied planograms before feeding numbers into the automated ordering system. And it changes what the manufacturer's salespeople have to do.
The companies that will do well are those that now implement White Space to take advantage of this Disruption. As you can imagine, it's a huge boon for the smaller, more entrepreneurial companies that may well have long been blocked from the big retailer's stores. It allows them to get creative about pitching their products in an effort to help the retailer compete on product – not just price. And for any existing supplier, they will have to use White Space to get more new products out faster. And get their salesforce to change behavior toward selling new products rather than just defending the old products and facings.
Markets work in amazing ways. Almost never do things happen as one would predict. It's these unintended consequences of markets that makes them so powerful. Not that they are "efficient" so much as they allow for Disruptions and big behavior changes. And that gives the entrepreneurial folks, and the innovators, their opportunities to succeed. For those in consumer goods, right now is a great time to talk to Target, Kohl's, Safeway, et.al. about how they can really change the competition by refocusing on your innovative new products again!
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 | Jun 23, 2009 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
What is a brand worth? Do you spend a lot of time trying to "protect" your brand? A lot of marketing gurus spent the last 20 years talking about creating brands, and saying there's a lot of value in brands. Some companies have been valued based upon the expected future cash flow of sales attributed to a brand. Folks have heard it so often, often they simply assume a recognized name – a brand – must be worth a lot.
But, according to a Strategy + Business magazine article, "The trouble with brands," brand value isn't what it was cracked up to be. Using a boatload of data, this academic tome says that brand
trustworthiness has fallen 50%, brand quality perceptions are down 24%,
and even brand awareness is down 20%. It turns out, people don't think very highly of brands, in fact – they don't think about brands all that much after all.
And according to Fast Company in the article "The new rules of brand competition" the trend has gotten a lot worse. It seems that over time marketers have kept pumping the same message out about their brands, reinforcing the message again and again. But as time evolved, people gained less and less value from the brand. Pretty soon, the brand didn't mean anything any more. According to the Financial Times, in "Brands left to ponder price of loyalty," brand defection is now extremely common. Where consumer goods marketers came to expect 70% of profits from their most loyal customers, those customers are increasingly buying alternative products.
Hurrumph. This is not good news for brand marketers. When a company spends a lot on advertising, it wants to say that spend has a high ROI because it produces more sales at higher prices yielding more margin. Brand marketers knew how to segment users, then appeal to those users by banging away at some message over and over – with the notion that as long as you reinforced yourself to that segment you'd keep that customer.
But these folks ignore the fact that needs, and markets, shift. When markets shift, a brand that once seemed valuable could overnight be worth almost nothing. For example, I grew up thinking Ovaltine was a great chocolate drink. Have you ever heard of Ovaltine? I drank Tang because it went to the moon, and everyone wanted this "high-tech" food with its vitamin C. When was the last time you heard of Tang? It was once cache to be a "Marlboro Man" – rugged, virile, strong, successful, sexy. Now it stands for "cancer boy." Did the marketers screw up? No, the markets shifted. The world changed, products changed, needs changed and these brands which did exactly what they were supposed to do lost their value.
Lots of analysts get this wrong. Billions of dollars of value were trumped up when Eddie Lambert bought Sears out of his re-organized KMart. But neither company fits consumer needs as well as WalMart or Kohl's for the most part, so both are brands of practically no value. People said Craftsmen tools alone were worth more than Mr. Lampert paid for Sears – but that hasn't worked out as the market for tools has been flooded with different brands having lifetime warranties — and as the do-it-yourselfer market has declined precipitiously from the days when people expected to fix their own stuff. So a lot of money has been lost on those who thought KMart, Sears, Craftsman, Kenmore, Martha Stewart as a brand collection was worth significantly more than it's turned out to be. But that's because the market moved, and people found new solutions, not because you don't recognize the brands and what they used to stand for.
Every market shifts. Longevity requires the ability to adapt. But brand marketers tend to be "purists" who want the brand to live forever. No brand can live forever. Soon you won't even find the GE brand on light bulbs. That's if we even have light bulbs as we've known them in 15 years – what with the advent of LED lights that are much lower cost to operate and last multiples of the life of traditional bulbs. GE has to evolve – as it has with jet engines and a myriad of other products – to survive.
Think for a moment about Harley Davidson. Once, owning a Harley implied you were a true rebel. Someone outside the rules of society. That brand position worked well for attracting motorcycle riders 60 years ago. As people aged, many were re-attracted to the "bad boy" image of Harley, and the brand proliferated. A $50 jacket with a Harley Davidson winged logo might sell for $150 – implying the branding was worth $100/jacket!! But now, the average new Harley buyer is over 50 years old! The market has several loyalists, but unfortuanately they are getting older and dying. Within 20 years Harley will be struggling to survive as the market is dominated by riders who are tied to different brands associated with entirely different products.
If you see that your sales are increasingly to a group of "hard core" loyalists, it's time to seriously rethink your future. Your brand has found itself into a "niche" that will continue shrinking. To succeed long-term, everything has to evolve. You have to be willing to Disrupt the old notions, in order to replace them with new. So you either have to be willing to abandon the old brand – or cut its resources to build a new one. For example, Harley could buy Ducati, stop spending on Harley and put money into Ducati to build it into a brand competitive with Japanese manufacturers. This would dramatically Disrupt Harley – but it might save the company from following GM into bankruptcy.
The marketing lore is filled with myths about getting focused on core customers with a targeted brand. It all sounded so appealing. But it turns out that sort of logic paints you into a corner from which you have almost no hope of survival. To be successful you have to be willing to go toward new markets. You have to be willing to Disrupt "what you stand for" in order to become "what the market wants." Think like Virgin, or Nike. Be a brand that applies itself to future market needs – not spending all its resources trying to defend its old position.
Don't forget to download the new ebook "The Fall of GM" to learn more about why it's so critical to let Disruptions and White Space guide your planning rather than Lock-in to old notions.
by Adam Hartung | Jun 22, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Rapids, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Web/Tech
For years business leaders have sought advice which would allow their organizations to become "evergreen." Evergreen businesses constantly renew themselves, remaining healthy and growing constantly without even appearing to turn dormant. Of course, as I often discuss, most companies never achieve this status. Today investors, employees and vendors of Apple should be very pleased. Apple is showing the signs of becoming evergreen.
For the last few years Apple has done quite well. Resurgent from a near collapse as an also-ran producer of niche computers, Apple became much more as it succeeded with the iPod, iTunes and iPhone. But many analysts, business news pundits and investors wanted all the credit to go to CEO Steve Jobs. It's popular to use the "CEO as hero" thinking, and say Steve Jobs singlehandedly saved Apple. But, as talented as Steve Jobs is, we all know that there are a lot of very talented people at Apple and it was Mr. Jobs willingness to Disrupt the old Success Formula and implement White Space which let that talent come out that really turned around Apple. The question remained, however, whether Disruptions and White Space were embedded, or only happening as long as Mr. Jobs ran the show. And largely due to this question, the stock price tumbled and people grew anxious when he took medical leave (chart here).
This weekend we learned that yes, Mr. Jobs has been very sick. The Wall Street Journal today reported "Jobs had liver transplant". With this confirmation, we know that the company has been run by the COO Tim Cook and not a "shadow" Mr. Jobs. Simultaneously, first report on the Silicon Valley/San Jose Business Journal is "Apple Claims 1M iPhone Sales" last weekend in the launch of its new 3G S mobile phone and operating system. This is a huge number by the measure of any company, exceeded analysts expectations by 33-50%, and equals the last weekend launch of a new model – despite the currently horrible economy. This performance indicates that Apple is building a company that can survive Mr. Jobs.
On the other side of the coin, "Walgreen's profit drops as costs hit income" is the Crain's Chicago Business report. Walgreen's is struggling because it's old Success Formula, which relied very heavily on opening several new stores a week, no longer produces the old rates of return. Changes in financing, coupled with saturation, means that Walgreen's has to change its Success Formula to make money a different way, and that has been tough for them to find. The retail market shifted. Although Walgreen's opened White Space projects the last few years, there have been no Disruptions and thus none of the new ideas "stuck." Growth has slowed, profits have fallen and Walgreen's has gone into a Growth Stall. Now all projects are geared at inventory reduction and cost cutting, as described at Marketwatch.com in "Higher Costs Hurt Walgreen's Profits."
Now the company is saying it wants to take out $1B in costs in 2011. No statement about how to regain growth, just a cost reduction — one of the first, and most critical, signs of Defend & Extend Management doing the wrong things when the company hits the Flats. And now management is saying that costs will be higher in 2009/2010 in order to allow it to cut costs in 2011. If you're asking yourself "say what?" you aren't alone. This is pure financial machination. Raise costs today, declare a lower profit, in order to try padding the opportunity to declare a ferocious improvement in future year(s). This has nothing to do with growth, and never helps a company. To the contrary, it's the second most critical sign of D&E Management doing the wrong thing at the most critical time in the company's history. When in the Flats, instead of Disrupting and using White Space to regain growth these actions push the company into the Swamp of low growth and horrible profit performance.
We now can predict performance at Walgreen's pretty accurately. They will do more of the same, trying to do it better, faster and cheaper. They will have little or no revenue growth. They may sell stores and use that to justify a flat to down revenue line. The use of accounting tricks will help management to "engineer" short-term profit reporting. But the business has slid into a Growth Stall from which it has only a 7% chance of ever again growing consistently at a mere 2%. This is exactly the kind of behavior that got GM into bankruptcy – see "The Fall of GM."
The right stuff seems to be happening at Apple. But keep your eyes open, a new iPhone is primarily Extend behavior – not requiring a Disruption or necessarily even White Space. We need to see Apple exhibit more Disruptions and White Space to make us true believers. On the other hand, it's definitely time to throw in the towel on Walgreen's. Management is resorting to financial machinations to engineer profits, and that's always a bad sign. When management attention is on accounting rather than Disruptions and White Space to grow the future is sure to be grim.
by Adam Hartung | Jun 19, 2009 | Boards of Directors, Books, Defend & Extend, eBooks, In the Whirlpool, Leadership, Lifecycle, Lock-in, Transportation
Of all the companies that typified America’s rise as an industrial superpower, none was more successful than General Motors.
What happened? Why has it fallen so far? GM at its biggest boasted some 600,000 well-paid employees. It will be left with something like 60,000 after it emerges from bankruptcy. How did that happen? Why did its stock price tumble from $96 per share at its height to 80 cents recently? Why did its market share shrink from one out of every two cars sold to less than one in five last quarter?
And thus begins the new ebook about the fall of GM. In 1,000 words this ebook covers the source of GM’s success – as well as what led to its failure. And what GM could have done differently – as well as why it didn’t do these things. Read it, and share it. Let folks know about it via Twitter. Post to your Facebook page and groups, as well as your Linked-in groups. As markets are shifting the fate of GM threatens all businesses. Even those that are following the best practices that used to make money. Let’s use the story of GM — and the costs its bankruptcy have had on employees, investors, vendors and the support organizations around the industry as well as government bodies — as a rallying cry to help turn around this recession and get our businesses growing again!
Download Fall of GM
by Adam Hartung | Jun 18, 2009 | Uncategorized
Yesterday we heard announcements about reforming the federal regulators and the systems they use to manage money and banking, and now the Treasury Secretary is out selling the program to Congress "Geithner Fields Revamp Queries" Marketwatch.com. It's touched off a big debate, as some people think the project has gone too far – and others think it hasn't gone far enough. That's interesting, because most people think something needs to be done so the events of last summer — a near melt-down in the banking system and a near collapse of the monetary system — are not repeated. So we might want to think about what was announced through the lens of The Phoenix Principle to see if we can expect much change.
Bruce Nussbaum is billed as "the innovation guru" on Businessweek.com. He reports "President Obama Failed At Redesigning the Financial System." Interestingly, his biggest complaint is that the President "didn't do what FDR did in the 1930s" and then attributes FDR with significantly Disrupting the government apparatus at the time.
I would agree with that assessment. FDR attacked a bevy of Lock-ins currently then in place. His attacks caused people to reconsider the approach then being used, which had remarkably high unemployment and long bread lines, and opened White Space to try all kinds of programs broadly referred to as "The New Deal." Ronald Reagan 50 years later was similar. He attacked what had become the conventional wisdom of the time, and his Disruption opened White Space which led to the greatest tax code reform ever, as well as significant changes in labor relations and government deregulation of industry. Both are examples of Presidents that first Disrupted, and then used White Space to develop new solutions.
President Obama has not Disrupted. He's definitely whacked the chicken coop a bit, ruffling a lot of feathers, by doing things such as pushing for the firing of GM's Chairman/CEO. But so far, even though he espouses change, his administration hasn't attacked any old Lock-ins. He keeps talking about changes "within the system." As The Phoenix Principle would predict, this sort of approach to change usually aggravates everybody – even your own supporters – and results in little significant change. Perhaps some marginal adjustments, but since the underlying Success Formula is not attacked all the recommendations lie within it – and the Status Quo is largely preserved.
Mr. Nussbaum, in an interview on BusinessWeek.com entitled "What Should A.G. Lafley Do Next?", recommends the President appoint the former head of Proctor & Gamble to be the nations Chief Innovation Officer. Although a novel idea, it won't make any difference. Mr. Nussbaum's consultant-style recommendation is the kind that gets a lot of executives in trouble who end up with lofty goals, but no chance of success. Such a move would put an embarrassing end on Mr. Lafley's career, and be an embarrassment for the President.
The federal government is a series of silo fiefdoms controlled by individual secretaries. Mr. Nussbaum would like Mr. Lafley to use "design theory" to cut across fiefdoms in order to innovate. Mr. Nussbaum gives Mr. Lafley credit for reorganizing P&G this way to success. But, how exactly is someone who works for the President supposed to re-organize the administrative branch of the federal government? Fiefdoms with their own individual mandates, leaders, staff and budgets. Especially without a dramatic Disruption that forces everyone to agree on such a massive reorganization. No commitment from the President will matter when the silo kings are allowed their silos. Probably a lot of recommendations – long the domain of Presidential commissions – that say there should be more cross-departmental work. But without a Disruption, something that rocks the apparatus to its core, there's no hope of this happening.
Despite the President's lofty goals and ambitions, he risks becoming somebody who talks about change – but doesn't accomplish much. This may upset you, or you may be happy, depending upon your point of view. But as a practical matter, should we expect that health care reform will be something radical – like social security and medicare were – or something much less dramatic? The answer is now clear. Lacking Disruptions, and when we look at the financial services reform proposed yesterday, we should expect something that will be an extension of the current system. A bit of tweaking to how things are currently done, but largely the same. Financial system reform left 95% of the players and their products untouched – and focused on small changes to a few institutions and a few products that are identified as central to the problems last summer. We should expect that health care reform would leave 95% of the system and products unchanged as well. Despite whatever rhetoric is extolled from politicians and pundits of either party.
This is not to say that the federal government does not adapt. When attempting to do more of what it has always done better, faster, or cheaper we regularly see that such sustaining innovations are picked up quickly and used effectively. And this was demonstrated this week when we learned that the State Department and other federal agencies were relying substantially on Twitter to receive information from Iran, and communicate with people in Iran.
For years the government apparatus relied on journalists for lots of two-way international communications. This often created a somewhat cozy relationship between very large newspapers with feet on the street in remote and unfriendly locations with people in government. This coziness had the really bad side effect of causing America's enemies to think most journalists were American spies working for the CIA, etc. So what worked for journalists all too often got them jailed and sometimes killed. But this system completely broke down the last 2 years as traditional journalism, and the newspapers, started going broke. The journalists were laid off in droves, and the government lost its primary info feed from offshore.
What's replaced journalists for readers has been a market shift to the internet. People have turned to bloggers, media sites and social networking for information. This dramatic shift has wiped out the profits at newspapers, and shut down a lot of properties. For media companies this represents wholesale change.
But government users quickly adapted. In their effort to Defend & Extend their roles, they became quick users of these sites as well. And when Iran refused to allow traditional journalists outdoors – or even to report on uprisings – the government officials turned to Twitter. And, just like the government used to ask the newspapers for help, they had no trouble asking Twitter – as reported in "U.S. asks Twitter to stay on line because of Iran vote" on MSN.com. And, much like how The Washington Post or The New York Times responded in the past, Twitter obliged. It was a remarkable example of "business as usual" for the government agencies – just done a little faster, better and probably cheaper. And this, of course, reinforced to international leaders their claims that Twitter and social media sites are "tools of the U.S. governement." In what appears "the more things change the more they stay the same" we see how easily the status quo can be reinforced, even amidst a dramatic change for the participants.
There can be reform in any government. There even can be innovation. But obtaining that reform requires
- Someone develop very clear scenarios about the future that describe the need for change
- A recognition that competitors will do better and we'll do worse if we don't change
- A Disruption – an attack on Lock-ins that support the Status Quo
- Using White Space to test new solutions toward which the organization can migrate as pieces are demonstrated successful.
It works. We see it work for individuals, work teams, functional groups, businesses, industries and even for governments – like exemplified by Franklin Roosevelt and Ronald Reagan. FDR did a marvelous job of describing a future at risk if America didn't start working again, otherwise international competitors would take over the country. And Ronald Reagan similarly described a future that would be entirely different (free of inflation and stagnation) if changes were made – and one at risk of its long-term enemy the USSR if changes weren't made. But if you try to shortcut these steps you get only marginal change.
by Adam Hartung | Jun 16, 2009 | Uncategorized
Let's say you've had a great business selling to auto companies. What do you do now? Wait for the American auto industry to get better, or……
Let's say you've had a great business selling to airplane manufacturers. What do you do now? This week is the biggest week in the airplane business. It's the Paris Air Show, or as many call it "La Bourget" which is the name of the suburban Paris town where the show occurs. It's the "mother of all conventions" as manufacturers of planes (and lots of military equipment beyond things that fly) try to book orders from international governments, airlines and corporations. This year, it's doom and gloom as Marketwatch points out in "Is Paris Burning?". Even the President of Brazil's very successful commuter jet manufacturer Embrear is saying it's too early to call a bottom in aviation sales in his interview "Not There Yet".
There are many American businesses selling to the aviation industry. Aviation doesn't cycle as fast as automotive, because the prices are much higher and the product lives much longer. So it's easier to predict market moves. We now can predict that the business will be soft for a few additional years with high confidence. Some will choose to "double down" and try to grow share while the recession is on. An expensive effort to find a lower cost while volume drops. Another option would be to cut output, lay people off and wait it out. But, unfortunately for both these options, when sales resume you can't be sure some new suppliers won't have entered the market with new products or new technology. Both approaches could well find prices down and competition up – or even worse the market recovers with new aviation products and you're in a pitched battle to supply the industry against new competitors against whom you have no advantage.
A better idea is to move resources. You don't have to abandon the old business, but why keep trying to live in a worsening environment? If the market is shrinking, isn't it smart to find new markets.
Take for example the behavior in retail. We all know that Circuit City went out of business, and lots of other retailers like Mervyn's and Filene's Basement have filed bankruptcy. It's tough on retailers. Especially those who keep trying to do the same thing. But some are taking actions to change in order to be more competitive. Nine West and some other retailers are changing their approach as reported in, "Gap, Specialty-retail stores mixing up brands."
"Consumers are interested in the best of the best. Not the best of what your brand has to offer. Retailers are learning not to put all their eggs in one basket. If it doesn't work, you just get rid of it." Now that's some advice worth listening to, offered by Marshal Cohen of NPD Group. When markets shift, you have to shift. Waiting around for customers to come back to you is not a viable option.
Retailers that are growing are using test markets to try new things. Like Nine West partnering with New Balance on a new shoe that is attracting a lot of young shoppers. Not everything works, at Cache the store tried some new brands but the test reinforced that people were looking for the Cache brand rather than the products Cache tested. That's the benefit of testing, you can learn. As you learn, you can adapt and adopt new behaviors.
Retailing is going through a massive market shift. Those who survive have to learn a lot more about individual stores versus malls, and on-line versus in-store. They have to learn about brands and about store brands and what people now want. Those who don't have ongoing White Space tests are failing. Those who are have a much better chance of surviving.
So, if your market is shifting, you need to MOVE. Whether you make car parts, aviation parts, furniture, windows,
clothing, candy – anything – you will see your market shift because of
the globalization of new technology. When markets shift, the thing you shouldn't do is "wait it out". That is not a viable strategy. That's putting your head in the sand. Just because you aren't certain what to do doesn't mean you don't take action. And that's why White Space projects are critical – because the only way you can develop a new Success Formula is by trying it in the marketplace. You don't want to end up like all those going out of business because they keep trying to do what they always did, only cheaper, faster or better. You have to start doing different things. And NOW, because the market keeps shifting more every day.
by Adam Hartung | Jun 15, 2009 | Defend & Extend, General, Leadership, Lifecycle
Harvard Publishing recently posted an article from a professor at the London Business School, Freek Vermeulen "Can we please stop saying the market is efficient?" The good professor's point of view was that he observed a lot of companies that were efficient which didn't survive, and several not all that efficient that did survive. He even took time to point out where some Harvard professors had identified that companies who implement ISO 9000 often see their innovation decline!
Unfortunately, the good professor is all too correct. If markets were efficient, we'd see performance move in a straight line. But any follower of equities, for example, can show you where the stock of a company may have gone up, then declined 20%, then gone back to a new high, maybe to even fall back more than the original 20%, only to then climb to even greater highs. If the market for that equity were efficient, it would never have these sorts of wild price gyrations.
Likewise, the market for products, things like copiers, aren't all that efficient. A case I describe pretty deeply in Create Marketplace Disruption. When Xerox brought out the 914 copier it changed the world of office copies. But it didn't take off. Instead, for years companies maintained their duplicating shop in the basement, using small lithographic offset presses. This went on for years, and usually the basement shop was closed when (a) the operator retired, (b) the printing press simply gave up the ghost and was ready for the scrap heap, or (c) when the company realized it had so many copiers the basement would be better served to house copiers instead of the printing press. The fact is that marginal economics – the very low cost of continuing to operate an alread-paid-for-press meant that it was easy to simply keep using presses long after they had any economic advantage. Not to mention all kinds of kinks in the decision apparatus that funded things like a print shop just because the budget "always had." But eventually, as the retirees and metal scrappers started accumulating, the market shifted. What had been a "mixed market" of presses and Xerox copiers suddenly shifted to almost all copiers. Xerox exploded, and the small offset press makers disappeared.
That wasn't efficient. There was a huge lag between when the benefits of copiers were well known and the demise of print shops. In the end, those who had debts or equity in printing press companies suffered huge losses as the business "fell off a cliff." There was no "orderly migration" out of the marketplace. In a very short time, the market shifted from one solution to another.
As recently as 2007 almost every home in America had a newspaper delivered. By 2009 the market had begun to disappear with subscriptions down over 60% in some markets. For advertisers, the purchasing of print ads dropped by over 50% in just 24 months. Yet, the growth of web usage and internet ads had been growing for almost a decade. In an efficient market there would have been a smooth transition between the two, with say 5% of ads shifting every year. Again, the economists' "orderly transition" would have applied. There doesn't seem anything orderly if you're in a market where the newspaper has disappeared, filed for bankruptcy, or cut its pages 40% – and you're wondering how to get the local news or even the TV listings you once found in the newspaper.
Market shifts are sudden, and big. In the later half of the 1980s the PC market shifted from 60% Macintosh to 80% Wintel in just 5 years – while growth for PCs exploded. It didn't feel very efficient to people at Apple, the suppliers of apps for Macs or the user base. Thousands of people in corporations were told "surrender your Mac and get a new PC next week" with no discussion, explanation or concern.
Companies that fall victim to market shifts aren't without strategists, planners or quality programs. Many have robust TQM or Six Sigma projects. But these are all about optimizing performance against past performance – not necessarily what the market wants. When you optimize agains the past you depend on minimal change. When markets shift, these "efficiency" programs can cause you to be the last to know – and the last to react.
People like to think of evolution as sort of like Continuous Improvement. Get 5% better every year. Like a variety of mammal might lose 1/4" of tail each generation until it no longer has one. We now know that's not how it works. There are winners. They keep reproducing, get stronger and more of them every year. Like mammals with long tails. Meanwhile, an alternative develops – like a mammal with no tail. Then suddenly, without expectation, the environment changes. Tails become a big hindrance, and those with tails die off in a massive exodus. Those without tails suddenly find they are advantaged by the lack of tails, so they begin breeding fast and getting stronger. In short order, perhaps a single generation, the tailed mammals are gone and the no-tails become dominant. Not very efficient, or orderly. More like reactive to an environmental shift.
If you want to do good tomorrow, I mean one day from today, the odds are that you can accomplish that by being just slightly better at what you did yesterday. But if you want to be good in 5 years, you may well have to do something very different. If you wait for the market to tell you – well – you've waited too long. By the time you know you're out of date, the competitor has taken your position. You have no hope of survival.
We live with a lot of myths in business. The value of efficiency, and the belief in efficient markets, are just a couple of big ones. Kind of like the old myths about blood-letting. Before the USA, never before in history has anyone ever tried to establish a government of self-rule. And self-rule led America to a country dominated by businesspeople. No longer did the king determine winners, losers, prices and behavior. Now markets would do so. The people who would make these markets were the emerging business folks. But nobody knew anything about markets – except some theories about how they "should" work written by an Englishman who had grand thoughts about open-market behaviors. So most people accepted the earliest theory – with its ideas about "invisible hands" that would guide behavior.
Markets are dramatically inefficient. Just look at the prices of equities. Look at the bankruptcies all around us. GM, your local newspaper, Six Flags and your neighborhood furniture store. People who were often efficient, but didn't understand that markets shift quickly, and very inefficiently. They don't move in small increments – they change all at once. And if you want to survive, you have to
prepare for market shifts. Simply working harder, faster and cheaper won't save you when the market shifts. If you aren't ready to be part of the shift, you get left behind and won't survive.
Markets are shifting today faster than they ever have. Telecommunications, internet connections, massive amounts of computing power, television, jet airplanes – these things have made the clock speed on changes much faster. Market shifts that used to be seperated by decades are compressed into a few years. If you don't plan on market inefficiencies – on market changes – you simply can't survive.
Lots of people misunderstand Darwin. The prevailing view is that his study on the origination of species says that the strongest survive. In fact, his conclusion was quite the opposities. What he said was that it is not the strongest that survive, but the most adaptable.
by Adam Hartung | Jun 11, 2009 | Uncategorized
"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.
