by Adam Hartung | Jun 10, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
As I've given presentations around the country the last year I'm frequently asked about the role of leadership in Phoenix Principle companies. All people can bring Phoenix Principle behaviors to their work teams and functional groups. Yet there is no doubt that organizations do much better when the leaders are also committed to Phoenix Principle behaviors.
Unfortunately, all too often, top leaders are more interested in Defend & Extend Management. BusinessWeek's recent article "How to Succeed at Proctor & Gamble" talks about replacing CEO icons such as Charles Schwab, Michael Dell and Jack Welch. Unfortunately, only one of these was a real Phoenix Principle leader – and the others ended up coming back to their organizations when the replacements tried too much D&E behavior – leaving their shareholders with far too low returns and only dreams of rising investment value. Even more unfortunate is the fact that too many management gurus simply love to wax eloquently about leaders of big companies – regardless of their performance. Such as Warren Bennis's description of A.G. Lafley at P&G as "Rushmorian." Those at the top are given praise just because they got to the top. Yet, we've all known leaders who were far from being praise-worthy. Even the mundane can be loved by business reviewers that rely on them for money, access, ad dollars and influence.
There's a simple rule for identifying good leadership. Grow revenues and profits while achieving above average rates of return and positioning the organizations for ongoing double digit growth upon departure. It's not the size of the organization that determines the quality of a leader, it's the results. We too often forget this.
Back to departing P&G CEO, Mr. Lafley. Preparing to retire, he's taken the high ground of claiming to be "Mr. Innovation" for P&G. Experts on innovation classify them into Variations, Derivatives, Platforms or Fundamental. Using this classification scheme (from Praveen Gupta Managing Editor of the International Journal of Innovation Science and author of Business Innovation) we can see that Mr. Lafley was good at driving Variations and Derivatives at P&G. But under his leadership what did P&G do to launch new platforms or fundamental new technologies? While variations and derivatives drive new sales – "flavor of the month" marketing as it's sometimes called – they don't produce high profits because they are easily copied by competitors and offer relatively little new market growth. They don't position a company for long-term growth because all variations and derivatives eventually run their course. They may help retain customers for a while, but they rarely attract new ones. Eventually, market shifts leave them weaker and unable to maintain results due to spending too much time and resource Defending & Extending what worked in the past. Mr. Lafley has done little to Disrupt P&G's decades-old Success Formula or introduce White Space that would make P&G a role model for the new post-Industrial era.
Too often, bigness stands for goodness among those choosing business leaders. For example, GM is replacing departed CEO Rick Wagoner with Ed Whitacre according to the Detroit Free Press in "Former AT&T chief to lead GM." Mr. Whitacre's claim to fame is that as a lifetime AT&T employee, when the company was forced to spin out the regional Bell phone companies he led Southwestern Bell through acquisitions until it recreated AT&T – as a much less innovative company. Mr. Whitacre is a model of the custodial CEO determined to Defend & Extend the old business – in his case spending 20+ years recreating the AT&T judge Green took apart. Where a judge unleashed the telecommunications revolution, Mr. Whitacre simply put back together a company that is no longer a leader in any growth markets. Market leaders today are Apple and Google and those who are delivering value at the confluence of communication regardless of technology.
Today, few under age 30 even want a land-line – and most have no real concept of "long distance". Can the man who put back together the pieces of AT&T, the leader in land-line telephones and old-fashioned "long distance service" be the kind of leader to push GM into the information economy? Does he understand how to create new business models? Or is he the kind of person dedicated to preserving business models created in the 1920s, 30s and 40s? Can the man who let all the innovation of Ma Bell dissipate into new players while recreating an out-of-date business be expected to remake GM into a company that can compete with Kia and Tata Motors?
Any kind of person can become the leader of a company. Businesses are not democracies. The people at the top get there through a combination of factors. There is no litmus test to be a CEO – not even consistent production of good results. But in far too many many cases the historical road to the top has been by being the champion of D&E Management; by caretaking the old Success Formula, never letting anyone attack it. They have avoided Disruptions, ignored new competitors, and risen because they were more interested in "protecting the core" than producing above-average results (often protecting a seriously rotting core). Much to the chagrin of shareholders in many cases.
Now that the world has shifted, we need people leading companies that can modify old Success Formulas to changing market circumstances. Leaders who are able to develop and promote future scenarios that can guide the company to prosperity, not merely extend past practices. Leaders who obsess about competitors to identify market shifts and new opportunities for growth. Leaders who are not afraid to attack old Lock-ins, Disrupting the status quo so the business can evolve. Leaders who cherish White Space and keep multiple market tests operating so the company can move toward what works for meeting emerging client needs. Leaders like Lee Iacocca, Jack Welch, Steve Jobs and John Chambers. They can improve corporate longevity by shifting their organizations with the marketplace, maintaining revenue and profit growth supporting job growth and increased vendor sales.
by Adam Hartung | Jun 8, 2009 | Current Affairs, General, Leadership, Lifecycle
Unless you have a lot of time to research stocks, you probably invest in a fund. Funds can be either an index, or actively managed. People like index funds because you aren't relying on a manager to have a better idea. Index funds can only own those stocks on the index. Like the S&P index fund – it can only own stocks in the S&P 500. Nothing else. Interestingly, the Dow Jones Industrial Average is considered an index fund – even though I don't know what it indexes. And that is important if you are an investor who benchmarks performance against the Dow. It's even more important if you invest in the Dow (or Diamonds – the EFT for the Dow Industrials).
GM is now off the Dow ("What does GM bankruptcy mean for Index Funds?"). Because it went bankrupt, the editors at Dow Jones removed it. But it wasn't long ago that the editors removed Sears and Kodak. But not because these companies filed bankruptcy. Rather, the Dow Jones editors felt these companies no longer represented American business. So the Dow is a list of 30 companies. But what companies is up to the whim of these Dow editors. Sounds like an active management (judgement) group (fund) to me.
Go back to the original DJIA and you get American Cotton Oil, American Sugar, Distilling & Cattle Feed, Leclede Gas Light, Tennesse Coal Iron and Railroad and U.S. Leather. Household names – right? As the years went buy a lot of companies came and went off the list. Bethlehem Steel, Honeywell, International Paper, Johns-Manville, Nash Motor, International Harvester, Owens-Illinois, Union Carbide — get the drift? These may have been successful at some time, but the didn't exactly withstand "the test of time" all that well. Even some of the recent appointments have to be questioned – like Home Depot and Kraft which have had horrible performance since joining the elite 30. You also have to wonder about the viability of some aging participants, like 3M, Alcoa and DuPont. So the DJIA may be someone's guess about some basket of companies that they think in some way represents the American economy – but it's definitely subject to a lot of personal bias.
Like any basket of stocks, when the DJIA is lagging market shifts, it is not a good place to invest. And the editors are greatly prone to lagging. Like their holdings in agriculture and basic commodities years ago, through holding big industrial companies in the 1990s and 2000s. And the over-weighting of financial companies at the turn of the century when they were merely using financial machinations to hide considerable end-of-value-life problems. When the DJIA is holding companies that are part of the previous economy, you don't want to be there.
The Dow should not be a lagging indicator. Rather, given its iconic position, it should hold the "best" companies in America. Not extremely poorly performing mega-bricks – like GM. GM should have been dropped several years ago. And you should be concerned about the recent appointment of Kraft. And even Travelers.
Those companies that will do well are going to be good at information, and making money on information. So who's likely to fall off (besides Kraft)? DuPont, which has downsized for 2 decades is a likely candidate. Caterpillar is laying off almost everyone, and cutting its business in China, as it struggles to compete with an outdated industrial Success Formula. Bank of America has shown it is disconnected from understanding how to compete globally as it has asked for billions in government bail-out money. And the hodge-podge of industrial businesses, none of which are on the front end of new technologies, at United Technologies makes it a candidate — if people ever recognize that the company would quickly disintegrate without massive U.S. government defense spending. Even 3M is questionable as it has slowed allowing its old innovation processes to keep the company current in the information age.
Adding Cisco was a good move. Cisco is representative of the information economy – as are Verizon, AT&T (which was SBC and before renameing, GE, HP, Intel, IBM, Microsoft, Merck and Pfizer (if they transition to biologics from old-fashioned pharmaceutical manufacturing ways – otherwise replace them with Abbott). But all those other oldies – like Walt Disney (sorry, but the web has forever changed the marketplace for entertainment and Walt's folks aren't keeping up with the times), Boeing (are big airplanes the wave of the future in a webinar age?), Coke (they've kinda covered the world and run out of new ideas), P&G (anybody excited about Swiffer variation 87?), and Wal-Mart – which couldn't recognize doing anything new under any circumstances.
As an investor, you want companies that can grow and create a profit. And that's increasingly not the DJIA – even as it slowly adds a Microsoft, Intel and Cisco. You want to include companies in leadership positions like Google and Apple. Their ability to move forward in new markets by Disrupting their Lock-ins and using White Space to launch new projects in new markets gives them longevity. As an investor you don't want the "dogs" – so why would you want to own DuPont, et.al.?
Investors may have been stung by overvaluations in technology companies during the 1990s. But that was the past. What matters now is future growth ("Technology on the comeback trail"). And that can be found by investing in the future – not what was once great but instead what will be great. Invest for the future, not from the past. And that can be found outside the DJIA. Unless the Dow editors suddenly change the portfolio to match the shift to an information economy.
(For additional ideas about recomposing the DJIA, see my blog of 3/12/09 "Dated Dow")
by Adam Hartung | Jun 6, 2009 | Uncategorized
"GM reaches deal to sell Saturn to Penske" is the latest GM headline. Although the management at GM could not figure out how to run a profitable Saturn, it has very quickly sold the business. And within a week of selling Hummer to a Chinese company. Sounds like a combination of low pricing, and better skills at hiring investment bankers than running a business.
The biggest lesson we can learn from this is that GM was so Locked-in to its old Success Formula that it was frozen in place, unable to take actions that would allow GM's revenue and profit to grow. After years of doing nothing more than layoffs, GM was able to find buyers for 2 of its 3 semi-autonomous divisions almost immediately. In other words, if GM management had to change to fix GM the team would rather fail — wiping out the shareholders, most of the bondholder value, and eliminating thousands of jobs – and sell assets (at a significant loss) than change. Rather than Disrupt and use White Space to create a new GM, management preferred to declare bankruptcy, beg for billions in aid (like some impoverished third world starving nation such as Bangladesh), and give away assets in an effort to preserve the Success Formula they believe in – but which failed in the market. These leaders have shown they don't care about anyone or anything more than they care about trying to Defend & Extend the GM legacy – Cadillac, Chevrolet, Buick and GMC. This management doesn't want GM to succeed, they want to wind back the clock, and they'll try anything possible to see if they can make it happen.
They can't. The clock won't rewind. And GM's management is demonstrating why they should not be allowed to run any company – much less a major auto company. Nor should you trust them to watch your dog – much less trust them with $60billion in financing. Trying to preserve the past will only prolong dismal results. They will not repay this money.
So what about Saturn? Some think this acquisition, coupled potentially with the new ownership of Hummer, marks another shift in the auto industry. In "Putting GM's Saturn on a different orbit" the Marketwatch commentator indicates that we may be seeing a shift away from an industrial model of manufacturers pushing cars onto dealers. Since Penske owns many dealerships, he thinks these new independent labels may let the dealerships take the lead. Manufacturing will have to respond, through a network of manufacturers something like Nike uses, to the retailers – who will be much more in touch with the market.
From the pixels displaying these articles to God's ear, paraphrasing an old maxim. It would be wonderful if both Saturn and Hummer, and the soon to be independent Saab, were driven by market requirements rather than internally entrenched management trying to Defend & Extend old practices. If they are, the odds are good that they'll push the losses at the remaining GM much higher, much faster than the management team (and probably the government overseers handing them money) expect.
But it does beg the question, if it's so easy to sell these divisions why doesn't the government simply dismantle GM and sell everything? These are supposedly the smallest, least viable parts of GM. And they are selling incredibly fast. Instead of these "one-off" sales, happening at distressed prices to buyers with little competition, why not create an open market to sell everything? Obviously the only way to get rid of the terrible GM leaders is to sell the business out from under them, leaving them with nothing to do. So, instead of handing these incompetent GM leaders another $40B, why doesn't the government turn over assets to the investment bankers and tell them to maximize the value of a sale? Create a bunch of bidders for the various assets (less toxic than nothing-down mortgage securities), ala the intent of bankruptcy law, so that people with new ideas (like Penske) can acquire these assets and use those ideas and innovations to convert the brands, product lines, supply chains and manufacturing plants into something more valuable?
In a sale, a new buyer could purchase plants to redeploy for windmill production, for example. A GMC buyer could attempt to converting the brand into a competitor of Caterpillar Tractor or Komatsu. Chevrolet might have better life as a U.S. motorcycle company. Someone might want to turn Cadillac into an airplane company. As crazy as these ideas sound, don't forget that Honda has entered airplane production and shows every sign of succeeding. We know that running any part of GM like it used to be run will not work. So why not give the innovators a shot at these tangible and intangible assets on the open market? Wouldn't you rather see someone new, like the team at Penske Enterprises, try to do something with the rest of GM – rather than leave it in the hands of the people who say they need another $40billion to keep it alive. Ever heard of the term "cut your losses"?
Those who listen to markets survive – even thrive. That's what creates optimism about the future of Hummer, Saturn and Saab. The concept that new owners will utilize new market-based scenarios with clear understanding of competitors to Disrupt these companies, then attack old Lock-ins in order to implement new behaviors, excites people. We can imagine these new leaders using White Space to convert the design, production and distribution processes into methods that give customers what they want when they want it – achieving profits as a result. After 3 decades of ongoing failure, we can't imagine the people running GM doing it.
We believed in Lee Iacocca primarily because he had been fired at Ford. He knew Chrysler was not well enough connected to customers – and that he was. This was a guy who would cut off the top of a production car with a skill saw in order to drive it around the block as a way to test relaunching convertibles. He wasn't afraid to develop cars people had never seen, like mini-vans, because he saw changes in customer needs. He wasn't afraid to Disrupt the status quo and he wasn't afraid of testing new technologies, new production processes and new markets. That's why he turned around Chrysler. And that's what it will take to turn around Cadillac, Chevrolet, Buick and GMC.
It's too early to really know if new owners will do the right things to make these fire-sale divisions into successful businesses. We have to look for the scenarios, Disruptions and White Space. But we know we won't see such behavior out of GM. If the government folks who are considering giving more money to GM really want to save jobs, grow the economy and keep the profit motive alive they need to pull back fast from funding this GM management team. Instead, use this immediate market input (from the dividion sales) to force the courts to bust up the rest of GM and sell it to someone who just might have a truly better idea.
by Adam Hartung | Jun 4, 2009 | Uncategorized
This week marks the 20th anniversary of the Chinese student uprising in Tiananmen Square, and its brutal put-down by the Chinese leadership. Ironically, the same week GM agrees to sell its Hummer division to a Chinese company. Quite a contrast in outcomes over 20 years. China was then a backwater nation having very little business with the USA, and GM was still considered a dominant U.S. industrial power.
We all know what China has accomplished in the last 20 years. From struggling poverty, the country is now the third largest economy – and the single largest offshore holder of America's debt. China is poised to be a superpower, and the world's largest economy within another 20 years. How?
Within months of the Tiananmen event, in which the Chinese military slaughtered thousands of its own citizens, the Berlin Wall tumbled. The Soviet Union evaporated, leaving behind a series of independent states poorly capitalized and ill prepared to compete internationally. The Chinese leadership recognized this as a major market shift, and wasted no time taking action.
Step 1 was recognizing that future scenarios no longer required investing massive funds defending the world's longest contested border. More tanks were on the Chinese/Soviet border than all the rest of the world combined – and the replacement of those tanks suddenly became non-essential. And the Chinese recognized this, and changed. With speed exceeding anything anybody imagined, the Chinese changed all their scenarios about the future. Instead of spending massive funds on military works, those funds could be spent elsewhere. By reworking their future scenarios, they realized they could undertake different opportunities. No longer were they required to do "more of the same" as they'd done for several decades.
Step 2 was recognizing the new competition. Instead of fighting a traditional war, the Chinese would be in an economic war with the smaller eastern European nations, and India. Dissolving the USSR meant the Indians, who had long sparred with the Soviets while also taking aid, suddenly knew they had to rely completely on the USA – and trade. And that meant the Chinese had a new #1 competitor, but in the new battle for trade rather than old fashioned aid. Where before China wanted money for armaments, now they needed to invest money in production to pull dollars from U.S. business. The new objective became competing with India, rather than the Russians.
Thirdly, they Disrupted their approach to world diplomacy. Instead of a closed country, they became open. Instead of investing in guns, they invested in power plants, roads and infrastructure. On the world stage, China wanted to become the biggest winner of foreign exchange. And the road to that win came through participating with American capitalists. The leadership realized it needed to totally change the country's investment patterns in order to make the country's low cost labor available, and it did so. Almost overnight. How, by recognizing and undertaking a Disruption in their investment patterns.
Fourth, China implemented White Space for job creation. Suddenly, almost every city had a development zone. They didn't need to figure out what infrastructure to buy. All they had to do was invite the Americans in and we'd tell them what we wanted. We'd describe the airports, power plants, telecom systems, roadways – everything we wanted to give them the work (and foreign exchange). All they had to do was listen and do it.
China is an example in doing things differently, changing how you
compete to be very efffective, without really changing values.
People often tell me they worry that The Phoenix Principle means you
have to give up your ideals. I disagree. Being a Phoenix organization
means you're willing to adapt to market requirements, and doing so does
not mean you have to change your "ethos," religion or personal values.
You merely have to adapt. If you want to be "green" or "sustainable" or "ethical" or even "religious" you can do so. You just have to make sure you are connected to the marketplace in ways that allows you to develop a Success Formula which creates growth.
Compared to India, the Chinese have been wildly successful. And that's saying lot, given how incredibly successful India has been. There is no doubt that India, too, has used outsourcing to raise foreign exchange, create jobs and grow. But compared to China, well there's no comparison. The Indian government is still trying to figure out how to build a highway, expand major (overcrowded) airports and provide consistent electricity to business parks in major cities. The Indian leaders don't suffer from a lack of smart – no way – but the government keeps trying to operate the way it always has. And that has held them back from making the investments and taking the actions which have catapulted the Chinese into the lead. While India had a head start in 1989 (largely English speaking leadership and a strong investment in education for the elite), China has eclipsed their growth and is chasing Japan and the USA.
Through all of this, China never changed its politics. Some people who go to China return talking about how "capitalistic" the country is. They forget the lessons of Tiananmen Square. China has been and remains a tightly controlled, Communist, centrally-planned country. "China scholars see little chance for political reform" is the headline describing how the politics of China are unchanged since the days when they shot thousands of their own students, and imprisoned thousands more. Several students taken prisoner have never been heard from again. Those that fled the country are not allowed to return – and their families were subsequently required to consider them bad Chinese. Many were held in prisons for years, and others are still in remote work camps. China is still China, deep inside. No more a market/capitalistic country than it ever was. It just learned to adapt to a changing world. (Something Chairman Mao tried to avoid – almost destroying the country.)
Coincidentally, my 21 year old son returned from a month in China yesterday evening. He was visiting manufacturing plants and engineering schools. We talked, and will talk more, about what the Chinese businesses and schools are doing. Why, and exactly HOW do these schools and factories affect competition? Competition to be a world-class engineer (he's a mechanical engineer prepping for his civil engineering master's degree), and competition for building things. As he summed it up before crashing to sleep "they do things entirely differently than we do in America – and I can easily see why they get things done cheaply. They do things in a uniquely Chinese way, but it meets the needs of American companies who want lower costs and market access. This may have been my first trip to China, but it won't be my last. It can't be if I want to remain competitive. Maybe I need to learn Mandarin or Cantonese so I can go to one of their schools for a year."
We all have to learn to adapt. The world changes. Every year. If we try to resist those changes, to Defend & Extend what we like to do, we grow further out of touch with market requirements and lose the ability to compete. You don't have to "sell your soul" to adapt. But you must adapt if you want to continue succeeding. You have to make your investments based upon what will make you a winner in the future – not what made you a winner in the past. You have to study competitors, and do those things that will make you a winner. You have to accept Disruptions by attacking old Lock-ins, and use White Space to develop new solutions. If you do that, even at the scale of the Chinese economy, you can have unbelievably successful results. Or at the level of an individual engineer. If you don't the results aren't pretty. Not pretty at all. Just ask the employees at GM.
by Adam Hartung | Jun 2, 2009 | Current Affairs, In the Whirlpool, Leadership, Openness
How appropriate. "GM strikes deal to sell Hummer" headlines a Marketwatch.com article. A day after declaring bankruptcy, Hummer with all its branding and product drawings is going to China. It seems everything about GM is iconic – including its movement of an operating auto businesses to China.
Is this bad for America, or good? I'd rather say it's inevitable. In a global economy, industrial production will move to the lowest cost location. And with a low valued currency, a very lowly paid workforce, and access to very inexpensive capital that puts China at the top of the list. Unless you want to bring back Chairman Mao and wall-in China, the population density and government programs make it inevitable that the country will be a leader in manufacturing.
But that doesn't equate to high value.
America is the world's largest agricultural nation. But has that made America wealthy? Not since the 1800s has it been true that land ownership for agricultural uses made Americans – and the nation – wealthy. As the value of agriculture declined – largely due to dramatic increases in production – America's wealth shifted to industrial production. It was by being the largest and most productive industrial nation that America prospered during the Industrial economy.
But now, industrial production has razor thin margins. Much like agriculture. Over-invest in capacity, and you can end up with under-utilized (or closed) plants and not much margin from other businesses to cover the cost. Not since the 1990s has America operated anywhere near "full capacity" on its manufacturing base. The "good" years of the last decade were unable to produce industrial jobs, or wealth for industrial companies (i.e. – GM's bankruptcy.)
In the great battle for economic leadership, the next wave is about information. How to obtain, use and manipulate information is where value is now created. Steel traders can make more than steel producers today. If you want to improve your profitability, and your longevity, you have to change your thinking from "how do I make and sell more stuff" to "what do I know they don't know, and how do I turn that into value?"
For somebody selling autos, it's becoming a lot more important to understand customer wants and preferences than to be good at making cars. Toyota and Honda can identify opportunities first, and put products into the market faster than anyone else. They can maximize their product development and short-run capability to reach targets fast, and gain advantages over competitors. Don't forget, Honda made money not just on small, high mileage cars but on a full-size pick-up called the Ridgeline (and Toyota on the Tundra). These companies are better at using scenarios to recognize early market shifts, and clearer about competitor moves so they can position products to fulfill unique customers needs. Even if it means launching products not traditional to their "core" – like Honda's Ridgeline, it's manufacturing robotics, and its new jet airplanes.
In the industrial era, people sought scale advantages and tried to build entry barriers against competitors. In the information economy flexibility is equally (or more) important than size. Recognizing customer needs and competitor actions early is more important than catering to old, devoted customer groups. Willingness to Disrupt, and do what you must do to change the market by using White Space test projects keeps you ahead of the competition – rather than trying to Defend & Extend your "core."
For the industry, having Hummer production in China could turn out to be a good thing. It will lower product cost. If the distribution in the USA can gain control of the market, by recognizing customer needs and directing the production, the distributors can grab all the value away from the Chinese manufacturer. If, on the other hand, the dealers try to act like old fashioned dealers who merely keep stock and negotiate price — then they won't create value and margins will stink. There are ways to make money in the information economy, even for traditional players, but it requires changing your Success Formula from industrial-era behaviors to the needs of an information-based economy. You can follow GM – or you can try to be like Cisco.
by Adam Hartung | Jun 1, 2009 | Current Affairs, Disruptions, In the Rapids, Leadership, Openness
June 1, 2009 will be remembered for a really long time. As I last blogged, I think the iconic impact of GM as one of the most successful and profitable of all industrial companies makes its bankruptcy more important than almost any other company.
As GM loses its market value, it was forced off the Dow Jones Industrial Average. In "What's behind the Dow changes?" (Marketwatch.com) we can read about how the Wall Street Journal editors selected Cisco to replace GM. I've long been a detractor of GM for its slavik devotion to its outdated Success Formula. For an equally long time I've long been a fan of Cisco and how it keeps its Success Formula evergreen. Cisco reflects the behaviors needed to succeed in an information economy, and its addition to the DJIA is a big improvement in measuring the American economy and its potential for growth.
What I most admire about Cisco is management's requirement to obsolete the company's own products. This one element has proven to be critical to Cisco's ongoing growth – and the company's ability to avoid being another Sun Microsystems. By forcing themselves to obsolete their own products, Cisco doesn't get trapped in "cannibalization" arguments. Management doesn't get trapped into listening to big customers who want Cisco to slow its product introduction cycle. Leaders end up Disrupting the company internally to do new things that will replace outdated revenues. It sounds so simple, yet it's been so incredibly powerful. "Obsolete your own products" is a statement that has helped keep Cisco a long-term winner.
Since even before writing "Create Marketplace Disruption" I've espoused that Cisco is a Phoenix Principle kind of company. One that uses extensive scenario planning to plan for the future, one that obsesses about competitors in order to never have second-place products, willing to Disrupt its product plans and markets to continue growing, and loaded with White Space developing new solutions for new markets. It's a great choice to be on the Dow – which will eventually have to replace all the outdated companies (like Kraft) with companies that rely on information – rather than industrial production – to make money.
by Adam Hartung | May 29, 2009 | Current Affairs, In the Whirlpool, Leadership, Lifecycle
GM will file bankruptcy next week ("GM reaches swap deal, but bankruptcy still lies ahead" Marketwatch). It's likely historians will look back on this event as a major turning point in the change away from an industrial world (away from making money on "hard" assets like factories). GM was considered invincible. As were all the auto companies. The reorganizing of Ford, and bankruptcy of Chrysler will be remembered, but not likely with the impact of GM filing bankruptcy. Pick up any book on America post WWII and you'll find a discussion of General Motors. The quintessential industrial company. Destined to live forever due to its massive revenues and assets. After next week, history books will change. Altered by the previously unimaginable bankruptcy of GM. If "What's good for GM is good for America" is no longer true, what does it mean for America when GM declares Bankruptcy?
None of America's car companies will ever again be strong, vibrant auto companies. They are in the Whirlpook and can't get out. It's simply impossible. GM is now worth about $450million (at current prices of about $.80/share). It already owes the federal government $20billion – which is supposed to be converted to equity, with more equity owned by employees and converted bondholders. For most of the time since the 1970s, the average value of GM has been only $15billion (split adjusted average price $25). To again become viable GM wants the government to increase its investment to $60billion ("GM bondholders may recoup $14Billion" Marketwatch.com. That means for GM to ever be worth just the amount being supplied by the government bailout it would have to be worth $116/share – which is $20/share more than it was worth at its peak in the market blowout of 2000! (Chart here).
That means it is impossible to conceive of any way GM could ever be successful enough to achieve enough value as a car company to repay the government – and thus it has no future ability to provide dividends to private investors. Even though GM says it will be repositioned to be healthy, that simply is not true. It's no more healthy or attractive than Quasimodo, the hunchback of Notre Dame, could have ever hoped to be – or the elephant man. Helping them is charity, not a business proposition. When a company has no conceivable hope of making enough money to repay its investors it cannot attract management talent, or additional capital as assets wear out, and it eventually fails. It won't be long before the people running GM realize their future are as bureaucrats in a non-profit – but with far less psychic value than working at, for example, the Red Cross.
Meanwhile, Chrysler is downsizing dramatically as it looks for its way out of bankruptcy. As it tries to give the company to Italians to run, the company is dropping obligations it has carried for years. Even the venerable Lee Iacocca, who literally saved the company 20some years ago, will lose his pension and even his company car ("Iacocca losing pension, car in Chrysler bankruptcy" Reuters).
Ford, which restructured before this latest market shift, has not asked for bailout money. But its market share is dropping fast. Its vendors (including Visteon) are going bankrupt and Ford is guaranteeing their debt to keep them in business – with an open-ended cost not yet reflected in Ford's P&L. Even though it restructured, Ford's balance sheet is shot ("What About Ford?" 24/7 Wall Street). It has no money to design a new line of competitive vehicles.
None of these 3 companies have the wherewithal as operating businesses to replace assets. And they are competing with Japanese, Korean and Indian companies that have lower operating costs, lower fixed asset investments, higher quality and newer product lines, better customer satisfaction rates, higher profits and stronger balance sheets. Without competition it's hard to expect America's car companies to do well. When you look at competitors you realize this game can still have several more moves (especially with market intervention by government players with public policy objectives) – but the end is predicatable. Only for reasons of public policy, rather than business investment, would you continue to fund any of these American competitors.
Even though the switch from an industrial economy to an information economy began in the 1990s, historians will likely link the switch to June, 2009. (I guess that's fair, since the shift from an agrarian economy to an industrial economy began in the 1920s but wasn't recognized until the late 1940s.) Just as GM was the company that epitomized the success of industial business models, it will be the company that becomes the icon for the end of industrial models. It failed much faster, and worse, than anyone expected.
If "What's good for GM" (as in the government bailout) isn't good for America any longer – what is? For many people, this is shift is conceptually easy to understand – but hard to do anything about. They don't know what to do next; what to do differently. They fully expect to continue focusing on balance sheets and assets and the tools we used to analyze industrial companies. And those people will see their money drift away. Just like you can't make decent returns farming in a post-agrarian economy, you won't be able to make money on assets in a post-industrial economy. From here on, it's all about the information value and learning how to maximize it. It's not about old-style execution, its about adaptability to rapidly shifting markets built on information.
Let's consider CDW – a 1990s marvel of growth shipping computers to businsesses around America. CDW has pushed hardware and software onto its customers for 2 decades in its chase with Dell. But every year, making money as a push distributor gets harder and harder. And that's because buyers have so many different sources for products that the value of the salesperson/distributor keeps declining. Finding the product, the product info, inventory, low shipping and low price is now very easily accomplished with a PC on the web. Every year you need CDW less and less. Just like we've seen distributors squeezed out of travel we're seeing them squeezed out of industry after industry – including computer componentry. If CDW keeps thinking of itself as a "
;push" company selling products – a very industrial view of its business – it's future profitability is highly jeapardized.
The market has shifted. For CDW to have high value it must find value in the value of the information in its business. Perhaps like the Chicago Mercantile Exchange they could create and trade futures contracts on the value of storage, computing capacity or some other business commodity. The information about their products – production, inventory and consumption – being more profitable than the products themselves (everyone knows more profit is made by Merc commodity traders than all the farmers in America combined). Or CDW needs to develop extensive databases on their customers' behaviors so they can supply them with new things (services or products) before they even realize they need them — sort of like how Google has all those searches stored on computers so they can predict the behavior of you, or a group your identified with, before you even type an internet command. CDW's value as a box pusher is dropping fast. In the future CDW will have to be a lot smarter about the information surrounding products, services and customers if it wants to make money.
A lot of people are very uncomfortable these days. Since the 1990s, markets keep shifting fast – and hard. Nothing seems to stay the same very long. Those trying to follow 1980s business strategy keep trying to find some rock to cling to – some way to build an industrial-era entry barrier to protect themselves from competition. They try using financial statements, which are geared around assets, to run the business. Their uncomfortableness will not diminish, because their approach is hopelessly out of date. GM knew those tools better than anyone – and we can see how that worked out for them.
To regain control of your future you have to recognize that the base of the pyramid has shifted. How we once made money won't work any more. Value doesn't grow from just owning, holding and operating assets. Maximizing utility of assets will not produce high rates of return. We are now in a new economy. One where outdated distribution systems (like the auto dealer structure) simply get in the way of success. One where a focus on the product, rather than its use or customer, won't make high rates of return. With the bankruptcy of GM reliance on the old business model must now be declared over. We've entered the Google age (for lack of a better icon) – and it affects every business and manager in the world.
The future requires companies focus on markets, shifts and adaptable organizations. Successful businesses must have good market sensing systems, rather than rely on powerful six sigma internal quality programs. They have to know their competitors even better than they know customers to deal with rapid changes in market moves. They have to be willing to become what the market needs – not what they want to define as a core competency. They have to accept Disruptions as normal – not something to avoid. And they have to use White Space to learn how to be what they are not, so they remain vital as markets shift. So they can quickly evolve to the next source of value creation.
by Adam Hartung | May 27, 2009 | Current Affairs, Defend & Extend, Disruptions, General, Leadership, Lock-in, Openness, Quotes
"The Need for Failure" is a recent Forbes article on why it is bad – really bad – to prop up failing institutions. The author is an esteemed economics professor at NYU. He says "too big to fail is dangerous. It suggests there is an insurance policy that says, no matter how risky your behavior, we will make sure you stay in business." Rightly said, only it creates a conundrum. Large organizations are not known for taking risky actions. Large organizations are known primarily for lethargic decision-making which weeds out all forms of risk – right down to how people dress and what they can say in the office. When you think of a big bank, like Bank of America or Citibank, you don't think of risk. You think just the opposite. Of risk aversion so great they cannot do anything new or different.
What I'd add to the good professor's article is recognition that large organizations stumble into risk they don't recognize, by trying to do more of the same when that behavior becomes risky due to market changes. My dad said that 100 years ago when my grandfather was first given pills by a doctor he decided to take the whole bottle at once. His logic was "if one pill will help me, I might as well take the whole lot and get better fast." Clearly, an example where doing more of the same was not a good idea. Then there was the boy who loved jumping off the railroad bridge into the river. He did it all the time, year after year. Then one month there was a draught, the river level fell while he was busy at school, and when he next jumped off the bridge he broke his leg. He did what he always did, but the environmental change suddenly made his previous behavior very risky.
Big corporations behave this way. They build Lock-ins around everything they do. They use hierarchy, cultural norm enforcement, sacred cows, rigid decision-making systems, narrow strategy processes, consistency in hiring practices, inflexible IT systems, knowledge silos and dependence on large investments to make sure the organization cannot flex. The intent of these Lock-ins is to make sure that historical decisions are replicated, to make sure past behaviors are repeated again and again with the expectation that those behaviors will consistently produce the same returns.
But when the market shifts these Lock-ins create risk that is unseen. Bankers had built systems for generating their own loans, and acquiring loans from others, that were designed to keep growing. They designed various derivative products as their own form of insurance on their assets. But what they did not recognize was that pushing forward in highly unregulated product markets, as the quality of debtors declined, created unexpected risk. In other words, doing more of the same did not reduce risk – it increased the risk! Because the company is designed to undertake these behaviors, there is no one who can recognize that the risk is growing. There is no one who challenges whether doing more of the same is risky – only those who would challenge making a change by saying change is risky!
Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and AIG all created a much higher risk than they ever anticipated. And they never saw it. Because they were doing what they always did – and expecting the results would take care of themselves. They were measuring their own behaviors, not the behavior of the market. And thus they missed recognizing that the market had moved – and thus doing more of the same was inherently risky.
(The same is true of GM, for example. GM kept doing what it always did, refusing to see the risk it incurred by ignoring market shifts brought on by changing customer behaviors, rising energy costs and offshore competitors.)
That's why big company CEOs feel OK about asking for a bail-out. To them, they did not fail. They did not take risk. They did what they had always done – and something went wrong "out there". Something went wrong "in the market". Not in their company. They need protection from the marketplace.
Of course, this is just the opposite of what free markets are all about. Free markets are intended to allow changes to develop, forcing competitors to adapt to market shifts or fail. But those who run (or ran) our big banks, and many of our big industrial companies, haven't see it that way. They believe their size means they are the market – so they want regulators to change the market back. Back to where they can make money again.
So how is this to to be avoided? It starts by having leaders who can recognize market shifts, and recognize the need for change. In an companion Forbes article "Jamie Dimon's Straight Talk Has A Good Ring" the author takes time to review J.P. Morgan Chase's Chairman's letter to shareholders regarding 2008. In the letter, surprisingly for a big organization, the JPMC Chairman points out market shifts, and then points out that his organization made mistakes by not reacting fast enough – for example by changing practices on acquiring mortgages from independent brokers. He goes no to point out that several changes have happened, and will continue happening, at JPMC to deal with market shifts. And he even comments on future scenarios which he hopes will help protect investors from the hidden risk of companies that take actions based on history.
Mr. Dimon's actions demonstrate a willingness to implement The Phoenix Principle. For those who don't know him, Mr. Dimon has long been one of the more controversial figures in banking. He is well known for exhibiting highly Disruptive behavior, yet he has found his way up the corporate ranks of the traditional banking industry. Now he is not being shy about Disrupting his own bank – JPMC.
- His discussion of future scenarios clearly points to expected changes in the market, from competitor shifts, economic shifts and regulatory shifts which his bank must address.
- He sees competitors changing, and the need for JPMC to compete differently with different sorts of institutions under different regulations. Mr. Dimon clearly has his eyes on competitors, and he intends for JPMC to grow as a result of the market shift, not merely "hang on."
- He is espousing Disruptions for his company, the industry and the regulatory environment. By going public with his views, excoriating insurance regulators as well as unregulated hedge funds, he intends for his employees and investors to think hard about what caused past problems and how important it is to change.
- He keeps trying new and different things to improve growth and performance at the company. It's not merely "more of the same, but hopefully cheaper." He is proposing new approaches for lending as well as investing – and for significant changes in regulations now that banking is global.
Very few leaders recognize the risk from doing more of the same. Leaders often feel it is conservative to not change course. But, when markets shift, not changing course introduces dramatic risk. People just don't perceive it. Because they are looking at the past, not at the future. They are measuring risk based upon what they know – what they've failed to take into account. And the only way to overcome this problem is to spend a lot more time on market scenarios, competitor analysis and using Disruptions to keep the organization vital and connected with the market using White Space projects.
by Adam Hartung | May 26, 2009 | Current Affairs, Defend & Extend, General, Lifecycle, Lock-in, Openness
Today I was hit by a market shift that left me baffled as to what I should do next.
Everybody, every work team, every company has Lock-ins. Lock-ins help you operate quickly and efficiently. And they blind you to potential market shifts. I have as many Lock-ins as anyone. Some I recognize, and some I don't. It's always the ones we don't recognize that leave us in trouble.
For 18 years I've listened to only one radio station in Chicago. WNUA 95.5 smooth jazz. I like jazz, and I've just about quit listening to anything else musically. I grew accustomed to the people who played the "light jazz" music on WNUA, and so enjoyed it I even listened to the station on my computer when traveling out of town. I was a stalwart, loyal fan. My whole family knew that when I was driving the car, the channel would be 95.5.
Then, after a long weekend out of town, I got in the car this morning. I pushed the button for 95.5, and for some reason there was Hispanic music. I couldn't figure it out. This didn't make any sense. So I turned off the radio and went about my business. When I returned home I logged onto WNUA.com to find a letter from a Clear Channel Chicago executive telling me that WNUA was no longer broadcasting as of 10:00am on Friday, May 22. The web site was gone, only this one HTML page existed. I was stunned.
I quickly did a Google search and found an article published by the media critic at The Chicago Tribune dated May 22, "WNUA Swings to Spanish Format." I immediately thought "this can't be right. There has to be something I can do to get back my radio station. Maybe if I email Clear Channel?" See, I quickly wanted to defend my radio selection, and extend the life of the product I personally enjoyed.
But then I read the article. Turns out there are a lot of smooth jazz lovers who were loyal to WNUA. But, unfortunately, that number has not been growing for a while. The channel management had tried many things to boost listeners, but none had worked. The market just wouldn't grow, despite their efforts. The jazz radio listener market had stalled – and was showing signs of (oh my gosh) decline! I was getting older, and apparently us old Chicago smooth jazz hounds aren't creating new jazz followers.
But, the station had done a lot of analysis as to what was growing. Hispanics now outnumber African-Americans as the largest minority group in the country. Clear Channel Chicago did a full scenario about the future, thinking about what would be needed to fill the needs of Chicago's biggest listener groups in 5 years. Looking forward, there was no doubt that smooth jazz wasn't going to grow – but the opportunity for an Hispanic station was "crystal clear". Competitively, they would continue losing revenue playing smooth jazz, and although the cost of shifting would be great – the opportunity to be part of a growing market had much more to gain. Chicago is the 5th largest Hispanic population in the USA and growing, with 28% of the current population Hispanic. Clear Channel management did both scenario planning and competitor analysis before deciding to make this switch – just what a Phoenix Principle company is supposed to do!
KaBoom. The market was shifting, and I saw it, but I didn't think about the impact on my own life. I just assumed WNUA would always be there playing jazz for me. But the people at Clear Channel looked at the market shifts, and how they could best use their 5 stations to service the most people. That is good for Chicago, and good business for Clear Channel. If they wanted to keep growing, WNUA had to be replaced. I would bet the hate mail has been extreme. The longing for our old station must be felt by several thousand people around Chicago. It's hard to let go of a Lock-in.
Oh, I feel terrible about not having my radio station. But the right move was made. I should have thought about this more, and seen it coming. I could have scouted out other radio stations, and started looking for other music styles that I'd like to listen to. But I wore blinders – until the market shifted and left me in the cold.
I'm curious, have any of you readers found yourself the unfortunate loser due to a market shift? Did some favorite aspect of your life or work disappear because the market went a different direction – and you found yourself in a small segment unprofitable to serve? I'd love to hear more stories from folks whose Lock-in left them unprepared for a change in lifestyle or work.
As for me, I guess there's always CDs. Or NPR (I'm getting old enough to like the news). But those would be D&E behaviors intended to ignore the shifting market. So, maybe I should start letting others in my family select the radio stations so I could climb out of my cave and learn what more modern musicians are doing these days. It would do me good to update my music knowledge – get me closer to people who have music appreciation beyond jazz, and probably make me a lot more likable as a driver. It's never too late to open up some White Space and learn what's new in the world you couldn't see because of your old Lock-in.
by Adam Hartung | May 24, 2009 | Current Affairs, Defend & Extend, General, Lifecycle, Television
One of the hardest things for leaders to do is recognize market shifts. The tendency to remain focused on Defending & Extending what was always does is so great that market shifts which demand change are overlooked in the urge to improve what was always done – even as results fade.
An obvious example is Playboy enterprises. "Playboy denies report of $300M price tag" was a Chicago Crain's headline, as rumors that the company (now publicly valued at only $90M) was being shopped for a new owner. Playboy was founded as a "lifestyle" media company intended to meet the emerging needs of "sophisticated" adult males in the 1960s. To the surprise of many publishers and government leaders, Playboy became a huge success. Its magazines outsold expectations. The company grew by opening clubs in major cities where businessmen entertained. Even resorts were founded as vacation destinations. As the company expanded it moved its headquarters from Chicago, where government officials disliked the hometown anomaly, to LA. And the company acquired a 727 as the corporate jet. As revenues and profits expanded, the company went public. As recently as 2000 the company was worth nearly $1.2billion (chart here).
But, the market changed. Women entered the workforce as one primary contributor to the clubs becoming passe, leading to their close. Likewise, the resorts closed as competitors – clubs catering to young men and couples, such as Club Med – did a better job of meeting their needs. The magazine became less and less viable as market shifts led to a split between pornography magazines for those who wanted photos and serious mens journals ranging from Stereophile and Autoweek to GQ. Market shifts ranging from America's attitudes about how to treat women, to what was needed in a serious current events or hobbyist journal, left the company's products less and less interesting. As the founder aged, the company lost track of its primary target and failed to identify a new target market. And the new CEO, the founder's daughter, was unable to develop future scenarios identifying a viable direction – or products – to keep the company growing.
At this point, Playboy has no clear market, has suffered from decades of declining revenue and profits, and investors have no reason to expect an improved return on investment. Why anyone should want to buy the company, especially as we observe that all print journalism is shrinking dramatically, is unclear. Playboy is at the vanguard again – but this time of demonstrating the end of print media and the losses capable from ignoring market shifts. Had Playboy long ago dropped the salatious pictures and moved itself toward a growing readership – providing insights to men's lifestyle issues in sports, fashion, electronics, autos or any number of topics – it had a chance of maintaining its success. But now the brand represents a complete out-of-synch with market needs and is more likely a negative than a positive; of no value. Playboy leadership should take the money and run, distributing what it can to investors, from whatever fool is willing to throw away its money on an acquisition.
Meanwhile, a recent Wall Street Journal Blog was titled "Skype Gets the Oprah Treatment". The WSJ blooger seemed perplexed that Oprah Winfrey's show would choose to run an entire episode by interviewing people on Skype. His implication was strongly that the episode was some sort of technology endorsement in disguise.
But, to the contrary, we can see where Ms. Winfrey and her producers are much smarter than her media CEO counterpart at Playboy. This episode gave viewers a firsthand experience with new technology which is available and usable by her target audience. People were able to recognize how the technology works, and why you would use it to communicate with others – possibly in remote locations.
Although Ms. Winfrey is "50ish" her company is keeping her product very current. Her audience is learning how to use new technology that will help them be better connected to family or business associates. And save money doing so, compared to traditional telephonic tools. Ms. Winfrey and her leadership team could continue to do what they always did, but this kind of new show helps them keep Harpo Enterprises and one of its products – The Oprah Show – in the forefront of competitivesness. That's why Harpo can lay claim to reaching even more people in Asia and Europe than in the USA! Thus Harpo keeps viewer numbers high, and advertisers willing to foot the bill.
Harpo Productions and Ms. Winfrey are demonstrating their willingness to shift with the marketplace. They are trying new things, and are willing to branch out with changes to stay connected to markets as they shift. Doing so is a requirement in lifestyle products, like media. She benefits her customers by willingly shifting with the market, and those lucky enough to work for Harpo or supply the company, will benefit by its willingness to remain connected to changing markets – by staying on the forefront.
Many CEOs and their leadership teams would do well to understand the failure of remaining Locked-in, like Playboy did. And to recognize the value of remaining abreast of market shifts and keeping products current with changing market requirements, like Harpo Productions and is famous CEO. Sometimes being criticized for being too avant garde is a good thing, because it shows you aren't afraid to change in the pursuit of keeping current with market shifts.
