by Adam Hartung | Dec 17, 2008 | Uncategorized
Steve Jobs is a Phoenix Principle leader. He's never afraid to Disrupt himself or his organization. He's always working to make sure new ideas are surfaced, and applied, and new markets developed. He keeps White Space alive, trying new products in new markets — unwilling to let himself or his organization become pigeonholed into narrow definitios that weaken revenues and returns. No wonder analysts, investors and employees want him at the helm of Apple.
But, no organization can survive long-term if it depends on a leader to maintain all Disruptions and White Space. Apple stock is down about 50% since the middle of this year, dropping 5% today (see chart here). This could be because Apple is ignoring the netbook marketplace – and possibly not introducing anything terribly knew this holiday season. Some think it's because there is a rumor that Mr. Jobs is in poor health because he's said he won't address the MacWorld trade show in December. His health has been something that has captured news attention since his bout with pancreatic cancer in 2006 (read more about Jobs and Apple's stock here.)
Apple's rise, fall and rise can largely be traced to its leadership by Mr. Jobs. But that's really too bad. Apple should move to institutionalize processes which would insure the company keeps Disrupting itself and implementing White Space. Even if Mr. Jobs is in great health, at some time he will leave Apple. And the company's employees, investors and vendors deserve the company to continue with the kind of performance it's seen since Mr. Jobs' return to the top spot.
Over at neighbor Silicon Valley tech company Cisco Systems Disruption has been institutionalized, rather than relying on Chairman John Chambers. At Cisco, the company works constantly to cannibalize and replace its own products. This policy keeps the company from resting on the laurels of good products, protecting them from competition and allowing the company to fall behind. Instead, product managers constantly work to either find replacement products or improve their products so they stay at the forefront of competition – or get out of the product line altogether. With this chronic product Disruption, they use White Space to find the replacement products growing revenues year after year.
Great Phoenix Principle leaders are good role models. But companies can't rely on them to keep the organization vital. Leaders leave. Too often, the organization then falls victim to Lock-in as Disruptions stop and White Space dries up. Defend & Extend management takes hold – as we saw at Apple when Steve Jobs was fired by John Scully in the 1980s. After his departure, the company focused entirely on the Macintosh and attempted to protect its share from the Wintel PC onslaught. Even though Mr. Scully tried to lead the company into the PDA market by championing the Newton, he was unsuccessful because he lacked Mr. Jobs Disruption skills (Mr. Scully was a corporate leader cut from a more traditional mold) and didn't know how to use White Space to get his product supported. As a result, the D&E managers at Apple rose up, had the Board fire Mr. Scully, and proceeded to focus on the Macintosh until it became a niche product and the company was in jeapardy of failure.
And that's what could happen again when Mr. Jobs leaves. That's why mentions of his health, or departure, draw so much press. Apple has not become an evergreen Phoenix Principle company, because it relies too strongly on its existing Phoenix Princple leader. There's time to change this – and that should be one of the highest priorities Mr. Jobs undertakes – long before he decides to leave.
by Adam Hartung | Dec 16, 2008 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in, Quotes
In 1993 Pulitzer Prize winning author David Halberstam wrote a book about the 1950s – called appropriately "The Fifties". He takes time in this book to talk about GM – a company today that has seen its leadership embarrassed, and its value for investors disintegrate in the face of mounting competition. It's humiliated executives have asked Congress for a bailout to save the employees and customers from total failure – because they seem unable to figure out a solution themselves. Read what Mr. Halberstam, a New York Times reporter, had to say about GM's rise to prominence:
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"No one at GM could ever have dared forecast so much prosperity over such a long period of time. It was a brilliant moment, unparalleled in American corporate history. Success begat success… The postware economic boom may have benefited many Americans, but no one benefited more than General Motors. The average car, which had cost $1,270 at the beginning of the decade, had risen to $1,822 by the end of it…twice as fast as the rest of the wholesale cost index.
There was in all of this success for General Motors a certain arrogance of power. This was not only an institution apart; it was so big, so rich, and so powerful that it was regarded in the collective psyche of the nation as something more than a mere corporation: It was like a nation unto itself, a seperate entity, with laws and a culture all its own.
The men who ran the corporation, almost without exception, came from small towns in America… Everything about them reflected their confidence tht they had achieved virtually all there was to achieve in life. Others, critics, outside Detroit, might believe that these men were not such giants and might believe that they did not so much create that vast postwar economic wave as they had the good fortune to ride it… As for the intellectuals, if they wanted to drive small foreign cars, live in small houses, and make small salaries, why even bother to argue with them?
As success of the company grew, its informal rules gradually became codified. The culture was first and foremost hierarchical: An enterprising young executive tended to take all signals, share all attitudes and prejudices of the men above him, as his wife tended to play the sports and card games favored by the boss's wife, to emulate how she dressed and even to serve the same foods for dinner.
The essential goodness of the corporation was never questioned. It as regarded as, of all the many places to work, the best, because it was the biggest, the most respected, made the most money and, very quietly, through bonuses and stock, rewarded its top people the most handsomely."
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If this was the world of GM, codified as Mr. Halberstam explains, it becomes easier to understand the behavior of GM in the 1960s, 1970s, 1980s and 1990s - as competitors kept chipping away at market share and power. From 50% share of all automobiles sold in the 1950s, GM's share is now only half that. Executives, managers and even union employees quickly came to believe (in the late 40's and 50's)the future would always be like the past. But Toyota, Honda, Nissan, Subaru, Kia and others didn't accept GM's claim to a monarchy. And now, everyone is paying for it.
Lock-in is built when companies are doing well. And Lock-in keeps the organization from changing. It is easy to belittle challenges, and blame poor performance on others. As competitors evolve, at times making big improvements, the Locked-in organization will explain away poor performance – but resist accepting the need to change. In the end, if we don't learn how to Disrupt the Lock-in and use White Space to become more competitive we all end up in the Whirlpool. Even GM.
by Adam Hartung | Dec 15, 2008 | Uncategorized
Want a winner, regardless of market changes? Look at Illinois Tool Works (ITW) (see chart here).
ITW has grown, regardless of market shifts and economic changes, for over 20 years. And this troubled year, 2008, ITW has grown another 2.4 percent (see article here). While other big companies are seeing revenue declines of nearly 50% (look at Chrysler), and some are disappearing overnight (Lehman Brothers and Bear Sterns) it's a rare story to hear of a company growing these days. Yet, ITW keeps plugging along.
ITW is in a wide variety of businesses. The company has over 800 subsidiaries – and it doesn't even require they all use the same accounting system – much less adhere to a common "core". Businesses are expected to meet their forecasts, or change in order to meet them. Acquisitions help the company keep trying new things in new markets – constantly maintaining White Space. It's not important what market they're in, or what products they sell, or what technology they use. What's important is if the business is able to sell more product and meet profit targets while doing so.
That willingness to keep White Space wide open has served ITW well for over 2 decades – and is doing so now. Revenues keep growing, via acquisition and ongoing business, despite changes in markets around the world. ITW is avoiding the draconian downsizings we read about across the country, and is not harping about insufficient capital while pursuing sales globally. Instead of focusing on a core business, and watching that market disappear out from under it, ITW keeps itself firmly growing in a wide variety of businesses creating better results for employees, suppliers and investors.
Long term success comes from avoiding Creative Destruction. Focus is of no value when your focus becomes obsolete. Companies that focus eventually end up out of step with changed markets – and wondering how to save themselves. ITW avoids that problem by constantly entering new markets, and trying new business models. A company based on White Space has proven it can grow, even in an economy like this one.
by Adam Hartung | Dec 14, 2008 | Uncategorized
The stories of woe in the newspaper business have been dire for a while. But lately they've gotten worse, as Tribune Company filed for bankruptcy and rumors abound that The New York Times Company is looking to sell real estate in order to stay alive. Of course, selling an asset like buildings to subsidize a business like printing newspapers is not a good idea – robbing Peter to pay Paul only delays the day of reckoning. And in the meantime investors are robbed of value while employees are given false hopes of improved business conditions. As we've seen at GM, selling EDS, Hughes and GMAC to subsidize auto manufacturing has not helped management build a stronger company.
And speaking of Detroit, rumor now is that the Detroit Newspaper Partnership, which runs the Detroit Free Press for Gannett and Detroit News for MediaNews Group, will stop printing the newspaper for delivery except on Thursday, Friday and Sunday. Other days will be a single-copy purchase product, very limited. (Read about the changes here.)
The only thing suprising about this announcement is how long it took to happen! By far the highest cost of a newspaper is printing it. Second is delivering it to homes. With subscriptions falling, the economics of distribution have been worsening dramatically. You really want everyone to take the paper as you drive down a street – not one in 3 or one in 4. That creates a compelling reason to advertise, and the cost of distribution low. But the news organizations have been cutting costs of reporters, editors, copyeditors, graphic artists, page layout professionals – all the people who report and relay the news. And in the process, the product has gotten considerably worse. In all cities – not just Detroit.
Obviously, what people value is the news. Not the paper. Today, acquiring news is far faster and easier by checking on-line than reading a newspaper. Thus, newspaper subscribers have been dropping fast. Of those that continue subscribing, estimates range as high as 50% who only continue because they want the advertising inserts on Sunday. But increasingly those ads are being delivered directly to the mail box. As for browsing the news, almost everyone today has multiple options for keeping up with current events via CNN, Fox, MSNBC, CNBC, Fox Business and other television sources. Many businesses run these stations in the background during the workday, making current events very immediate and a lot easier to track than reading a day-old rendition via a paper.
Unfortunately, when we look for news on-line we find that the leading newspaper companies have not been good at taking their most valuable proposition to the distribution system people most want. There are no markets where the "newspaper" has the leading news website. People don't go to NYT.com, or ChicagoTribune.com or LATimes.com or even WSJ.com for most of their news. Readers get what they want faster and easier from superior sources that know not only how to find news, but how to post it fast and make their sites a lot more valuable. And learning how to have a valuable (and profitable) web site is not where these companies have invested their money the last 10 years. By trying to Defend & Extend the paper, they missed learning how to maintain their status as news distribution shifted on-line.
There's an old phrase in newspapers – "Don't bury the lead." It refers to writers spending too long on facts before getting to the "so what." Within these newspaper companies, they buried the value of their business. News was their business – not printing on paper. But Lock-in to old ways of doing business kept them focused on printing papers until…. well…. we see many shutting down and some declaring bankruptcy. Meanwhile, the demand for current news is growing faster than ever! The number of web searches for news articles, and news sites, and blogs keeps growing every month!
Back in Detroit, it's high time some newspaper group finally Disrupted itself and started focusing on what it needs to do, rather than what it want to do (and has always done). In Detroit, people are very worried. Business is terrible. Advertising has fallen off the proverbial cliff. It was only when facing extinction that these papers finally considered focusing on-line rather than focusing on print. It may be too late in Detroit. These organizations have not built strong capability, and they've run out of resources before trying to change. When you fall into the Whirlpool of failure, not much can save you.
But for other news companies, the time for Disruption is NOW. Everyone knows that newspapers are an inefficient news mechanism. Everyone knows that eventually they will be obsolete. Instead of leading the change to on-line, these companies have resisted – hoping they could Defend & Extend their models "another year or two." That is not a strategy – and the tactics rarely work. To be a vital competitor, businesses have to address market shifts by building future scenarios that take into account changes. And then Disrupt their old ways – create a pattern interrupt allowing themselves to fully realize that the future simply canNOT be like the past. Only after Disruption can White Space help develop a new Success Formula.
Let's hope many of struggling news organizations take the time now to Disrupt. If not, if they try to Defend & Extend much longer, they will disappear. And that will be terrible for all of us that depend on these local news groups to tell us what's happening in our towns, counties and states. Not only will investors be wiped out, but the fabric of our communities will be shattered if we lose these local reporters keeping us current about what's happening at the school board and city meetings – and we can't depend upon 15 second television bites to really inform us.
by Adam Hartung | Dec 10, 2008 | Current Affairs, Defend & Extend, General, In the Whirlpool
Illinois' Governor Rod Blagojevich has burst onto the national scene. Not in a good way, obviously. What's surprising, though, is how people are reacting to the fact that today he returned to work and has shown no inclination to resign. They seemed surprised. They seem perplexed that he did not immediately resign. One newsperson on superstation WGN television said he thought this case was in greater need of a psychologist to explain the governor's behavior than a lawyer. I could not help but chuckle when I heard an NBC political analyst on "Countdown" say the "logical" thing for the Governor to do was resign. None of these people are taking the time to think about the Governor's Success Formula.
Rod Blagojevich is the product of some pretty rough-and-tumble politics, still carried out in the wards around Chicago. This is not to imply any wrongdoing on the part of Chicago's Mayor or his administration, nor any of the state employees of Illinois. But reality is that for many years politics in Chicago meant, "you wash my hands and I'll wash yours." While things have changed at the top, for many people in the bowels of government work, this Success Formula was ingrained. For many, if you want your street plowed of snow early, you make sure you contribute to the Alderman's re-election fund – and that was considered absolutely normal. In the old Secretary of State's office you could buy a truck driver's license without even taking the test. Even though several leaders have changed, there's been no real Disruption in local politics and so for many participants, many work teams and some functional groups, this Success Formula has endured. (Although the Secretary of State's office is a model example of change – and nothing at all like it was for many years under previous Secretaries.)
Governor Blagojevich got his "jump start" into politics by marrying the daughter of a powerful Chicago Alderman – Richard Mell. Mell has been powerful for a long time, and as a result he's learned how to play big time, hard ball politics. You don't back down easily, and you play each and every situation to win – not tie – and certainly not to withdraw. You never quite know what might happen, and those who attack may be attacked before they can make something stick. Play to win, all the time, every time. Horse trading is part of the game.
I would not be surprised to learn that similar hard-ball poiticing is common in many city halls and state offices across America – and between most of our representatives in the Congress and Senate. Even Presidents learn how to make compromises – albeit a lot more subtly and ethically than how we're hearing the Governor did it. To some extent, he seems less the "political criminal" (as characterized by the U.S. Attorney) than the politically naive who got too high without the proper training in "how to get things done" politically.
A result of his training was that the Governor learned to play to win. Never give up. Thus, he's utterly predictable. From his point of view, so far he's been convicted of nothing. He may be disliked right now – but there are many examples of politicians who see themselves publicly rehabilitated. In the 1980s a highly discounted politician, who had not even bothered to pay taxes for more than a decade, was elected Chicago's mayor and was quite popular (Harold Washington). Why would the Governor give up? Why resign? He still has the power of the governorship, and any effort to impeach him will take months – if it should succeed. Until the day comes when he absolutely, positively has to stop – why stop?
That's the way of Success Formulas. They don't work by other people's rules. They don't work by consensus, or public opinion, or even common sense. George Wallace extolled the virtues of segregation and even launched a campaign for the Presidency long after segregation was widely deplored in America. Richard Nixon felt humiliated as Vice-President by the lack of respect he was given from Eisenhower – including a complete lack of endorsement when he ran for President. And of course he lost his first run for President, and he was not well liked in his own party. Yet, he successfully positioned himself to win 2 terms as President before resigning in disgrace due to his involvement in ordering the Watergate break-in. None of these people did what would seem "normal" to most people. But they were entirely consistent with their Success Formulas.
We can expect that Governor Blagojevich will work very hard to protect himself, his family and his future. After all, if you listen to the counts against him you can see that was exactly what he was doing as Governor. There is no reason to think he will change that behavior now. While he is now severely challenged, and he has a big stack of problems, he has not been Disrupted – and he has not taken on any White Space where he would try anything new. To the contrary, he is in the same job, with the same people, doing the same work. What he will do is very predictable – it will be the action most likely to help himself and his family. You don't need to be a psychiatrist to understand the Governor – you just need to look at his past and understand his Success Formula. And notice that nothing has happened which is likely to make the Governor think he should change that Success Formula now.
After all, his predecessor (a Republican) didn't change his Success Formula and now the #2 Democrat in the U.S. Senate (Dick Durbin) is asking the President to pardon him for past wrongdoings so he can get out of prison. Why wouldn't Blagojevich ask the incoming President to pardon him in exchange for stepping down from the Governorship (for the good of the state)? To this day, many people think that was "the deal" Nixon made with Congressman Ford when he gave him the Vice-Presidency - which led to him becoming the first President to never be voted on by the American population when Nixon resigned. It was rather quickly that the new President Ford pardoned ex-President Nixon "for the good of the country."
Never underestimate the power of Success Formulas. People will follow them long, long after their results have proven unsatisfactory. Lock-in, established years (often decades) before keeps the person going in the same direction despite the lack of recent success. As small wins come in, they reinforce that the Success Formula will work again, if just adhered to closely enough. And many leaders – in government or in industry (don't forget Bernie Ebbers at Worldcom or Mr. Skilling at Enron) will deny wrongdoing and remain committed to their course even in the face of considerable evidence that to change would be more beneficial.
Of course, if you allow yourself to be Disrupted – and you keep White Space alive in your life – you can avoid this problem. You can learn to adapt your Success Formula to produce better results as environments around you shift. But that has not been the way of Governor Blagojevich. Do you allow Disruptions and White Space in your life? Or are you risking a drift into weaker results while remaining tied to old Lock-ins?
by Adam Hartung | Dec 9, 2008 | General, In the Rapids, Innovation, Leadership, Openness
We keep hearing about all the bad news in this recession (Tribune Company, GM, Circuit City for example). You could easily believe there is no good news. But if we look a little harder we can see that there are businesses which are looking forward and taking actions to build market share – winning against competitors that are reacting by retrenching and hiding in a foxhole. There is a better way to manage when times are tough than cutting costs and "waiting for times to get better."
Ever heard of Tractor Supply Company (see chart here)? If you live in a big city, probably not. As the name implies, this retailer has largely supplied products to farmers and competitors in the agrarian economy. Of course, the number of individual farms has been declining for decades as the economy shifted from agrarian to industrial – and now to information. So you would expect Tractor Supply to be disappearing from the retail landscape, especially during times so difficult that much better known retailers are disappearing and filing for bankruptcy.
But that is not the case. Tractor Supply realized that while "production" farms are fewer and becoming a less attractive market, on the periphery of more and more cities there were people with unsupplied needs. And as cities expanded, and corporations moved headquarters to the suburbs, these ex-urban and suburban families were increasing the number of pets – and in some cases picking up pets like horses and other animals traditionally considered livestock. "Gentleman farms" of only 5 or 10 acres were increasing, where families escaped urban lifestyles to enjoy a connection with gardens, small crops and a few animals. They also needed tools, and hardware for fences and buildings – in short a panoply of products not readily available at Home Depot. And with that insight to the changing market, Tractor Supply has been expanding. The chain has 834 stores (and you never heard of them?). The company opened 20 new stores last quarter, compared to 21 a year ago and 70 this year compared to 63 last year. They are now opening 2 stores in outlying Chicago. The company is growing more today than last year, and moving into new markets where even Wal-Mart has chosen to leave. (Read article about Tractor Supply growth moves here.)
Another great example is Papa John's pizza restaurant chain (see chart here). We keep hearing about how people are eating out less now than before. The marketplace is struggling, as chains such as Bennigan's have shut their doors, unable to draw enough customers. So analysts keep talking about more failures in restaurants. Yet, Papa John's ignored the analysts and figured out a way to grow.
Instead of restricting itself to the "tried and true" revenue growth approaches used by most chains – such as television advertising and newspaper coupons – Papa John's studied how people were using the internet, and created White Space to develop new marketing approaches. They created a one-day campaign, flooding websites such as MySpace.com, NHL.com and others with display ads, via Google ad placement. The result was a 20% revenue jump. By driving people to order on-line, rather than old-fashioned telephone orders, they saw average ticket sizes increase 10-15% due to increased ordering. And they have connected many more customers to Papa John's email marketing. For example, on Facebook the number of Papa John's fans increased from 10,300 to almost 187,000 – an 18X increase in just 3 weeks! Now Papa John's is adding more on-line opportunities for customers, such as advance ordering (up to 21 days – say for a party) and "repeat last order" capability to make transactions fast and easy. As the world moves to the web, Papa John's is learning to use the web to connect with customers and grow! (Read about Papa John's on-line marketing programs here.)
It's easy to bemoan a recession, say there's little you can do, and start whacking at costs. It's easy to get down in the dumps, and lose interest in trying to do better. Tough market news can breed discontent and worry and inaction. In the cost-cutting process you well might lose some of your most valuable employees – and leave yourself quite unprepared for future competition (read here at Harvard Business Press about how traditional recessionary cost cutting reduces competitiveness). Even worse, while you tread water, you greatly increase your vulnerability to competitors who focus on market shifts, analyze competitors to upend them, Disrupt their old behaviors to create future focus, and use White Space to try new things which can create a much better returning Success Formula in the changed marketplace. These Phoenix Principle companies are the ones that will lead future growth in revenue and profits by not running for foxholes today, instead concentrating on how they can Disrupt and use White Space to become a far more successful competitor.
by Adam Hartung | Dec 8, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
So we now hear that Congress will loan $15billion to GM, Ford and Chrysler intended to keep them going concerns until at least March. We've been told that there are requirements on the loans that will better the industry. But honestly, there's nothing new being proposed that makes any difference, nor the proper teeth in Congress's proposed bill. (Read about the bill here.)
The bill limits executive bonuses and severance packages. But why does it let management (and the Boards of Directors) keep their jobs? It is clear that these leaders, and their management teams, led these companies into desperate circumstances. They put their bondholders, equity investors and employees all at risk. They passed the "brink" and got to the point of requiring government assistance to stop a cataclysmic disaster. So why are these people left in their jobs? How can anyone expect a really changed industry if the people who sold off assets for 2 decades trying to Defend & Extend a thoroughly out of date and broken Success Formula are given the money to invest?
Oh, we can expect a "car czar" who is supposed to oversee these loans and assure a the industry invests appropriately for change. Who's the right guy for this job (don't forget – I applied!)? We now read that the lawyer who oversaw the handout of money to survivors of 9/11/01 victims. This is, of course, the right qualifications to evaluate business plans, investment rates and innnovation programs for an industry. He's shown he can hand out money – but where has he shown he knows anything about re-engineering a very broken, large company? Where does he have credentials for un-knotting the Lock-in that keeps these companies dysfunctional? And how is he supposed to stand up to management teams that claim to have superior knowledge about auto company management – despite driving these companies into the proverbial financial ground.
The union leadership apparently wants Board seats in exchange for concessions. What difference will that make? Do union leaders know how to turn around companies where they encouraged Lock-in that cost them thousands of jobs? Are they trying to reach back to the kind of union practices that kept coal stokers on trains long after electric automotives were introduced? Defending & Extending out of date union practices won't fix these companies either. What these union leaders need to be asking for is government promises to secure the unfunded pension obligations, and creating a government program to preserve heath care costs that are likely to be stripped in an effort to lower variable costs. There is no bailout that can cover these costs indefinitely – and that is where labor restructuring needs to focus.
As investors, Americans deserve better than leftover thinking for their investment. More of the old management won't fix the problems. What's required is White Space to make significant changes:
- Auto design has to change from backward integration and standardization for manufacturing to forward-thinking which brings customers
- Distribution has to allow customers more opportunites to buy than the old-fashioned, and tedious, dealer structure which puts off almost all customers (and makes buying an unpleasant event). Customers deserve the right to buy direct if they like, and from dealers if they enjoy what dealers offer.
- Manufacturing has to change from "scale" to "build to order". Flexibility has to overtake 80 year old industrial design practices which have made the products inflexible and too expensive.
- Pension reform is essential. The overhead costs of pensions makes these companies unviable. This will require government intervention.
- Health care reform is essential. Perhaps Michigan should follow the Oregon example (and Massachusetts), and be a leader in developing programs to have state-assisted insurance coverage for everyone. Perhaps this should be an experiment in changing from employer paid health coverage, which offshore competitors do not have to shoulder, to self-paid coverage with guaranteed protection.
These are complex problems. They defy simple solutions. They require White Space. Cut Saturn free (again, like when it was founded) to experiment with new solutions. Give other nameplates the indepence to experiment with other possibilities. Monitor performance, see what works, and migrate toward what succeeds.
Now is the time to implement Disruptions and try something new. When the airline industry was grounded in 2001 there was a tremendous opportunity to restructure from unprofitable hub-and-spoke systems with outdated practices to new approaches using White Space. But neither government, nor the industry, took advantage of the stoppage to really try something new. Everyone was in a rush to start operating again, with practically no change. A huge opportunity was lost. And that sounds like the direction we're headed with the desperately uncompetitive auto industry.
We should not make that mistake again. Now is the time to Disrupt these companies. Fire the executive teams and the Boards. They've never been shy about firing employees or vendors. Put new management in place that understands how to manage innovation – rather than Lock-in. Get people in the jobs who don't want to Defend & Extend what's broken – but instead want to make changes and learn what will make these companies world class once again. And put in place competent oversight that can make sure change happens.
by Adam Hartung | Dec 7, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
A year ago Sam Zell was telling Chicago that he knew how to make money in newspapers. He was certain, absolutely certain, that Tribune Company newspapers – including The Chicago Tribune and The Los Angeles Times – would soon be returned to higher readership, higher ad rates and greater profits. Now, Tribune Company is preparing for bankruptcy (read article here.)
Sam Zell did a horrible job of scenario planning. He didn't look into the future and develop scenarios about what was likely to happen in news. Instead, he simply assumed that readers would return if he made a few format and editorial changes, the economy would strengthen and he could depend on advertisers returning as well. He expected a fast, big payback for his investment. Just like he'd done in real estate all those years.
Sam Zell had a very Locked-in Success Formula. He had spent a lifetime buying property, usually properties already in locations demanded. All he had to do was fix up the property and let growing demand for the scarce resource – his building in a demanded location – drive up the value. He didn't stick around to make money off rent. He didn't run a business that made a product and sold it. He bought properties, dressed them up and sold them at a profit. To him, Tribune Company was a property that was being ignored. All he had to do was fix it up a bit, wait a bit, and sell it to someone for more than he paid.
Oops. That Success Formula doesn't work when customers are walking away from the property to pursue a better one. News seekers in droves are going to the internet for their news. They no longer want to browse a newspaper – understanding that takes time, and it gives only a single source. The internet gives them fast answers to their queries from multiple sources. And advertisers are going where the readers are going – to the internet as well. The cost for a printed medium is high, and the results are hard to prove. Whereas internet ads can be tracked for number of page views, number of click-throughs and even sales. The readers are more, and the follow-up is superior. Advertisers have found it easy to forget about newspaper ads, especially in a soft marketplace.
Meanwhile, the Tribune Company Success Formula was firmly stuck in the 1990s. From sales people to editors, denial about shifting reader needs was everywhere. Even though each news company – from newspaper to radio and TV – had great access to reporters and first touch at many news stories, they did not realize that readers were looking for that news on the web first. Each newspaper and station was Locked-in to pushing the news through its format, ignoring the enormous audience opportunity they had in their local markets by using cross-media approaches, including the web. There was no one approaching customers with multi-format advertising opportunities. Nor was the company investing heavily into web sites or portals that could attract large numbers of on-line readers. The on-line environments were under-invested, and selling ads was completely fractured. There was limited, at best, sales efforts to get advertisers onto the weak websites running news from each individual business unit.
What Tribune Company needed was not only scenario planning that identified the range of opportunities for ad sales – but a sincerely intense analysis of on-line competitors. Instead of bragging that the company had leading newspapers in major cities, the leadership should have recognized its fast declining share of total news coverage – due to shifts in how people acquire their news. By focusing internally, cutting costs and trying techniques like new formats, Sam Zell missed the opportunity to really study competitors and figure out how to transform Tribune into a competitive news company – like, say, News Corp.
And while he was busy firing people and making changes on the periphery, Sam Zell was unwilling to really Disrupt Tribune Corporation. He didn't change the business model – the Success Formula. He whacked the chicken coop, scaring employees, readers and advertisers alike as he talked about firing people until he made money. But he never caused his leadership team to really stop and talk about the future of news. They were too busy looking for people to lay off or protecting their own jobs — while Sam was trying to find buyers for the Cubs, Wrigley Field and the Tribune Tower as a potential condo project.
And Sam's Success Formula had no space for White Space. Sam didn't see any reason to try new things – like having salespeople sell internet ads as well as print ads. Or trying to drive traffic to the Tribune or L.A. Times web sites. As a property "flipper" extra-ordinary, Mr. Zell was not interested in developing a new business model. So none was developed – nor any energy spent trying to create one.
Now, America's second and third largest cities are at risk of losing their primary local newspapers. The suppliers are seeing their customer shrink, and possibly their accounts receivable jeopardized. Advertisers are wondering how they reach their local customers. And employees are looking for new jobs. Meanwhile, citizens are wondering who will be out interviewing the mayors, governors and congresspeople of their fine states. Who will be supplying the news?
The cost to Sam Zell Defending & Extending both his Success Formula and that at Tribune Company is enormous. The bond holders – most certainly pension funds and bond mutual funds - will take a horrible hit. The employees and employees of suppliers pay as well. And the citizens, dependent upon a robust news community will also suffer. It's too bad Mr. Zell didn't talk less, and listen more – implementing White Space to make a leading news company that would impress his customers across the U.S.A. I guess he'll have a lot of time to read Mr. Murdoch's newspapers (like the Wall Street Journal), watch Mr. Murdoch's Fox television stations and look at Fox's web site (have a MySpace page yet Sam?) after Mr. Zell's equity value gets wiped out in bankruptcy. Surely the creditors will ask for a new leader – who faces a much more difficult challenge now that the resources have been gutted by Mr. Zell.
by Adam Hartung | Dec 4, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Innovation, Leadership
Well the heads of GM, Ford and Chrysler are back in Washington asking Congress for cash. According to Senator Dodd it's a sure thing they'll get it (read article here). And accordinto the the Government Accountability Office even if Congress doesn't approve bailout money, Treasury or the Federal Reserve can provide assistance from the TARP fund (read article here). So, it looks like something will happen.
This time the auto companies are saying they intend to "reinvent" themselves with the money. Uh-huh. And exactly who's going to lead this re-invention? Why the same leaders that got into this problem. Now, do we believe that? A lot of people in Congress have their doubts – seeing as how the bankers didn't seem to change much after being told they would get bailed out. So these Congressional folks are saying they want the auto leaders to report back on their plans to change – and of course GM's head said he'd be happy for the oversight. "It would be very helpful for us, whether it's a board or an individual, to have someone to work with on this, to submit our proposals and then for that person to say,'OK, don't agree with that. You've got to change this," said GM CEO Richard Wagoner. (Read quote and more here.)
So Senator Dodd and Speaker Pelosi – for the good of America – I volunteer for the job. I'll review GM, Ford and Chrysler's plans for innovation and report back on the likelihood of them revitalizing the industry. Now that I've put that on the table – I'll just wait for your phone call or email – you can reach me right here through this blog if you like (see the "contact me" area).
Oh, you don't think I'm the guy Mr. Wagoner had in mind? Why not? Do you suppose he was looking for some "industry guru" who is already sympathetic to his claims that the problems are not of management's making – but rather due to economic circumstantces? Do you think Mr. Wagoner prefers someone who is more traditional, on corporate boards that have been agreeable to CEOs for years – accepting of their tough jobs and approving their extreme paychecks? Do you suppose he doesn't want somebody who has expertise in innovation at all, but rather someone who wants to slowly seek change via one small, incremental step at a time, because that's the way big companies do things? Perhaps someone with government experience, used to the pace of change in government agencies? Or perhaps a lawyer who will be sure all actions are within current legal boundaries – whether they actually create benefit or not?
I do think GM and Ford can be saved. But I don't think current management will do it. They are so Locked-in, so used to the "boundaries" of convention, that there is no way they can create companies competitive with Honda, Toyota and Kia. The first thing any oversight agency should do is change the leadership teams, attack the industry Lock-ins and establish White Space to build a new company. Maybe look at Tessla – the electric car company auto execs love to laugh at — but that hasn't asked for any money from Congress as it's built its sold-out sports car using laptop batteries – for some new management. Or ask John DeLorean to quit dealing drugs long enough give up a few ideas (Ok, that is going to far). But surely, with all those talented graduates at the University of Michigan and Northwestern there has to be some people ready to actually do things differently.
GM needs more than oversight. It needs change. Big change. Let's hope Congress takes Mr. Wagoner's words to heart and finds somebody who knows something about innovation to watch over the billions they give these companies.
by Adam Hartung | Dec 3, 2008 | Uncategorized
For years I was a Merrill Lynch client. Largely because one of my high school buddies became a broker there when he graduated from college. When I finally had a few bucks to invest, I called my friend and became his client. In the 1980s, this was a sensible way to do business – and Merrill Lynch's fees were largely the same as everyone else because both the stock exchange and the SEC set client fees.
But, Charles Schwab started change in the brokerage business by launching a "discount broker" after the exchange and SEC deregulated rates. At the time, I told my friend that I was likely to switch. His response was to use a program offered at Merrill to lower his fees to match Schwab. Although this was fine for me, I pointed to him that it sounded like Merrill was ignoring the real impact of competition shifts.
Some years later, eTrade came along lowering fees for retail brokerage customers even more. Again I told my broker it looked like time I should move on. And again, he and Merrill lowered his fees and offered me on-line access to my account as well as research. I stayed with Merrill, but pointed out that it seemed like Merrill wasn't really addressing competition.
Every year, for more than 20 years, there have been changes happening in brokerage. And every year I talked to my friend about whether it made sense for him to keep doing business as usual. Every year he assured me that Merrill Lynch knew what it was doing, and he was comfortable staying at Merrill. As brokers failed or retired, he would "Buy their book" – meaning he would buy their list of names and accounts from them and then work to keep those clients at Merrill and with him. By doing this, he was able to Defend & Extend his commissions even while Merrill had its struggles. He even laughed to me about all the turnover at the district manager level (above him) and how every year fewer and fewer new brokers were able to survive. I would point out to him that perhaps he was taking a risk by remaining Locked-in to Merrill – but he said he was comfortable and had faith in a company as big as Merrill Lynch. "Merrill will never go away, so why should I" he would say.
Now, I'm no longer a client at Merrill Lynch. Guys like me weren't in their "sweet spot." Services kept being reduced, and fees went up. Merrill Lynch isn't even Merrill any more. Soon it's to become a division of Bank of America – if investors agree to the price. And my high school buddy? Well, his bonus is evaporating (read article here). His retirement, almost totally invested in Merrill stock, has seen dramatic reduction – and could go down even more. And he has developed no skills to do anything else. Nor does he understand the changes in financial services so he can position himself for his next position. He's hoping to keep hanging on – even as his benefits, pension, bonus and pay drop like the proverbial stone.
Merrill never escaped the Lock-in created years before deregulation. Merrill never came to grips with significant changes like discount brokerage, or on-line brokers. Worse, it ignored the growth of new competitors like independent financial advisors, and the explosion in broker services and competitive products offered via insurance agents and commercial bankers. Looking year-to-year, Merrill kept pushing brokers to find more clients, bigger clients and sell. And it ignored the aging of its clients, as well as the aging of its brokers. It ignored the fact that it was increasingly dependent upon fewer brokers with fewer accounts that were all at great competitive risk. Merrill was a sitting duck for competitors, that could compare rates and services against the old giant that kept looking weaker and more out of touch with retail clients.
And my buddy never addressed his personal Lock-in. He kept finding ways to stay at Merrill, and ignored the signs around him that Merrill was becoming a riskier place to work. He kept not only his job, but his pension tied to the company as he reinforced the value of his loyalty. But, in the end, he's now in a world of hurt. Even if he survives into some job at B of A, his income and pension are shredded. He could have seen it coming – but he preferred to remain Locked-in rather than look into the future and really discuss competition. And he never allowed any White Space in his life to consider doing anything other than work for Merrill Lynch.
We can laugh at Lock-in when we see it cause other companies to do foolish things. But when we work for a Locked-in company, we risk our future as well as its. As employees, we have to bring up issues to management above us - cause them to focus on the future and how things are likely to be different rather than merely an extension of the past. We owe it to bring our employers information about competitors – especially when our customers are pointing out changes on the horizon. And we should be willing to discuss how we could change things – how we can accept the need for Disruptions so we can open up to new opportunities. And we need to keep White Space in our lives so we are prepared to help our employers. But, in the end, if our employer remains Locked-in to D&E tactics we owe it to ourselves to prepare for market shifts by looking for other ways and places to be employed. When Lock-in hits home it can be exremely painful.
