by Adam Hartung | Nov 11, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Starbucks (see chart here)announced earnings – well sort of (read article here). Accounting rules are the only thing determining whether Starbucks had earnings or losses. Let's say the company broke even – because we don't know for sure given the financial machinations. Starbucks was on a growth tear for a decade, and became a brand synonymous with upward mobility. Company value is now down 75% in just 2 years. Revenues are down, and projected to continue declining into 2010. Earnings have evaporated and company leaders say the only way to create them in the future is continued draconian cost cutting. Company management would like to lay blame for these horrid results on the crappy economy. But is that why Starbucks has taken this fall?
Management has to take responsibility for these results – and it's the leadership in place now. Starbucks was a model of growth. While the company was expanding its shops the previous CEO looked into the future and developed a series of new businesses to augment the original business:
- He started adding food – both cold and hot – to increase sales within the stores
- He pushed Starbucks into food service (United Airlines, among others)
- He pushed Starbucks into grocery stores with prepacked beans
- He pushed Starbucks into liquor stores
- He began promoting CD sales and exploring MP3 distribution
- He produced music – including the #1 CD in 2005 (Ray Charles Greatest Hits)
- He began producing movies (Akeelah and the Bee)
- He opened an agency for artists (signing Paul McCartney of Beetle's fame)
These actions all opened White Space for expanding Starbucks when, inevitably, either stores reached saturation or the growing lust for coffee and tea declined. But he was replaced by Howard Schulz, considered the founding CEO by most. Schulz demonstrated true "hedgehog" behavior (to coin a term used by Jim Collins in "Good to Great") by rapidly exiting of most of these businesses. Mr. Schulz felt Starbucks should concentrate on its "roots" – on coffee. His approach to improving Starbucks was to "focus" on what used to work. And to cut costs until profits met his goal.
But now we can see the disastrous results of his strategy. Stores are closing, and revenues in open stores are going down causing total revenues to decline. And revenues are falling faster than costs, evaporating profits. Where Starbucks was once a model employer, he is cutting benefits to employees and shows little (if any) interest in the famous barrista experimentation that led to innovations like "Frappucino" which helped add billions to total revenue. In just a very few months Starbucks has gone from a company willing to Disrupt its Success Formula and use White Space to grow – into a company exclusively trying to Defend & Extend a strategy from 15 years ago.
But in the last 15 years, the marketplace has shifted dramatically. Quality coffee, including specialties like espresso and latte not formerly common in America, have become commonplace as competitors from Caribou Coffee to Panera Bread, Dunkin Donuts and McDonalds have entered the business. Prices for good coffee have declined, and customers now have other places they can mingle, network or sit and read besides Starbucks. And increasingly you can obtain a good coffee right where you eat breakfast, lunch or dinner. The need to pay a "Starbucks premium" has evaporated – like Starbucks' profits. The new CEO, by following the Jim Collins approach, has ignored the dramatic market shifts which make Starbucks coffee shops a far less profitable business than they were just 5 years ago. He's more likely to end up like Circuit City than the growth company Starbucks used to be.
As mentioned before in this blog, research for "Create Marketplace Disruption" disclosed that only 7% of the time do companies that hit a growth stall ever grow again at 2% or higher. Why such dismal performance? Because the growth stall shows management has missed important market shifts! Focusing internally on profit improvement – especially with cost cutting or "back to basics" actions – only allows competitors to keep improving their position while the former leader retrenches. While the competitors are charging forward, the hedgehog company is burrowing into the dirt, allowing himself to get run over.
Markets never run in reverse. Once someone develops a winning Success Formula competitors emerge. They copy the leader down to the detail, and even come up with their own advantages (including lower price.) Some develop a better solution. And when market shift happens, the leader finds profits decline. To maintain revenue and profit growth requires leaders use White Space to explore new businesses that can evolve and enhance the Success Formula. That was the road Starbucks was on. Until Mr. Schultz took over the reigns. And now, his "Collins-esque" approach to business is driving Starbucks right into the ground(s).
by Adam Hartung | Nov 10, 2008 | Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in
What a day this Monday is turning out to be. Circuit City files for Chapter 11 (read Reuters article here, and Marketwatch article here). Sirius radio looks like it will follow soon (read article here). And Deutsche Bank analysts are predicting GM will end up wiping out shareholders through either bankruptcy or a government bailout that will eliminate the equity (read article here). GM was trying to find a solution by merging with Chrysler, but that deal's now dead leaving Ford at risk of failure, and Chrysler in need of a partner if it is to survive (read Financial Times article here). Who's pulling the rug out from all these stalwarts of American capitalism?
Let's not forget that Circuit City was the statistically best performing company in Jim Collins' wildly popular book "Good to Great". How could a company that was considered a model for all leaders to follow decline so far, so fast? Is it worth considering that the management approach the author recommends possibly might not be as effective as promised? Mr. Collins' recommends companies figure out their approach to the market, then get everyone committed to that approach. After that, his recommendation is to leave ego at the door, and execute, execute, execute against the approach and its metrics. Those who work hard, and sacrifice, he predicts will win. So, should we conclude that Circuit City changed after he wrote his book? Did management become vainglorious? Did leaders, managers and employees lose commitment to the market approach? Did everyone quit working hard, quit sacrificing? Is that the problem in all these companies? Egotistical management lacking committed and hard working employees willing to sacrifice?
My research into hundreds of companies for "Create Marketplace Disruption" concluded just the opposite. In most instances of troubled companies, management was extremely dedicated and hard working. Examples of sacrifice were everywhere, as employees dropped bonuses and accepted pay and benefit cuts. Vendors took longer terms and lower prices while carrying inventory for their troubled customers. Customers remained loyal often right up to the point of failure. In reality, there was just as much commitment and sacrifice, hard work and effort in those that failed as those that succeeded. As Mr. Rosenzweig concludes in "The Halo Effect" these characteristics do not explain performance of winners as distinctive from losers. So, what is it?
Following best practices can oftentimes be as harmful as anything else. Companies that get into trouble consistently demonstrated commitment to Defend & Extend management, even after market shifts rendered D&E management unable to improve results. Continuing to optimize, to do more while trying to be faster and better and cutting costs in efforts to be cheaper simply did not turn the corner on performance. For example, just today a leading marketing web site is recommending that companies need to implement only tactics that are designed to optimize the existing brand and its performance while eschewing innovation (read article here). Innovation is costly and risky, they presume, so investing in wht you know is the only way to go. That same journal pointed out that all the American auto companies were focusing on cost cuts in an effort to save themselves (read article here) - when we all know the biggest problem these companies face are autos which aren't competitive with foreign products which have equal or higher quality at better pricing and often considerable advantages in fuel economy, longevity, cost of ownership and performance.
When management focuses internally, bad things happen. Focusing on how to operate better presumes there will be no market changes which alter competitiveness. The reality is that most companies falter because they miss market shifts – and the shifts cause competitors to become relatively more attractive. If management keeps trying to do what it used to do better, it misses market changes and keeps falling farther and farther behind. Simple product enhancements (product variations or simple derivatives), early cost cuts, and other short-term actions give a false sense of betterment leading to complacency – as competitors keep gaining share due to better relative market position.
The retail marketplace started shifting powerfully in the late 1990s as internet retailers changed the costs and processes for customers. Circuit City ignored these market trends far too long. The auto industry has been shifting ever since offshore competitors started gaining share in the 1980s. But the "Big 3", their employees and their vendors ignored these trends for too long. Even as offshore competitors opened facilities in America, the changed competitive marketplace was ignored as GM, Ford and Chrysler tried doing more of what they'd always done. In the end, who pulls the rug on these companies? It's the competition.
Competitors who link their Success Formula to changing markets use scenario planning to keep abreast of necessary changes and obsess about all competitors to learn what they can do to remain in front with customers. These winning competitors don't Defend & Extend some plan management creates, but instead use Disruptions to keep themselves adaptable to changing markets, and use White Space to constantly test new solutions which can keep them advantaged. The losers are the ones who keep trying to do more, better, faster, cheaper with their old Success Formula, and fall behind competitors who ignore the siren's call of optimization, focus, productivity and sacrifice in favor of adaptability and leading market trends.
by Adam Hartung | Nov 6, 2008 | In the Rapids, In the Swamp, In the Whirlpool, Leadership
Companies get into trouble when they stop developing scenarios and plan to succeed by merely Defending & Extending what they’ve always done. In the last few weeks we saw Bear Stearns and Lehman Brothers disappear because they did not prepare for market shifts. Merrill Lynch almost followed them, and may still if Bank of America (chart here) decides to change the name (now that Merrill is becoming a wholly owned subsidiary of BofA).
Companies get into trouble when they stop developing scenarios and plan to succeed by merely Defending & Extending what they’ve always done. In the last few weeks we saw Bear Stearns and Lehman Brothers disappear because they did not prepare for market shifts. Merrill Lynch almost followed them, and may still if Bank of America (chart here) decides to change the name (now that Merrill is becoming a wholly owned subsidiary of BofA). Another example popped up today when we learned the Las Vegas Sands (chart here) is on the brink of failure (read article here). As Sands management ran up the debt, it failed to consider scenarios which could have caused people to not gamble – like a recession! When you aren’t looking at the range of possible shifts, it’s easy to be blindsided. In the last year, the Sands stock price has declined from $120/share to $8. That’s an amazing $40billion loss of value! And all because it forgot to plan for market shifts.
On the other hand, let’s look at Apple (see chart here). Apple is highly dependent upon computer chips for all its devices, from the Mac to the iPhone. Originally the company was built on microprocessors from Motorola. But that changed years ago as the company adopted chips from IBM. Now Apple is using chips from Intel. In its phone products, Apple once used IBM chips but now licenses its chips designs from ARM holdings and modifies them for its own use. And recently Apple hired the former IBM chip head to a new position managing device hardware engineering (read article here).
Wow, Apple looks to be all over the board. Some accuse Apple of being a lousy partner with is chip suppliers. Or accuse CEO Jobs of being a control freak who is trying to get into the chip business. But think again:
- Apple is highly dependent on chips. If they guess wrong on the chips, and over-commit, they could end up suddenly behind competitors and in big trouble.
- How is Apple to know if its vendors will remain on top of the technology curve? If the partner slips, Apple could slip with it.
- Competitors are all around Apple with new products, including Google with its new phone and Motorola with its new commitment to the same software Google is using. They are trying different technology solutions with the hope of eclipsing Apple.
What we see is Apple looking forward, and seeing a range of potential scenarios. Any of these vendors could be dominant, or could be a flop. Additionally, Apple itself has some ideas about what could create market leading product that might eclipse the vendors. What we see is a company that is keeping its options open. Apple is using scenario planning to identify a range of potential outcomes, and it is trying its best to keep itself positioned to win regardless of which outcome occurs. It is obsessing about competitors, and keeping itself flexible to move quickly with market shifts should a competitor take an action which could jump it into the lead.
Making big bets is NOT the job of management. That’s a fool’s folley. Good leaders use scenario planning to identify a wide range of options, and work hard to keep their options open to win regardless of which scenario develops. You have to marvel at how clever CEO Steve Jobs is to position Apple for future success, and how good it is for investors that he would add someone to his top staff who can help keep all options open. This is a very good sign for Apple investors, employees and customers that Apple will remain a strong, viable competitor into the future – even as the shifts of technology threaten to whipsaw the market.
by Adam Hartung | Nov 5, 2008 | Disruptions, Leadership
Now that Senator Obama is the U.S. President-elect, everyone has recommendations for what he needs to do (read sample on Marketwatch here). What we know from the campaign is that as President he has promised change. Listening to him speak, you could imagine a lot of change.
Do you recall any Presidential campaign where the candidate didn't promise change? It has certainly been a common call during the modern era. Yet, election after election we hear the repeated refrain about how "those in Washington" are bad, and the candidate will provide change. As the decades have passed, it appears that "Washington" (whatever that means) has been more resilient than the candidates have been change agents. In some ways this is similar to outside CEOs that join organizations promising change, yet they get chewed up by the machinations of their new employer and find themselves without a job when the Board decides it must replace them. Few "change" CEOs actually pull it off – and one would think changing a company is easier than changing the U.S. government. So does that mean we should not expect change from an Obama presidency?
The federal government is pretty well Locked-in. Not only does it have the behavioral Lock-ins of a large bureaucracy, but it creates laws when designing its structure and decision-making processes. It is substantially harder to change the software used in a federal agency than it is in a corporation, for example. Or even a supplier. The rules, the laws, create Lock-ins which keep the government operating pretty consistently – despite who's in the Presidency or Congress. For any President to make a change, that person has to find a way to Disrupt selected Lock-ins and open up some White Space to do new things. That is possible, and we've seen some Presidents use the tools very effectively.
For example, John Kennedy shocked everyone by undertaking an enormous Disruption when blockading Cuba (read about blockade here). People clearly saw this was a change in "business as usual." Then he threatened to nationalize the steel industry if the executives didn't make concessions to striking union workers – a threat previously almost carried out by President Truman. These actions were deliberate in their intent to change how people thought about the decision-making of his administration. He wanted people to thinking differently about what could be done during his presidency. Then, to develop new technology solutions via innovation he created the "man on the moon" project. He exploited NASA's extra-ordinarily wide charter (wide permission – read here) to spend money on new technologies — which just happened to have quite a few applications in defense.
More recently, Ronald Reagan entered the presidency promising significant change. But he took on the job in a very weak economy with incredibly high interest rates. Spending on "entitlement" programs (like welfare and social security) were skyrocketing with inflation, while "real" program expenditures like defense and roads were declining. President Reagan needed a Disruption, and he found one when he fired the striking air traffic controllers. No one ever believed he would fire them all. But he did. And he did not waiver. No one who had any doubts things were going to be different after that action. (Read about the PATCO firings here.)
President Reagan didn't try to "fix" what he perceived as a broken system of unions holding up employers for better benefits and cost of living pay hikes – he simply fired all the controllers and made it clear unions would have far less voice. He intended to fight them. This dramatic event opened the door for people to start thinking about new solutions – ones that had never been tried. And in short order President Reagan pushed through the largest personal tax cut in the history of the country. He took the entire Office of Management and Budget into White Space by forcing them to explore whether the "Laffer Curve" (read about Laffer Curve theory here) would work and whether tax receipts could increase due to a better economy under lower taxes.
For Mr. Obama to provide significant change in his presidency he must find and implement a Disruption. He must identify a Lock-in (lower defense spending was Kennedy's, and the power of union's was Reagan's) and attack it. He must not waiver in his commitment to the Disruption in order to establish that there is another way to get things done. And then he must create White Space in which he can explore new solutions.
Disruptions and White Space are much tougher to create in the federal government than they are a corporation. The President must weave between complex laws – and even tightrope whether proposed actions are legal. Sometimes taking actions that are at risk of failing a potential review. And White Space is hard to find because who wants to give the new President permission and resources to experiment? But that is what Mr. Obama must do if he really is hoping to "change how things get done in Washington."
by Adam Hartung | Nov 4, 2008 | Defend & Extend, General, In the Whirlpool, Leadership
In 2004 Motorola (see chart here) was about to take off. It's radio business was continuing to grow as it launched into digital products. And its handheld cellular business was about to go nuts with the launch of a new product called Razr. A new CEO was focusing the company on the future, obsessing about competitors that were launching new products, Disrupting everything from the new product launch process to free corporate lunches and opening White Space all over to get growth going. And it worked.
But then, almost as fast as it grew, Motorola went south. Instead of continuing the new approach, Ed Zander, the CEO, became overwhelmed by a 2-pronged set of concerns. Carl Icahn started buying shares and asking to oust the CEO so he could (somehow) start cutting costs. Instead of taking on Mr. Icahn by demonstrating how his results were headed the right direction while Mr. Icahn was clueless when it comes to high-tech, Mr. Zander began cost cutting to appease Mr. Icahn. Secondly, Mr. Zander stopped pushing the scenario building, competitor obsession, Disruptions and White Space. Instead, he reacted to employee uneasiness by turning immediately to a Defend & Extend strategy, Locked-in on the Razr. New products dried up as the company just pushed harder and harder on Razr sales. The company quickly began operating as it had 8 years earlier when it slid into disarray, lousy returns and massive layoffs as the future grew murky.
Now Motorola is trying to define a new future. The plan is to split the company into 2 parts. Radio and cellular. But the problem is that the biggest, cellular, is in deeply difficult territory. Sales are down, new product launches are few and profits are gone. So the Board hired a new CEO for that business – the former Chief Operating Officer at Qualcomm. And now Crain's Chicago Business reports he's issued an internal memo with his plan (read article here). So can we expect a turnaround?
His plan involves changing his top reports. And he's cutting a line of new products being launched to save cash and "better position products for the future." He's narrowing the technology line-up toward those he believes are the most likely winners. And he's reorganizing along geographic lines. So do you think this will "fix" Moto?
There are reasons to be concerned:
- Products are being stopped from market review. In the end, White Space has demonstrated that the marketplace is much better at selecting winners than executives are. It was "getting Razr out the door" that got Moto going again – an historical problem at Motorola that loves to over-engineer everything and has been slow to new products letting competitors chew them up.
- The company is narrowing its technology use. History has shown that technology shifts can happen fast in high tech, and those companies that avoid the bets by playing the widest technology tend to make the most money the longest. Making technology bets is a quick way to turn a large fortune into a small one – and Moto doesn't have much fortune left.
- There is no Disruption in what he's doing. Changes in employees at the top, and reorganizing along traditional lines, does not attack the behavioral or structural Lock-ins. Without an attack on existing Lock-ins the organization will not do anything new. Organizations like to Defend & Extend what they've always done. Given that there's no Disruption planned, why would we believe the organization will be more productive?
- No White Space. The opposite could be implied, with the decision to stop a new product launch and to narrow the technology use. It's up to the leadership to be right, to guess the future of technologies and customer needs as well as the design of new products. Instead of White Space to develop a new Success Formula to which the company can migrate, this is an effort to have the CEO be brilliant and lead the organization into better results. Unfortunately, this approach almost always fails as Lock-in inhibits transition and the difficulties of being prescient become obvious.
I'd love to see Moto come back. But with the approach as relayed by the Chicago journalists, it appears unlikely. Perhaps a few big investors with private equity will think that a "streamlined" and "focused" Moto will be a better bet. But the fact is that only the market will decide if Moto is a good operation. And that will require having new products and services that meet changed market needs. Moto operates in a hotly competitive marketplace. It doesn't have the luxury of dictating what will work and what won't. Competitors will have more to say about its success than management will. And this approach is weak on scenario development – and absent on talking about competitors. Without Disruption and White Space, how can we expect the company to be effectively market reactive? Doesn't look good for shareholders, employees, suppliers or customers.
by Adam Hartung | Nov 3, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
Circuit City (see chart here) has announced it will close another 155 stores (see article here). Here, right before the big holiday buying season, Circuit City is contracting drastically. The company is almost out of cash, and is running into problems obtaining inventory. And with the likely demise of the company soon, it's unclear how many customers will buy from Circuit City when they can't take back items that break after the retailer is gone.
What makes this story somewhat remarkable is that Circuit City was one of the 11 companies Jim Collins profiled in "Good to Great." Not only was it one of what were considered the best 11 corporate performers in the world – it's turnaround to greatness score was the absolute highest of all the companies profiled, more than twice as high as the next best performer, and more than 3 times higher than the average "Good to Great" company. Jim is considered a management guru, who receives around $100,000 every time he gives a speech to corporate clients. "Good to Great" has been considered a corporate bible by many CEOs and other executives who have taken the stories from Mr. Collins to heart and decided his approach is the best way to great success. So to have Circuit City severely falter, and most likely fail, after only a handful of years since Mr. Collins published his book is an event worth spending some time discussing.
Despite Mr. Collins' great wealth accumulation and speaking success, he is not without detractors. Many academics have questioned the validity of his research. And in "The Halo Effect" professor Rosenzweig of Switzerland's top business school casts Mr. Collins as a fraud. Unfortunately for Mr. Collins, a review of the performance of his 11 "Great" companies demonstrates their performance since publishing the book is – at best – average. When one fails, perhaps it's worth spending some time reconsidering Mr. Collins' recommendations.
What appears true is that companies Mr. Collins likes end up in growth markets. Then, they pursue very targeted strategies which Mr. Collins recommends you not alter much nor even challenge. Mr. Collins ascribes business success in these companies, as he does in his first book about start-ups that get big ("Built to Last"), largely to dogged determination and sacrifice. He proselityzes that success is the result of hard work, dedication, and focus. And, from all appearances, once a company is into the Rapids of Growth, such actions to reinforce the Success Formula are helpful for the early leader to grow. For those who turnaround, much of their success can be ascribed to getting into a growth market and then simply doing what got them there.
But the problem with Mr. Collins' "Great" companies occurs when they lose their growth. In most cases, exactly as it happened with Circuit City, competitors figure out the Success Formula and they copy it. Additionally, lacking the significant Success Formula Lock-ins (behavioral and structural) which Mr. Collins loves and become part of the "Great" companies, new competitors more quickly implement new ways of competing which the "Great"companies ignore. In Circuit City's case, this was obvious in spades as Circuit City ignored on-line competitors which have lower cost, faster inventory turns, wider selection and lower price than traditional brick-and-mortar stores.
As a result, even Collins's "Great" companies end up falling out of the Rapids. Quickly they move into the back half of the life cycle, mired in the Swamp. Without the current of growth, which pushed them in the Rapids toward profitability, they are consumed fighting competitors. But, doing "more, better, faster, cheaper" of what they've always done simply does not make them more profitable. Competitors create market shifts which require changes in the Success Formula to continue thriving. But, with "everyone on the bus" (a favorite phrase of Mr. Collins) no one knows how to do anything new, and there's no place to try anything new. Quickly, results continue faltering and the company is sucked into the Whirlpool of failure – a prediction being made by Marketwatch.com when labeling today's Circuit City article "Circuit City Circling the Drain." Of course, it's hard to argue with Marketwatch's editors when the company value has declined from over 30 dallars per share to 30 cents per share in about 2 years!
Phoenix companies avoid this sort of fall by overcoming their Lock-ins. Something Mr. Collins never discusses. Yes, these Lock-ins help them grow during the Rapids. But all markets eventually shift. The Rapids disappear due to competitive changes. To succeed long-term companies have to Disrupt their Success Formulas by attacking Lock-in BEFORE they find themselves in the Whirlpool. And they implement White Space where they can test and develop a new Success Formula toward which the company can migrate for long-term success. Winning long-term requires more than a single turnaround into a growth market and then slavish willingness to do only one thing. Instead, it requires figuring out likely market changes with extensive scenario planning, being obsessive about competitors in order to identify new competitive changes. And then Disrupting and using White Space to constantly be reborn.
by Adam Hartung | Oct 31, 2008 | Disruptions, General, Leadership
Even in the midst of the recent financial crisis, you probably also noticed that the price of oil has dropped. In fact, it's had a record-setting drop (read article here). It was just in July that oil peaked at $147/barrel. Now it's trading around $60-70/barrel. I'm sure you've noticed the benefit if you're a U.S. driver, as the gasoline pump price has dropped from over $4/gallon to under $3/gallon.
A lot of people simply breathed a sigh of relief. "Well, that's one problem I can now forget about" an executive recently said to me. I was disappointed to hear him say that. Because how does he know oil won't go back up to $150? Or drop to $25? Regardless, doesn't it have implications on how competitors in your business behave? On who wins and who loses? Things certainly haven't "returned to normal." The signs are all around us that there have been substantial changes in how companies manufacture, procure IT services and finance their business. Just because the price of oil went from $25 to $150 to $65 dollars doesn't mean things are "back to normal."
Scenario planning is really important to developing competitive strategy. Most people spend a lot of energy to achieve high precision understanding their historical sales, customers, technology comparisons, price comparisons and share. But they put very little energy on creating potential scenarios about the future. When they do look forward, the tendency is to seek the same sort of precision. As a result, too few scenarios are developed and they end up being based on data people feel are "highly predictable." The scenarios that are important are the ones where unlikely events and outcomes occur. They create opportunities for changes in competitive position.
Scenario planning should start with "big themes." Once you explore that theme, however, the objective is not to develop your "best guess." Instead, the objective is to cast a wide net and explore, in detail, what the world will look like given that scenario. How would thing change given the expectation? How will that help, or hurt your ocmpetitiveness. Who will be the big winner? The big loser? Create a robust description of that scenario – what are the implications – not the likelihood of it happening.
Over the last year the price of energy was one such big theme which interested a lot of people. But most people only explored one scenario – what if oil prices went to $200 or $250? Interesting, but not sufficient. Yes, that scenario is well worth investigating in great detail. But, it's also important to investigate other options – like oil at $150, or $100 or $65 or $35. All of those have different implications. What's important in scenario planning is to investigate them all. To understand how each would impact competition and individual competitors. So your SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis can be done for the future – not just for today.
The other value from scenarios is identifying and understanding the triggers. By exploring the scenarios you start to understand what would make each of the outcomes more likely. Not so you can develop a probability distribution – which will lead you to the "average" or "most likely" outcome – and thus the least likely to make any difference and therefore the least interesting. You don't want to use scenarios to become a forecaster – because odds are you won't be very good at it. You want to recognize the implications of these scenarios, and then figure out how you can use that scenario to improve your competitive position. To upend competitors who did not do the scenario planning and thus aren't prepared. Then you can start tracking key variables, key metrics, in order to recognize when you need to prepare for one of the various outcomes. And if you've done a good job with your scenarios, be the competitor best prepared to take advantage of the changed circumstance to improve your position.
The only way you can be prepared is to have considered the scenarios, and developed some plans should that scenario happen. To be a long-term winner it's not enough just to be good in the current environment, you have to be prepared to succeed no matter what the environment. By developing scenarios, you can be prepared to take advantage of market shifts – and if your competitor isn't, you can gain market share and improve your returns.
We all are subject to letting current events drive our views of the future. Then we try to "stand back" and look at a long term trend and develop some sort of "average" point of view. But neither of these really help when markets shift. What's needed is a set of scenarios – such as oil at $25 or 50 or $100 or $150 or $250 or $300. Understanding how you can grow sales and profits in each makes you prepared, and greatly improves your long-term chances of growth. It's the only way to prepare for market shifts, and worth a lot more during turbulent changes, like we're seeing now, than the deepest analysis of what you've done the last year, 3 years or 5 years.
by Adam Hartung | Oct 30, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
The business press, whether print or on-line, is full of stories about lay-offs. Motorola (chart here) to cut another 3,000 jobs in its flailing handset business (article here). American Express (chart here) to cut 7,000 jobs (article here). Over the last few weeks, other announcements included 3,200 job cuts at Goldman Sachs (chart here), 5,000 at Whirlpool (chart here) and 1,000 at Yahoo! (chart here).
Given the regularity with which leaders have implemented layoffs since the 1980s, investors have come to expect these actions. Many see it as the necessary action of tough managers making sure their costs don't unnecessarily balloon. And political officials, as well as investors and employees, have started thinking that layoffs don't necessarily have much negative long-term meaning. People assume these are just short-term actions to save a quarterly P&L by a highly bonused CEO. The jobs will eventually come back.
Guess again.
Most layoffs indicate a serious problem with the company. Long gone are the days when layoffs meant people went home for a major plant retooling. Now, layoffs are a permanent end of the job. For the employer and the employee. Layoffs indicate the company is facing a market problem for which it has no fix. Without a fix, management is laying off people because the revenues are not intended to come back. Thus, the company is sliding into the Swamp – or possibly the Whirlpool – from which it is unlikely to ever again be a good place to work, a good place to supply as a vendor or a good place to invest for higher future cash flow. Layoffs are one of the clearest indicators of a company implementing Defend & Extend Management attempting to protect an outdated Success Formula. Future actions are likely to be asset sales, outsourcing functions, reduced marketing, advertising & R&D, changes in accounting to accelerate write-offs in hopes of boosting future profits — and overall weak performance.
Layoffs are closely connected with growth stalls. Growth stalls happen when year over year there are 2 successive quarters of lower revenues and/or profits, or 2 consecutive declines in revenues and/or profits. And, as I detail in my book, when this happens, 55% of companies will have future growth of -2% or worse. 38% will have no growth, bouncing between -2% and +2%. Only 7% will ever again consistently grow at 2% or more. That's right, only 7%.
When you hear about these layoffs, don't be fooled. These aren't clever managers with a keen eye for how to keep companies growing. Layoffs are the clearest indicator of a company in trouble. It's growth is stalled, and management has no plan to regain that growth. So it is retrenching. And when retrenching, it will consume its cash in poorly designed programs to Defend & Extend its outdated Success Formula leaving nothing for investors, employees or suppliers. The world becomes an ugly place for people working in companies unable to sustain growth. People try to find foxholes, and stay near them, to avoid being the next laid off as conditions continue deteriorating. Just look at what's happened to employment and cash flow at GM, Ford and Chrysler the last 40 years. Ever since Japanese competitors stalled their growth, "there's been no joy in Mudville."
Given how many companies are now pushing layoffs, and how many more are projecting them, this has to be very, very concerning for Americans. Clearly, many financial institutions, manufacturers, IT services and technology companies appear unlikely to survive. Meanwhile, we see wave after wave of new employees being brought on in companies located in China, India, South America and Eastern Europe. For every job lost in Detroit, Tata Motors is adding 2 in India. For every technologist out of work in silicon valley, Lenovo adds 2 in China. For every IT services person laid off at HP's EDS subsidiary, Infosys adds 2 in Bangalore. It's no wonder these companies don't regain growth, they are losing to competitors who are more effective at meeting customer needs. There really is no evidence these companies will start growing again – as long as they use layoffs and other D&E (Defend & Extend) actions to try propping up an old Success Formula.
Sure, times are tough. But why die a long, lingering death? Instead of layoffs, why not put these people to work in White Space projects designed to turn around the organization? Instead of trying to save their way to prosperity – an oxymoron – why not take action? In most of these companies, lack of scenario planning and competitor focus leaves them unprepared to rapidly adjust to these market changes. But worse, Lock-in and an unwillingness to Disrupt means management simply finds it easier to lay off people than even try doing new things. And that is unfortunate, because the historical record tells us that these companies will inevitably find themselves minimized in the market – and eventually gone. Just think about Polaroid, Montgomery Wards, Brach's Candy company, DEC, Wang, Lanier, Allegheny Coal, Bear Sterns and Lehman Brothers.
by Adam Hartung | Oct 29, 2008 | Uncategorized
The old story goes that once a there was a European village that was overrun by its mortal enemy. The enemy left without investigating one small area where all the blind people lived. Upon learning that their village was now gone, the remaining people found out that there had been a single survivor of the attack. He had lost one eye, and his vision was poor. Nonetheless, he was voted the new leader of the village. From this story comes the famous line, "In the land of the blind, the near-sighted one-eyed man is king." In other words, how good something looks has a lot to do with what it's being compared to.
That's about the only explanation for recent interest in Kraft (chart here), Procter & Gamble (chart here) and Kellogg's (chart here). About the only thing that makes these companies appear attractive is their equity values haven't been hammered like some other companies. But are these companies upon which we can expect growing revenues and profits that will generate more dividends for investors, more demand for suppliers and higher pay and more jobs for employees?
Investors have not shed these companies as fast as some others because the view has been that demand for their products is more recession-resistant. But one thing these companies have in common is limited growth. Kraft was recently placed on the Dow Jones Industrial average to replace AIG. Until recently, Kraft was a division of Altria (the old Phillip Morris cigarette company). As Kraft "repositioned" for spinning out it sold most of its growth businesses, including Altoids. The company refocused on its old-line businesses, like Velveeta, Oscar Meyer bologna, Ritz crackers and Kraft macaroni and cheese - none any kind of high-growth business and each with ample competition from other branded and store-branded products. Leadership planned to increase earnings by cutting costs in these old businesses. Now we hear profits are up! But that's because Kraft sold its Post cereal business, gathering another one-time asset sale gain. And the company keeps cutting heads (read article here). The company isn't bringing out new products, or developing new businesses. If the stock market wasn't crashing, who would care about Kraft's asset sales and headcount reductions as it tries to find profits without anything new.
P&G's profit is up 9%, but the company admitted sales growth will fall below forecast (read article here). Profits are up mostly because commodity prices have fallen. Its competition from store-brands is hurting sales, as competitive private label sales are up 8.4% this year. Kellogg's got on the Phoenix track with plenty of White Space under previous CEO Guitierez, but the current CEO has done nothing to maintain Disruptions and White Space. Sales are up 9%, but that's primarily due to raising prices driven by higher commodity costs. Frozen meal sales seem to benefit from people eating at home more – not any new products (read article here). That's not a long-term trend.
Are these companies poised for high growth? Well, do you see the companies doing extensive scenario planning to identify new business opportunities? Are they talking about fringe competitors that they are worried about, and need to address with new products?? Do you see them Disrupting their Lock-ins to historical products and markets? Attacking old sacred cows? Is there any discussion of White Space where they can develop new Success Formulas with more growth and higher rates of return? Or are these recent earnings announcements mostly discussions of how well they are trying to Defend & Extend the old Success Formulas in turbulent markets?
Before the bottom fell out of the stock market investors focused on growth opportunities. Now, with fear involved, they are looking for companies that appear less risky. If you want less risk, go buy bonds! Preferably government bonds! There is no such thing as a low-risk company. Doing more of the same, but at lower cost or charging higher prices, inevitably leads to competitive problems. There are no "defensive" companies because all companies are vulnerable to new competitors with new solutions that better meet customer needs. Those who like these consumer goods companies today are too narrow in their focus. They are ignoring other investment opportunities in companies outside the USA, or in other types of assets like bonds, tangible items like art, or commodities like gold. As U.S. equities have seen problems, short-term these consumer goods companies have had less equity problems. But that does not make them good investments. For high rates of return companies must be developing new Success Formulas that deal with current Challenges and allow for higher future rates of return.
You're not likely to come out a winner if you vote the one-eyed, short-sighted person (or company) king. Better to find another village.
by Adam Hartung | Oct 28, 2008 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lifecycle, Lock-in
Wal-Mart (see chart here) has not been doing badly the last couple of quarters. Of course, it hasn't done great either. And if we look back the last 8 years – well there's not been much to get excited about. Wal-Mart Locked-in on its low price Success Formula 40 years ago and hasn't swayed since. Today as incomes go down and fear is huge about jobs and investments people are looking for low prices so they are returning to Wal-Mart. But those sales aren't coming easily, because Target, Kohls and other retailers are battling to get recognized for value while simultaneously offering benefits consumers demonstrated they enjoyed before economy went kaput. It's not at all clear that the small uptick in sales at Wal-Mart is anything more than a short-term blip in a very flat environment for Wal-Mart.
It's unclear that there's much growth. This week Wal-Mart admitted it was finding fewer opportunities to open new stores as saturation of its low-price approach appears imminent in the USA (read article here). Instead of opening new stores capital expenditures are going to decline by 1/3, and dollars are being shifted to store remodeling rather than new store opening. This implies a far more defensive tactic set, reacting to inroads made by competitors, rather than an understanding of how to regain the growth Wal-Mart had in the previous decades.
So now Wal-Mart is saying it will turn investments toward emerging markets (read article here). Sure. Wal-Mart wrote off huge investments and exited failed efforts in Germany and France, It's efforts to expand in Canada and the U.K. have been marginal. In Japan it only avoided a huge write-off and failure by making an acquisition. And its China project has gone nowhere, despite much opening hoopla 5 years ago. So why should we expect them to do better with a second attack into China, possibly going into India and Mexico?
The Wal-Mart Success Formula worked in the USA and drove incredible growth, but it is unclear that shoppers in developing countries get much benefit from a strategy largely based on buying goods from low-cost underdeveloped countries and importing them to the USA for mass-market buyers in low-cost penny-pinching store environments. What's the benefit to Wal-Mart's approach in Mexico or India? In India and China customers must pay high duties on imported goods, and low-cost retail exchanges already exist across the country for domestic products. Additionally, lacking a robust infrastructure (meaning a big car and good roadway to carry home mass quantities of stuff bought in large containers) it's unclear that Wal-Mart's approach is even viable. If you have to carry goods home on a bicycle, why would you want to go to a big central store? Isn't buying regularly what you need better? Wal-Mart has made no case that it's Success Formula is at all viable outside the USA, and especially in emerging countries.
Compare the Wal-Mart approach to Google (see chart here). In the last year Google has moved beyond mere search into other high-growth businesses such as mobile telephones. And today Google announced it is going to legally offer books and other copyrighted material to customers in some ways unique – but competing with Amazon's e-book (Kindle) business (read article here). Google keeps entering new high-growth markets with new demands from new customers. And in each market Google enters with new products intended to be better than what's out there today.
Wal-Mart keeps trying to find a way to Defend & Extend its old, tired Success Formula. Wal-Mart is huge, but its growth has slowed. Competitors have entered all around it, and every year they are chipping away at Wal-Mart by offering different solutions to customers. The competitors are getting better and better at matching the old Wal-Mart advantages, while offering their own new advantages. And we can see Wal-Mart is now being defensive in its histiorical markets while naive in trying to export its old Success Formula to markets that don't show any need for it. Wal-Mart is mired in the Swamp, struggling to fight off competitors while its growth is disappearing and its returns are under attack. On the other hand, Google keeps throwing itself back into the Rapids of growth in new businesses that offer new revenues and increased profits. And it enters those markets with new solutions that have the opportunity of changing competition. Google doesn't have to have everything work right for it to find growth through its White Space projects and continue expanding its value for customers, suppliers, employees and investors.
