by Adam Hartung | Aug 27, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
The U.S. credit crisis has a lot of people very concerned about the economy. (Read LATimes article on the high stakes of this problem here.) As well it should. It was a credit crisis in the 1930s which created a rash of loan failures lead to bank failures, deflation and the worst economy in American history. While we keep being assured there will not be another Great Depression, there is still reason for serious concern. Three major financial institutions have failed in the last year (Countrywide, Bear Sterns and IndyMac), and one of the world’s leading economists has predicted the worst is yet to come with at least one additional major financial institution collapsing. So, isn’t it worth asking "how did we get into this mess?"
It wasn’t long ago the big controversy was about how much the heads of Freddie Mac and Fannie Mae were getting paid. The argument was whether these institutions were independent banks, or government agencies. After all, they were guaranteeing FHA and similar loans, so they were using government backing as they regulated the mortgage market as well as underwrote its activities. So the question was whether the leaders should be paid like regulators – say a Federal Reserve Board member – or like executives of an independent bank. As the mortgage markets ballooned these institutions were booking more and more paper profits, and the CEO pay had gone up dramatically. Many people were questioning whether this was appropriate.
Now we can see that both institutions were allowing ever riskier loans to be made by mortgage providers. And both are near insolvency. Equity holders have been nearly wiped out as Freddie Mac’s value has dropped from $70/share to under $5 (see chart here) and Fannie Mae has dropped from $80 to $6.50 (see chart here.) Privatizing these formerly government agencies hasn’t worked out too well for investors lately.
Freddie and Fannie didn’t have bad leaders, they just kept trying to make it possible for their primary customers – the banks and mortgage companies – to keep making more and larger loans. They didn’t come out and say "we’re going to take more risk", they just slowly inched their way forward allowing loans to have less down payment, allowing the buildings to have higher valuations as collateral, allowing higher debt-to-income ratios. They didn’t start out in 1995 with the idea they would eventually be making loans for $300,000 to people who never before owned a house, had no down payment, could provide no proof of income and on an asset valuation that was 25% higher than the most recent sale. That loan would never have been approved by any bank in 1995. Or 1996. Or 2001.
But the banks and mortgage companies wanted to grow. They had a well known Success Formula. They could advertise a good rate, implement the loan application process, then sell off the loan in the secondary market with a Fannie Mae or Freddie Mac guarantee. As real estate values took off, they simply needed more leniency on some of these items so they could do more loans faster and cheaper – extend their business (the back half of Defend & Extend Management). They wanted to Defend & Extend what they knew how to do. So Freddie Mac and Fannie Mae went along. And they got the big financial houses involved as well as they packaged up what were becoming increasingly risky loans.
And that’s what happens in D&E management. In order to keep growing, it is tempting to push just a little harder by trying to extend the old Success Formula. Cut a cost corner here. Take a little more risk there. Just do a little bit more of what was previously done. Everyone can see that these actions are taking them downstream. But, so far so good! Nobody has drowned yet. We might be able to see the waterfall ahead, and hear the water crashing down below a little clearer, but so far we haven’t seen any problems. So let’s try to do just a little bit more.
Of course, inevitably, D&E managers go over the waterfall – and take their customers, investors, employees, suppliers and this time the U.S. citizenry along with them. They reach just a little farther than they should have, and then it’s a free-for-all as the business gets sucked into the Whirlpool from which there will be no return.
We saw this before, when the Savings & Loan industry melted down and went away because of the ever increasing risk its leaders took. Equity holders were wiped out, and many lenders were significantly damaged despite the unprecedented government bailout at the time. In the end, we suffered a recession and a big loss of faith in real estate as the Keating 5 were tried and the S&L industry collapsed. All by trying to maintain the Lock-in, then Extend the business just a little more into some new area. And by getting the regulators to go along, the entire country and its economy end up at risk.
D&E managers don’t like risk, and intend to take risk. But because there isn’t any White Space to develop a new Success Formula they keep extending the old one. They claim they aren’t taking risk, but in fact they are. Each risk may be small, but as we’ve seen they quickly add up. These leaders start turning a blind eye to the risk as they remain Locked-in and see no other way to grow. They have to grow, and they have to remain Locked-in, so they take risks that to outsiders might look crazy. (Think about how Enron started guaranteeing its own derivatives so it could keep growing.) But Lock-in allows them to pretend the risk isn’t as great as it is. These extensions keep the Success Formula in place, and make it appear to be producing better results. But these extensions are moving closer and closer to the waterfall, and the inevitable fall into the Whirlpool. Eventually, we all must have White Space to evolve a new Success Formula, or the trip over the waterfall is inevitable.
by Adam Hartung | Aug 26, 2008 | Defend & Extend, Ethics, General, In the Swamp, Leadership, Lock-in
Sometimes management behavior can cause outsiders to think the industry and company leaders fear growth. Take for example a new book about innovation in the movie business Inventing the Movies by Scott Kirsner (see at Amazon here or read a review in Forbes here.) As the author points out, after Edison invented the first Kinetiscope movies – which were small viewer-based single person devices – he saw no reason to move forward with a projection system. Why advance the innovation when multiple audience members appeared to risk the revenue? To Edison, he could assure each and every viewing created a payment with his single-viewer technology, but the audience viewership meant he would lose control and possibly see revenue cannibalized. Fear of cannibalization caused him to avoid new innovations which would grow total demand, and considerably grow the revenues of his fledgling movie business.
But we all know this didn’t happen. Projection systems only caused more people to want to go to the movies. Then when talking movies came about again the industry feared that investing in sound equipment would be a cost not recovered and they delayed and delayed. But talking films again increased the audience. And this cycle played out again with color movies. And lest we not forget the wars that were fought over video tapes of movies, which all industry leaders feared would kill the business. Yet, videos (and now CDs) have only increased the audience, and demand more.
All businesses develop a Success Formula early in their life cycle. That Success Formula ties the Identity of the business to its strategy and tactics. So a tactic as simple as having a single-viewer kinetiscope becomes almost impossible to change because it gets linked to the identity of the business (and often its founder – in this case Edison). Thus it takes a new entrant, often from outside the industry, to parlay the new technology into the market. This new entrant, not afraid of controlling the business through administration of an old Success Formula, is able to bring forward the new technology/solution and build the new audience/demand. And often we see the old industry leader far too late to change – stumbling, fumbling and failing.
Businesses need not follow this course, however. If they are willing to invest in White Space they can test new solutions. They can figure out new Success Formulas. They can evolve, and they can grow. Doing so isn’t really hard, it just takes a willingness to accept the requirement for White Space to take advantage of market shifts. White Space allows you to migrate forward, rather than constantly fall back into Defending & Extending what you’ve always done.
As we all know, each innovation in the movies has grown the industry, not been its doom. And that’s true in all industries. Yet, the largest players are rarely the ones who lead these shifts. Look at how it took Apple to bring about the revolution in digital music, rather than Sony. Lock-in gets in their way. If we want to avoid being pummeled by market shifts that create great growth opportunities for the new competitor we have to be vigilant about implementing and maintaining White Space that can provide our beacon for growth.
Where’s your organization’s White Space?
by Adam Hartung | Aug 25, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership
Most managers want to move up. It is characteristic to have ambition in organizations. To want to do more, to accomplish more, and to receive more compensation. So we look for opportunities to do more, inside our organizations and outside. Usually we move positions because we don’t have upward mobility internally, so we find the opportunity externally. But, not all upward moves are worth the risk.
Look at the revolving door installed by Mr. Lampert at the executive suite of Chicago headquarted Sears (see chart here). (Read more about another round of Sears executive changes here.) Mr. Lampert has convinced some very talented people to take top positions at Sears. He has hired people away from companies as well known as Yum Brands, Motorola, Proctor & Gamble, Now he’s hoping that a new crop of execs will save the company from its perilous slide which has cut equity value more than 50% in the last year. But, rather than becoming business saviors, these new executives will probably be limiting their careers when Sears continues to falter.
It’s the nature of leaders to be optimistic. To think they can accomplish what previous managers couldn’t. And some are better than others. But we should eschew the "hero" complex entirely when looking at a new position. Success will have more to do with circumstances than us as individuals. And when a business is struggling, like Sears, it’s only hope to turn around requires it give up looking in the rear view mirror at old advantages and focus completely on the future. It must be clear about competitor strengths, and ignore the temptation to think of customers as an asset. It must Disrupt the old Lock-ins, and nullify the Status Quo Police. And it must implement White Space where the manager has permission to do whatever it takes to succeed – unbounded by old Lock-ins – as well as the resources committed in advance to accomplish the goals. Without those 4 things, success is not going to happen. No matter how good you are.
Looking at Sears and Mr. Lampert we know a few things. He keeps talking about the old Sears advantages, and trying to find a way to recapture them. He’s trying to plan for the past, not the future. Meanwhile, he isn’t looking for new customers by being a cutting edge competitor, instead he’s trying to hang onto old customers and Defend them from better competitors. Thirdly, he likes to "whack the chicken coop" by making lots of noise and firing people, but he’s not willing to Disrupt old processes, practices and behaviors in order to nullify the Status Quo. And Fourthly, he absolutely doesn’t have any White Space as he keeps trying to fiddle with the old Sears to improve it. Rather than create White Space he shuts it down in cost cutting actions while trying to "fix" a hopelessly out of date Success Formula.
Those who left good jobs to go to Sears for Mr. Lampert have not escalated their careers. And the new batch of managers he’s hired will fare no better. Sears under Mr. Lampert is not following The Phoenix Principle to turn itself around, but rather keeps trying to find some way that it can be cheaper, faster, better and thus Defend & Extend what worked 30 years ago.
If you want to make a career move, do not listen to the Siren’s song about how everything can be different if the right person is in the job. Circumstances make more difference than the person. We work in organizations that have powerful Lock-in to behaviors, structural systems and cost. Unless the primary pieces of successful change are there, no individual will make much difference. Yes, it’s good to want to get ahead. But make sure you don’t take a job where your head will be handed to you.
by Adam Hartung | Aug 21, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
What is success? We often think of it as accomplishing goals. If we set a goal, and achieve it, we succeeded. If however we repetitively don’t achieve goals that leads to failure. So, you would think that managers would do the things that would most likely insure reaching goals year after year, quarter after quarter and month after month. And because markets shift, that would mean doing things differently to deal with market shifts.
But if we look at Chicago-based United Airlines, as an example, we can see that is not how many leaders define success. Their definition of success is all about Defending & Extending an old Success Formula – even when the results of that Success Formula have sunk to dismal lows. Often leaders, and this does appear true at United Airlines, would rather fail, by missing goals over and over, than Disrupt and use White Space to change. As we know, United fell into bankruptcy (not the first time) earlier this decade blaming the events of 9/11/01. But everyone who’s followed United knows the company has never flourished, and has a long litany of missing its goals for revenues, revenue per passenger mile, and especially all measures of profit.
No business can succeed without the support of its customers and employees. Investors will not achieve a satisfactory rate of return when customers and/or employees are unhappy. Yet, let’s look at the actions United is taking to deal with its most recent hard times. It lengthened check-in lines by refusing to develop a streamlined method for gate access – preferring to maintain its status quo while security requirements grew substantially. It started charging to check a bag, even though carry-on bags are the biggest problem for security checks and boardig. It cut food on all domestic coach flights. And now it has cut food for most international flights in coach class (read article here.) With each step, United Airlines might as well get a bullhorn and shout through the terminal "we think you customers are irrelevant to us as an airline. We wish you would shut up and do what we tell you to do and quit complaining. We’d be a great company if it wasn’t for you stupid customers."
United Airlines’ unions have made round after round of concessions the last 25 years. All classes of employee, from pilot to gate agent to flight attendant to ground crew to mechanic have taken pay cuts. They have deferred compensation into pension plans, only to see the deferral wiped out by company losses. They have seen benefits slashed. And they have seen work rules tightened in order to pursue tighter enformcement of behavior intended to cut hours worked, overtime and even base pay. Meanwhile, the executives (and there’s been a lot of executives through the United revolving door) have paid themselves quite richly on both base pay and bonuses – and departing execs have received very rich golden parachutes. With each management decision they got out the old bullhorn and announced "hey, you employees should just shut up and be glad you have a job. We run this place, for better or worse, and you don’t have a say in what we do. You’re the reason we’re not a more successful company, you crummy employees, and its because of you that we as a management team look so incompetent."
Now, the employees have taken to wearing plastic bracelets that say "Glenn’s Gotta Go" referring to a dismissal of the CEO (read article here.) And management is taking the tack that these employees are out of line with this behavior. Management says employees should "suck it up" and keep their grievances quiet. Even though management has not done the employees any favors for over 20 years, they are upset these overworked, much abused and underpaid employees would offer up this quiet form of civil disobedience. But employees are finding themselves more aligned with customers than management these days – and their wrist bands are a show of unity with the customers that management is the group out of step with shifting market requirements.
At the end of the day, management is responsible for results. Current results. United could have hedged fuel costs, like Southwest, and never gotten into its current jam. Management could have acted at any time the last 30 years to work with Unions to make a better airline, rather than maintain long-term contentious negotiations keeping them from the benefits of employee ideas. United Management could have launched Ted with the permission to develop a new Success Formula rather than hamstringing the idea to nothing more than a name change on certain flights. Management could have done many things differently.
But over the years, despite different people in the managerial seats, United Airline leadership has chosen to remain steadfast to its Lock-ins. It has consistently chosen to Defend & Extend a lousy business model that’s never consistently made money. For United Airlines management, success has not been about meeting goals – it has been about extending the status quo. No matter who suffers amongst customers, employees or vendors. Despite what management is saying, these leaders would rather fail than change. Success isn’t nearly as important for them as we would assume.
by Adam Hartung | Aug 19, 2008 | Defend & Extend, General, In the Rapids, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
Last week BusinessWeek reported on how Dell was making a strong play to catch Apple’s iTunes in the digital music marketplace (read article here). On the surface, it sounds like a good set of tactics that might work. But it probably won’t.
Apple (see chart here) is a company filled with Disruption. In fact, Disruption is the lead in the Businessweek story. The reporter, Peter Burrows, discusses how a very disruptive Steve Jobs made it impossible for one of Apple’s engineering execuutives to remain at Apple – subsequently causing a lawsuit and payout by Apple. Typical for Mr. Jobs, he was ready to Disrupt rather than continue on a path he had lost faith in. So he made a hard turn to drop Tim Bucher. It is through this process of Disruption (painful as it is) and using White Space that Apple’s market value has increased by some 13x the last 5 years.
As a disruptive leader, heading a Disruptive organization, Mr. Jobs has Apple constantly creating White Space and doing new things. Apple has gone from the Swamp – practically the Whirlpool – back into the Rapids. It is sustaining its big hit products like iPod and iTunes with new innovations, while using White Space to jump into new markets like mobile telephony and wireless hand held computing. These Disruptions and White Space projects keep Apple working on the process of innovation to grow existing markets and enter new ones.
Dell (see chart here) is a very different company. Dell is still working hard to "leverage" its "core competency" in direct-to-customer sales. This approach has led Dell to attempt augmenting its "core" product lines of PCs and laptops with high definition televisions, and even its own mobile MP3 device. Both are long gone. Dell is still Locked-in to the culture, processes, IT systems, HR practices, decision-support approaches, vertical silos and knowledge sets that are focused on personal computing. Dell keeps trying to find ways to Defend & Extend its "core" in the hopes that late entry into new markets will allow the company to regain past rates of return. And it’s market value is down about 1/3 in the same timeframe.
Dell has added an acquisition (Zing) to its market approach, along with the engineering exec formerly fired by Mr. Jobs. But what Dell has not done is Disrupted itself. It has not admitted it must change its Success Formula to really be successful. And, it has not created White Space with permission to do whatever is neccessary to succeed – rather than operating within the confines of the old Success Formula and old Lock-ins. Without Disruption and Lock-in this project will be hamstrung by old assumptions, culture and structural restrictions which will stand in the way of creating a new Success Formula and market success. So even though the new Dell project sounds pretty good, it is probably won’t work because the project is still in an organization that first and foremost wants to sell more PCs – it wants to sell boxes in very, very high volume to businesses that can buy thousands.
You may ask if this isn’t possibly a replay of Apple versus Microsoft (see chart here)? And the answer is no. In both markets Apple took early leadership. But in the case of the Mac versus the PC Apple Locked-in on its hardware and software platform as a system sale and was unwilling to consider any other option. At that time Apple fixated on Defending & Extending the Mac. Meanwhile, Microsoft focused solely on software – and not only the operating system but the most critical and common applications (word processing, spreadsheet, presentation and database). By changing the competition to a "Windows + Intel" platform Microsoft was able to focus on software innovations which it could then take to market faster than Apple could react.
In the early 1980s, Microsoft was not saddled with a two decade Locked-in legacy like Dell, and Microsoft was not trying to Defend & Extend its DOS operating system when it launched Windows followed fairly quickly with Word, Excel, Powerpoint and Access. Meanwhile in 2008 Dell is a 25 year old company that has historically eschewed R&D and new product development, relying on vendors to do such work as it put all energies into supply chain management and direct-to-customer selling. Now in its effort to compete with Apple, Dell is trying to build its new solution inside this old fortress – which is designed to do something entirely different. Because Dell won’t Disrupt itself, admitting it needs to evolve, and won’t create White Space, it’s Lock-ins will be the hurdles that will stop progress. It’s this legacy – a very successful one producing above-average results for most of the 1980s and 1990s – that will hinder Dell’s success. One it can overcome – but shows no signs of taking the necessary actions.
by Adam Hartung | Aug 14, 2008 | Disruptions, General, Leadership, Lock-in, Openness
The Phoenix Principle applies not only to companies, but industries and even whole economies. There is no doubt countries Lock-in on a market approach, and then Defend & Extend it. And these Locked-in countries become victims of market shifts and new competitors who are not afraid to Disrupt and use White Space to change.
Just think historically for a moment. There was a time when the Dutch controlled more land than any other country. As leading explorers, their territories were the most vast. But they were unable to evolve a system of government which would allow them to Defend & Extend their territories, and they fell from the top perch. The Spanish became the next big economic engine, developing extensive colonies for their King, Queen and church. But, a Lock-in to how they would govern became rife with corruption and eventually they lost their leadership as their floating armada was destroyed. The British led the industrial revolution, and took over global economic leadership, but unable to evolve quickly enough from a monarchy to a more participative government they lost leadership to competitive countries who built systems of self-rule (such as the Americans.) This is not intended to be a chronology, but rather examples of economic Lock-in and inability to Disrupt and use White Space to maintain economic leadership.
We are now looking at what appears to be another major transition. In 2009 or 2010 China will become the #1 manufacturing country in the world, pushing America to #2. As the world has witnessed this week, watching the Olympics, the Chinese are making great strides in pushing forward – changing the face of business competition as they grow in almost all parts of the global economy. Today, the price of gasoline globally is being increased largely by exploding Chinese demand for fossil fuels to promote their economy – and current prices are something they are able to pay while still achieving their country goals for growth in jobs and economic prosperity. Meanwhile other economies, like the USA, are plunging into recession partly aided by high energy costs.
We can see that the Chinese have been good implementers of The Phoenix Principle. Let us not forget that within our lifetimes this country was a deep economic backwater under the no-growth leadership of Chairman Mao and his Gang of Four. Despite one of the world’s oldest cultures just 50 years ago China was not an important economic force. But:
- The Chinese demonstrated an ability to visualize a very different future. After Chairman Mao died the leaders developed scenarios for China that were built upon ideas for how they could lead. Remember that China had no foreign exchange, nor available assets (such as oil or timber) to sell. Yet, the leaders were able to create scenarios of China as a world power. Thus, when the Soviet Union failed the Chinese were primed and ready to stop spending money for tanks on their western front and invest in manufacturing and infrastructure for growth.
- The Chinese focused on competitors to learn how to succeed. And they looked not just at the Japanese and Americans – who were the leaders – but at all countries for how to build a strong, high growth economy. By looking at emerging nations they learned what worked, and where the problems layed, and they designed an approach that would allow them to unseat the Americans, Japanese and Europeans. They did not try to compete like Americans, but rather built their own competitive engine which was unique – and we now see almost beyond competition with U.S. manufacturers.
- The Chinese were quick to Disrupt. Old practices, some enforced with death sentences, were overturned to allow people to do new things. When necessary, entire cities were flooded to create better waterways and fresh water for industry. Homes were destroyed, and some historical landmarks, to make way for highways. The Chinese were willing to challenge their internal Lock-ins, and use Disruptions to create opportunites for doing new things.
- And they have been very willing to create and use White Space for developing a new Success Formula. It wasn’t long ago China retook possession of Hong Kong from the British. Thousands of Hong Kong Chinese fled to American, Canada, Australia and elsewhere fearing a loss of freedoms. But the Chinese turned Hong Kong into the White Space from which they could learn how to operate a capitalistic system that would work for China. As they learned, they utilized those learnings to open new industries and new cities which allow intense capitalisitic style competition in a country that still values central planning. White Space has allowed the Chinese to hone a new Success Formula which is now growing much, much faster than anything in the "developed" world.
The Chinese have emerged as fierce competitors. The market has shifted. Fiddling with exchange rates may help U.S. manufacturers, but it is just so much short-term financial machination. While America sits in a debt crisis threatening to shatter real estate values and strangle economic growth, the Chinese are rapidly becoming the world’s economic leader through manufacturing. For Americans to think they will ever recapture the manufacturing lead is nothing but fairy tale thinking. That game is over, and they won. Americans can hope for a return to the past, but hope won’t grow the economy.
America, and Europe, must realize the market has shifted. Rather than use tactics trying to Defend & Extend old Lock-ins, leaders must Disrupt. White Space must be used to define a new Success Formula. Here America has strength. One benefit of the American structure is how much White Space is created through entrepreneurship.
Now, more than ever, it is time to funnel resources to those White Space initiatives to develop a new American economy. America went from the #1 agricultural economy to the #1 industrial economy via its ability to look forward rather than backward, to Disrupt and to follow those on the front edge of the economy into new businesses. And that is what must happen today. The focus must be on building upon leadership in advanced electronics and telecommunications, nanotechnology and bio-engineering (3 examples – not exhaustive) to find the next economy – and build a Success Formula capable of regaining economic leadership. Or, it can slip further into the Swamp of slow-to-no-growth like those countries which are the heritage of most American leaders – Britain, France, Germany, Italy and Spain. All wonderful countries with a spectacular past.
by Adam Hartung | Aug 13, 2008 | General, In the Whirlpool, Leadership, Lifecycle
"Things will work out in the end." "It’s always darkest just before the dawn." These were a couple of phrases my mother used to say. To her, just have faith and everything would work out. Raised in Oklahoma during the Great Depression, and never having the opportunity to go to school beyond about the 6th grade (and a sparse 6 grades at that), she simply had to trust in faith most of the time. But for us in business, we should be quite a bit smarter than that. It’s not faith that drives our success – but the ability to know when to make changes reacting to shifting markets. Because too often, things don’t work out in the end – and the darkness never goes away.
Just today it was reported (read article here) that Whitehall Jewelers will be liquidating its inventory and shutting its 370 stores. For the company’s employees, investors, suppliers and customers very soon there will be no tomorrow. Things didn’t work out. But you can bet management was not admitting this. Management kept expecting things to work out. Why just in April Whitehall paid over $14million to buy the assets and take over 78 stores from another failed jeweler – Friedman’s. Surely they did not expect to be throwing that money down the drain. Yet, by June Whitehall itself filed for Chapter 11 bankruptcy. And now the company is liquidating. The final end.
All Businesses go through a lifecycle. From the Wellspring of ideas it eventually finds a market allowing it to enter the Rapids of high growth. But then growth hits a bump – usually because the market shifts and the old Success Formula no longer produces above-average performance. Growth hits the Flats. It’s here that management needs to reassess it’s Success Formula – Disrupt and use White Space projects to create a new Success Formula, throwing itself back into the Rapids and keep growing. But most don’t.
Instead leaders will decide to protect the old Success Formula by Defending & Extending it – hoping the market will return to its previous state. But markets don’t go backward. Only forward. Thus the business and the market keep getting farther and farther apart – developing a re-invention gap – that the business doesn’t close. The business moves into the Swamp, where it’s so busy fighting the alligators and mosquitos – the competitors that are pushing the market forward and it’s business nowhere – it forgot the original mission was to make money, rather than defend its old products and practices. Growth is spotty to nonexistent.
In the Swamp management constantly asks its stakeholders to have faith. To believe things will get better. To trust that given just a little more time, a little more money, a break in one form or another and the business will suddenly return to producing returns like it did before. They keep promising things will work out in the end, and the darkest days are behind it. But, inevitably, things just keep getting worse. Until one day, as a surprise to most stakeholders who have been optimistically hoping for the best, the business ends. Possibly in an acquisition or merger (like the Bear Stearns takeover by JPMorgan Chase) or liquidation (like Bennigan’s a bit over one week ago – and now Whitehall). By trying to do more, better, faster and cheaper management lets the business slip into the Whirlpool of no return.
When you enter your church, synagogue, temple or mosque have faith. But when you work, invest, sell or buy you need to be sure the organization clearly recognizes market shifts. Management needs to be aware of the hard reality that market shifts can be deadly – totally deadly. Deadly to the point of failure. Unless management reacts to these shifts using The Phoenix Principle, with clear determination to Disrupt and use White Space to regain growth – building a new Success Formula rather than trying to Defend & Extend the old, tired one – the end is assured, it’s only a matter of time.
by Adam Hartung | Aug 11, 2008 | General, In the Rapids, Leadership, Lifecycle
Some businesses get in the Rapids by picking a fast growing market and then trying to keep up with exploding demand. Such as PC manufacturers in the 1980s and laptop manufacturers in the 1990s. Or internet companies in the late 1990s. The market explosion means these companies keep selling more and more primarily due to robust demand. And revenue growth covers a world of sins, as they can raise external money to fund growth even if not profitable. But in these instances, when the explosion stops many of these competitors rapidly disappear – unable to maintain growth as the market shifts. The Rapids is a temporary phenomenon which disappears, and these businesses are not able to keep growing.
But Phoenix Principle companies create above-average growth and maintain profits in shifting markets often considered low growth. Take Aldi in grocery retailing. That market grows along with the population – about 1 to 3% per year. The vast majority of "good" competitors grow no faster than that. And those who do sport better growth usually obtain it merely by making acquisitions – so there’s no "real" growth just mashed up bigger numbers under one name. Worse, as Wal-Mart and other discounters have started selling groceries it’s caused many traditional grocers to see declining revenues as customers started buying more groceries at the new alternative. So, you’d think yourself hard pressed to get into, and stay in, the Rapids as a grocer. But Aldi, one of the world’s largest grocers, has done just that.
Aldi may seem small to Americans, with only 900 stores in the USA. But the company is $45B in revenues. And their success, growing at 5-10% per year, can be traced to following The Phoenix Principle:
- Aldi is always looking for places to expand. They don’t just try to sell in one geography, like most U.S. grocers, nor in just one country. They cover most of the developed world, with plans to expand into growing markets as well. They don’t focus on what they’ve done, but rather on where they can go and what they must do to keep growing.
- Aldi doesn’t follow the competition. They do what competitors are too locked in to even consider, much less do. While large grocers carry upwards of 45,000-80,000 items, Aldi stores carry 1,300. While most grocers rely on branded goods, Aldi is almost exclusively private label. While large grocers advertise weekly with specials, Aldi advertises very little and instead provides dramatically lower prices. Major grocers constantly rotate "deals" pitching suppliers to offer money to cover the deal cost, but Aldi just has the same price low price all the time. Where major grocers have lots of staff to help people, the typical Aldi has only 7 or 8 employees thus maintaining revenue/employee almost triple the national average. Aldi doesn’t ask customers what they want. Instead, Aldi competes by attacking competitor Lock-ins and beating them for customer sales.
- Whenever opportunities come along, Aldi remains open to Disruptions. In every country Aldi allows local management teams to build the concept tailored to customer needs. Aldi doesn’t force every country, or even every store, to be similar. Instead, they Disrupt their pattern and open stores where they can be most profitable – not necessarily where they will create "market density" – and each store is built to take advantage of its location.
- They don’t shy away from White Space. Recognizing the upscale shopper is not inclined toward an Aldi because of the merchandise available and sparse layout the company bought Trader Joe’s Market in 1979 which sells considerably more upscale merchandise, and has aggressively expanded. And instead of the typical grocery circular, Trader Joe’s mails out something that looks and reads more like a newspaper with recipes and discussions about featured merchandise, rather than just focusing on price (even when prices are very competitive.) And Aldi even allows Trader Joe’s stores and Aldi stores to exist in the same market – not worrying about cannibalization, but instead trying to maximize revenues.
Aldi is probably the most profitable grocer in the world (it’s hard to say definitively because the company is private.) It certainly is the most successful – opening a new store somewhere almost every week for the last 20+ years! With a growth rate more than double the industry average, and the highest net margin in the industry, Aldi has long been a quiet game changer that simply goes out there and makes money in one of the toughest businesses on earth. Selling groceries. And that’s what staying in the Rapids is all about.
(Read more about Aldi’s business in Chicago area here [Aldi North America is headquartered in suburban Chicago]. Read about the company history here.)
by Adam Hartung | Aug 7, 2008 | General, In the Swamp, Leadership
We all know success. At some time, we’ve been in the winning position – possibly as an individual, but most likely as part of a team. When we taste success, we look hard at what got us that great flavor and we hold that memory closely. We all want to succeed again. And sometimes we can repeat those behaviors, those activities, and repeat success. The more we work hard, repeat our experiences and find success the more it reinforces repeating those behaviors and tactics.
And that leads to Lock-in. Very quickly, success breeds doing more of the same. We work harder and harder at doing what used to work, in the belief that the more we do it the greater our likelihood of success. But what we start to miss is changes in the marketplace. Despite our great strength, things change. And as much as we would like to keep doing what we’ve always done the reality is that our returns are destined to decline. We have to adjust to changing competitors and find new ways to win.
As I’ve listened to the the recent story of Brett Favre’s career as a football player, it’s hard not to feel for the guy. He’s one of the greatest NFL quarterbacks of the last 25 years. There’s no doubt he’ll be in the Hall of Fame. And recently he retired. But, as autumn came around he found himself Locked-in to doing what he’s always done. Even though he’s well past the age most players retire, and he retired in March, he decided he wanted to "unretire" and play more football.
But, his team – the Green Bay Packers – have moved on. The coaches and managers have recognized that they have to deal with intensive competition this fall. Although it would feel good to put Mr. Farvre back into the lineup, the odds of success are very low. Continuing to hope the competition won’t cannibalize Mr. Favre is a low probability proposition. Although his historical success has been great, when looking forward it’s clear the team must move toward a new Success Formula. Mr. Favre did well for a long time, but things have changed.
For his part, Mr. Favre needs to take a look at where his value is greatest. Many former football players have found fortunes beyond their imaginations after leaving football. This week Roger Staubach, a former Dallas Cowboys football quarterback, sold his real estate venture to another company for more than $500 million and remained a director of the company. His value from moving on into real estate development has been multiples of his football salary. Similarly, former Green Bay quarterback Bart Star made a fortune in auto sales, and former Denver quarterback John Elway has seen his football value eclipsed by his ownership of sports franchises and (again) auto dealerships.
Mr. Favre has seen diminishing rates of return as a quarterback for the last few years – and that is unlikely to change. But his celegrity is great. His value in other venues is greater than his value on the football field. He may love to play football – and all of us have our passions. But it becomes nonsensical when we let our passions overtake our ability to add value. It hurts ourselves as individuals, and the organizations we work with.
Many sports superstars find this a hard lesson to understand. Michael Jordon retired twice from Chicago – and played in D.C. before finally quitting. And it is usually to their detriment that they let Lock-in to prior personal Success Formulas stop them from developing more success. Mike Ditka, "da coach" as he’s called in Chicago, has made vastly more money from restaurants and endorsements than he ever did as a coach – even including his 2 years as head coach in New Orleans after coaching the Chicago Bears.
When markets shift, value from old Success Formulas declines. We may wish for the past – but it’s gone. For individuals, and the organizations that employ them, there comes a time to move forward to where greatest value can be achieved. The faster we move toward that future the better for everyone. Including the cheeseheads in Green Bay’s Lambeau Field. And for the very talented Mr. Favre.
by Adam Hartung | Aug 6, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle
If you don’t control your destiny, who does? Most Americans are especially proud of their independence, because it gives them the strong sense that their destiny is up to them. While everyone understands the role of luck and timing, those who also understand their strengths can find ways to maximize them. Anericans have the opportunity to make the most out of our circumstances. And that independence is also true for business. In America, home of capitalism if not the birthplace, any business has the ability to direct itself toward greater returns and success. And the larger you are, the greater your resources, the greater your ability to control your destiny and maximize your results.
So how is it that General Motors, the world’s largest auto company, would say that it’s destiny is not in the hands of its leaders? As the Board of Directors at GM reinforced its support in its CEO, I was shocked to read the following quote in today’s Chicago Tribune (read article here):
- "Most of the problems the company is suffering are not of their own making. There’s been radical changes in North American demand," said David Hel, an analyst at Burnham Securities Inc. in Sierra Vista, Ariz., said. "I don’t think making a change at the top is going to solve that."
Excuse me???? What was that? We’re to believe the largest auto company in the world, with all those assets, all that cash flow, all those employees, was without the ability to influence its own competitiveness and results? We’re to believe that no leader would have managed this absolutely dysmally performing company any better the last 5 years? The CEO, who over the last few years has watched the company lose market share, see it’s share price drop to a 54 year low (chart here), sold off many of the most valuable remaining assets (like GMAC) and overseen write-offs that exceed the entire market value of the firm is not responsible?? I do hope your investment firm receives enormously large fees for helping GM with its pension plan investments, or whatever it is you do for them, to make such a blatantly ridiculous comment. Because you just shot your personal credibility all to heck. l’m sure employees and investors could help identify a raft of better leaders than the ones who drove GM into its current dire straits. Mr. Waggoner may be well educated, well speaking, bright, cordial, tall, and good looking – but he’s done one heck of a terrible job as CEO at GM.
I guess following Mr. Hel’s confused thinking the leaders at Toyota, Honda, Nissan and Kia have no responsibility for the success of their companies. It’s all just a random set of variables that leads to success, or failure for an auto company?
Time for a reality check here. Of course the decisions made by leaders at GM were very different than the decisions made by Honda’s leaders. And the outcomes are radially different. What has befallen General Motors is a failure to recognize that markets keep growing, just in different ways. The demand for transportation has never been greater than it is today. Sure it may have shifted, from horses years ago to trains to automobiles to airplanes. And the kinds of autos people want to buy may have shifted around since the Model T was number 1. And the growth in auto sales may now be greater in China and India than the USA. But the demand for transportation is growing, not declining. So the market is growing – just not GM. Because GM quit trying to grow, and tried to Defend & Extend its practices and traditional markets.
GM leadership was willing to consider itself a "mature" company. Thus GM’s management expectations for growth were allowed to subside. Instead of measuring itself against total growth, managers became happy to talk about GM share and growth in selected segments. Thus GM could justify its below-market growth, and claim that it was an acceptably mature company. The leadership was OK with performing poorly because it abdicated its responsibility to growth – despite the impact on shareholders, employees, suppliers and customers. Management, and apparently the Board of Directors, is more happy to fail as GM than to become a better company – albeit one significantly different than the one sucking tail pipe fumes now.
Once any leadership team accepts that slower growth is acceptable, ultimate failure is a fait accompli – it will happen. Growth absolutely will slow. And eventually that will lead to enormous troubles. For any analyst or investor to claim that growth is out of the hands of management is syccophantic. As we know, despite the move to small cars in the 1970s, then big cars, and to higher quality cars, and then to higher mile-per-gallon cars year after year the offshore manufacturers have been growing share at the expense of the U.S. companies (except for the great success Chrysler had prior to its acquisition and innovation killing management changes by Daimler Benz). These offshore competitors did not relegate themselves to excuses about shifting customer tastes between segments as they came out with new models that covered the board – including pickups and SUVs – to keep their share profitably growing.
If you haven’t thrown in the towel on GM – you should definitely do so now. Clearly, the leadership team has given up on figuring out how to be successful. They are hoping to do no more than survive by doing what they’ve always done. And we know that won’t work. They may survive a while, but without growth the competitors will eventually eat up all their customers, resources and eventually them. By admitting they can’t believe a different leadership team could find a better way to compete, and grow, demise is a fait accompli.
