by Adam Hartung | Apr 15, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Hundreds of years ago philosopher Hippocrates created an oath, and for years medical doctors subsribed to it. Dramatically paraphrased, it included the notion "Doctor, first do no harm." The objective was clear – if you go messing around with a bad situation you can make it worse. Make sure you know what you’re doing – and you know how you’re going to make things better.
We should tell modern businesspeople to swear by this same oath. Delta and Northwest airlines have announced their intent to merge and make one huge Delta (read article here). It is widely expected that very shortly United and Continental will attempt the same maneuver to create an even larger United. Now, do you think this means air travel is going to get any better? Will service improve? On-time performance? Less lost baggage? Happier gate agents and flight attendants? Better maintained aircraft?
No one believes that. Even the leading industry gurus claim the only merger benefit is theoretically this will somehow lead to lower cost – and less capacity (at a time when capacity utilization is around 80%) – which is supposed to raise prices. So we should expect basically the same sort of service, with fewer flights, and yet even more attempts to cut wages and maintenance spending to increase profits? The reality is that either (or both) of these mergers will lead to mass confusion as the companies try sorting out conflicting schedules, optimizing broken systems and negotiating new contracts.
This deal is just another effort to Defend & Extend the traditional hub/spoke airline system the major airlines have used – unprofitably – for 30 years. Things won’t get better if these companies merge – for customers, suppliers and investors they will only get worse. There’s no plan here to make a new, more profitable airline. They aren’t suddenly going to become Southwest.
Monday, Blockbuster said it wanted to buy Circuit City (read article here). Why? Blockbuster is getting killed by on-line music downloads, Netflix and On-Demand direct-to-home distribution, and pretty quickly movie downloads. Circuit City was eclipsed by Best Buy in 1990 and has been choking on the leader’s dust, barely making money ever since (despite being heralded as a "great" company in Jim Collins’ book Good to Great). As on-line sales of consumer electronics grows at over 30% per year, making life tough even for leader Best Buy, this merger is supposed to somehow make things better?
The bidder says it’s an opportunity to create a 9,300 unit group of stores – right as we start the worst consumer-led recession in 30 years! As retailers of all types are rapidly closing stores in order to avoid bankruptcy, the plan here is to get a bunch of stores under one name to sell products that are being displaced by on-line and direct-to-home models and consumers are becoming more price conscious. Right. This is nothing more than a move by Blockbuster to try Defending & Extending a retail model that has already proven to be obsolete.
The reality is that Southwest and Virgin have shown airlines that approach the industry differently can make money. Making a bigger company that uses a broken Success Formula only makes for larger losses – not a new airline. Everyone should be wary, because life will only get worse as we consolidate management of most of the system into fewer hands trying to make a broken model work. If you’re an investor, keep buying Southwest and Virgin because these mergers will provide more opportunities for the Disruptive competitors to win.
Likewise, Apple has shown us all that we’ll never go buy CDs in historical quantities. All media is quickly going digital. We don’t buy newspapers, magazines or books like we once did – we go to the internet. And very soon we won’t be buying DVDs either. New competitors are causing Blockbuster and Circuit City to faulter – and trying to make both bigger will only cause them to do worse.
These companies desperately need White Space to build new Success Formulas before they fail – and not just fail investors but customers, suppliers and the communities they serve as well. These merger efforts will not help any of them to be better competitors that offer better products with better service that meet customer needs with lower cost models. And that means they are only going to make things worse. It would be good if businesspeople could overcome their desire to "do something – anything" to save their old Success Formulas and instead only undertake actions based on plans to be better. First do no harm!
by Adam Hartung | Apr 11, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Microsoft (see chart here) is huge and has a lot of cash. So do you care? What made Microsoft an incredible company was how it managed to aid the growth of PC technology, making the machines every day parts of our lives. Microsoft products ranged from operating systems to desktop applications to the prolific Internet Explorer web browser. Along the way Microsoft grew incredibly fast, literally won every marketing war it engaged in, dominated its markets and made huge amounts of money. What a great past.
But what is Microsoft doing now? It’s latest operating system (Vista) took 6 years to develop, got to market almost 3 years late, and is not even adopted by half the current customers. A year after launch, Microsoft has to strong-arm PC manufacturers to load the product rather than the older version (XP). Meanwhile both Linux and Macintosh are stealing operating system share from Microsoft – a very bad sign. Users aren’t clamoring for new versions of office automation software, and growth has stymied. And after dominating the market with IE, Microsoft is now contending with Firefox in the browser market. Quite simply, Microsoft isn’t growing. It is sitting on a huge pile of cash, but can’t figure out how to invest it to generate additional growth. And investors haven’t seen any growth in company equity value the last 5 years!
So, Microsoft has offered to buy Yahoo! But why? Microsoft hasn’t offered any new insight to what it’s ownership of the #2 browser will do for customers or investors. Microsoft has merely said it has the money to spend – like a teenager with last week’s paycheck burning a hole in his pocket. If there’s no plan to launch new products, or otherwise generate growth, why spend the money on a company that is far, far behind the #1 player Google? If Yahoo! can’t maintain or grow share versus Google, what is Microsoft planning to do to change the situation? Merely owning Yahoo! won’t help Microsoft be a better company.
Microsoft slipped into the flats four years ago. Now it’s trying to Defend & Extend its past glory, but to not much success as it is losing little bits of share all over. It has a huge war chest to fight this defensive battle. But wouldn’t investors be better off if Microsoft handed out huge dividends? Why not let investors take the money and buy shares of Cisco, Google, RIMM, Oracle or other higher growth companies? Why should Microsoft management burn this cash? No one is fooled by this action – today’s Chicago Tribune headline ran with "Is Yahoo deal set up for failure?" (read article here) and the last paragraph reads "No matter who ends up with Yahoo, the people involved are not innovators" – quoting Marc Benioff CEO of Salesforce.com. "They are followers. This is not a deal about the future of the Internet. It’s about the problems of not executing in the past against Google."
If companies don’t grow, then why do they exist? Without growth, the company should be milked for maximum cash and the money given to investors who can invest in other high growth opportunities. Microsoft had a great past – but it has not maintained its focus on markets and new opportunities. It missed the networking wave – which largely went to Cisco. It missed the PDA wave (personal digital assistants) which has gone to RIMM and Palm. It missed the digital music wave which has gone to Apple. It missed the internet search and advertising wave – which has already gone to Google.
Microsoft started Defending & Extending its personal computer business, and it lost its growth. Bill Gates demonstrated a knack for developing future scenarios and identifying emerging markets. But he almost missed the web – and it took a herculean effort on his part to get the company refocused and out with IE. Mr. Gates did not build an organization that valued Disruption and invested in White Space seeking new markets early and experimenting with new Success Formulas. He relied on himself. Mr. Balmer is a classic D&E manager – not a Disruptor nor investor in White Space. So now Microsoft leadership is doing things that will just waste our time and investor money.
by Adam Hartung | Apr 9, 2008 | General, In the Rapids, Innovation, Leadership, Openness
Great companies don’t only get into new businesses, they know when to get out. Look at GE – a company that sells almost as many businesses as it buys every year. Another company following this practice is Philips (see chart here). In the U.S. few people know much about Philips – although it is a global company with many successful products in multiple businesses.
Philips sells consumer products, like radios, telephones, monitors, DVD players, cameras, webcams, Sonicare toothbrushes, Norelco razors, MP3 players and televisions. It also sells medical systems – like CT scanners, ultrasound machines and heart defibrilators. It sells lighting systems which includes everything from home light bulbs to interior designs to products for lighting the exterior of office skyscrapers or religious temples. Philips was a pioneer in developing compact disc technology and optical storage devices and is a leader in high tech plastics and printed circuit board technology. (Read about Philips at its company web site here.)
Philips generated 2007 revenues of $39billion. Founded and run out of the Netherlands, this is pretty remarkable. The Netherlands has only 16.5million people! The whole country’s population is about 2x the five buroughs of New York City – or the same as the New York metropolitan area. Yet this company is bigger than DuPont, Intel, 3M and Merck – all members of the Dow Jones Industrial Average. Founded in 1891, Philips has met the test of time, entering new markets, and growing both revenues and profits, for several decades. Well resourced, Philips has created and implemented White Space to grow for longer than almost any company in the U.S.A.
Yet, today Philips announced it was going to quit making televisions for North America (read article here). A pioneer, and leader, in flat panel televisions – a high growth product line in the consumer-centric U.S. market – Philips is abandoning manufacturing this $1.7Billion product line, shutting its Althanta headquarters. Manufacturing for the Philips and Magnavox brands will transfer to Tokyo based Funai (which makes Emerson brand as well.)
Phoenix Principle companies not only are quick to Disrupt and implement White Space, they are quick to get out as well. And here we see a large company, with big resources, walk away from manufacturing a product line that is huge WHILE GROWTH IS GOOD. Long before the business slips into the Swamp Philips is looking ahead and changing course. Rather than get trapped in a low-profit business as growth slows, they are getting out on the way up to maximize the value – while focusing precious resources on other opportunities.
All companies of all sizes can be fleet of foot. Even large and aged ones. It requires the discipline to be forward-focused on markets and opportunities rather than history focused. It requires not getting blinded to think big businesses need Defend & Extend behavior – but rather the flexibility to move fast as markets move. It requires a willingness to not rely on your own internal focus – and your own resource pool – when making decisions about future investments. It requires the skill to realize that not all White Space is worth additional investment, and there are times to get out.
Long term success requires overcoming Lock-in. Not only by consistently setting up new White Space, but knowing when to get out of White Space rather than Lock-in on its efforts. Constantly getting into new opportunities means, by definition, that not all are worth pursuing. Some get out early, and others later. It takes discipline to overcome Lock-in – and Philips has shown the knack for 10 decades.
by Adam Hartung | Apr 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Last night ABC’s Nightline program featured an article on Starbucks (see print version here). This is not the first time Nightline has discussed Starbucks. The program previously chided management about it’s competition with McDonald’s (see video on YouTube here) saying Starbuck’s coffee wasn’t any better than the fast food giant. Nightline’s recent feature was that Starbucks needs to "regain its focus" under the return of early CEO Howard Schulz. Something he was happy to support. Even Marketwatch kicked-in its review of the "retro-strategy" being taken to rejuvenate the company by launching a new coffee blend (read article here).
Wrong. Do we need a lot more Starbucks? At 15,000 units, one could easily argue that it’s sensible to expect less growth. And, as in all markets, competitors are figuring out how to duplicate Starbucks original idea – from other "shops" such as Caribou Coffee to mass chains like McDonald’s and Dunkin’ Donuts. ALL Success Formulas have a half-life. ALL Success Formulas grow tired, and lose their ability to maintain above average growth and profits. And that is happening now to Starbucks. Starbucks did the right things to grow like crazy as an early pioneer in its largest business. But doing more of the same – possibly better, faster or cheaper – is not going to get Starbucks back on the growth path. That’s just Defend & Extend activity which is already demonstrating declining marginal value.
Mr. Schulz was obviously the right guy to get things growing 20 years ago at Starbucks. Out of the Wellspring he took the coffee shop idea into the Rapids. He built systems that helped Starbucks Lock-in on all the things that could help the company grow. Imagine the skill it took to consistently open 6 new units a day!!! He was the right guy in the right place and he helped create an empire.
But that’s not what Starbucks needs today. For at least 3 to 5 years it has been obvious there would be a limit to the growth in Starbucks traditional business. Starbucks has been tailing off the Rapids, and heading into the Flats. And now it is rapidly falling into the Swamp of low growth. It was obvious the demand for shops was going to become saturated, and competitors were bound to get sharper and better. So the last CEO Disrupted Starbucks – saying the company was not just a coffee company. He got into music production, movie production, performer management, liquor production and consumer goods. He also started expanding the stores to offer sandwiches and many other products besides coffee. He actively promoted and funded White Space to find new revenue opportunities. And that is what Starbucks needs more than anything – more sources of revenue.
Starbucks is blessed with a name that does not mean anything. Starbucks doesn’t have to think of itself as a coffee company. Think about Nike – which didn’t have to be a shoe company. Only by moving beyond shoes did Nike become the megapower brand it is today. For Starbucks to now make an about-face and try to find the future in its past is lunacy. That’s trying to catch last night’s dream. The competitive market which supported rapid coffee shop growth is gone, and a new one is in its place. Focusing energy on a slugfest with its competitors will only result in price wars, lower margins, declining growth, store closings, laid off workers and lower returns for shareholders (who already know this and have knocked 50% off the company value in the last year – see chart here.)
The appeal of "back to basics" is so strong. We’ve seen too many executives fall prey to the call. It seems so logical to think that if we "focus" on "core competencies" we will somehow return to previous greatness. But that simply isn’t true. Watch old prizefighting clips, and it is amazing. Rocky Marciano looks like an out of shape thug compared to the athleticism of Joe Forman or Muhamed Ali – who look like they need another year in the weight gym compared to Mike Tyson and today’s belt competitors. Each wave of winners creates yet another round of competitors who are different – and that changes the game. Doing more may have worked for Rocky Balboa – but he had the help of a dozen script writers to make his dream come true. In the real world, we cannot capture the old glory but rather have to find new places and ways to compete as our markets become crowded from those seeking our success.
Starbucks is in for some really big trouble – worse than already seen – if Mr. Schulz stays in place and continues with his plans. For investors, its highly unlikely to be a pleasant ride. Starbucks can succeed if it realizes that its future growth is not about the coffee. It’s about finding ways to change other markets the way it changed the last one. And that means avoiding focus on past successes and instead using White Space to develop a new Success Formula that can grow and prosper – achieving past results but in new ways.
by Adam Hartung | Apr 4, 2008 | General, In the Rapids, Innovation, Leadership, Lifecycle
Today the press announced that the U.S.’s #1 music retailer is iTunes (read article here.) This is actually pretty amazing, given that Apple’s (see chart here) iTunes is only 5 years old. To reach this position Apple climbed over Target, Best Buy and finally Wal-Mart. Companies generally considered pretty good retail competitors. And iTunes did it with a handicap. Those who track the stats count songs – so iTunes had to sell 12 tunes to get the credit the traditional retailers get for selling 1 album – so as for number of music transactions iTunes clearly dominates.
You have to ask, why did Wal-Mart (see chart here) and Best Buy (see chart here) let this happen? They arent without resources, and music is profitable. Why didn’t they get out there 4 years ago with web sites that attacked iTunes offering product at great prices? If Wal-Mart is "Always low prices" why didn’t they put out digital music at a discount to Apple? With best guesses now that Apple has 19% market share, to Wal-Mart’s 15%, why didn’t Wal-Mart react to declining CD sales and invest in its own digital music site to slow Apple and get it’s fair share?
Wal-Mart and Best Buy are too busy trying to get people into the store. Those big old buildings are what management thinks about. These buildings are a testament to the company. Management is fixated on keeping people going to the stores. As retail goes on-line, and music has been an early leader, Wal-Mart isn’t about retail. Wal-Mart is about it’s stores. Rather than figuring out how to be a great retailer, thus giving customers what they want, when they want it, at a price they will pay, Wal-Mart is all about trying to get people into those stores by selling things cheap. The decor is allowed to remain lousy, the advertising looks cheap, the products in many cases aren’t stylish or alluring – and in the case of music the product isn’t even what’s growing (digital) but rather they rapidly dying CD.
Wal-Mart doesn’t care any longer about retailing. Wal-Mart is fixated on Defending & Extending its Success Formula, which it has closely tied to those incredibly ugly stores. Wal-Mart is about doing more Wal-Mart. And, unfortunately, Best Buy isn’t a whole lot better. Their approach to on-line sales is to get you to place an order, and then pick it up in the store. Again, all about the physical store – not about retailing. The goal has long been forgotten as the organization fixates on it’s stores as sacred cows they have to justify.
So Apple, which is a well run company, didn’t really have much competition the last 5 years. Apple has been allowed to grab the lions share of the market, while prime, well-funded competitors have ignored it. Not only retailers, but look at Sony – which has all the pieces (a recording company and a leading position in consumer electronics) to mount a considerable competitive attack. But Sony can’t get beyond Defending & Extending its old businesses, completely missing the opportunity to be a leader in the fast growing digital music sales arena. And Apple just keeps growing, and practically minting profits, with ease.
Southwest Airlines did the same thing 30 years ago. There was no reason Southwest should have been allowed to grow so fast, and make so much money. There were lots of airlines. But many went broke (Pan Am, Eastern, Braniff, Continental) and the others lost billions of dollars trying to Defend & Extend their business rather than simply get in and really compete with Southwest. So, like Apple, Southwest grew fast and profitably – and did it with seeming ease.
So who is threatening Apple? MySpace is jumping in, and we all know MySpace is very savvy about internet users. But note that MySpace is a division of News Corporation (see chart here). NewsCorp was once a newspaper company. But today it has interests in not only newspapers but radio, TV, cable TV and the web. Chairman Rupert Murdoch is a leader, like Steve Jobs, who is not afraid to Disrupt – nor is he afraid to invest in White Space. As a result News Corporation has flourished while other companies started as newspapers (Tribune Company, New York Times Company, McClatchey, etc.) have struggled and are floundering.
Businesses that focus on Defend & Extending their past investments become obsolete. Like SS Kresge, Montgomery Wards and Woolworths’s – Wal-Mart’s stores are not a protection against competition. D&E management likes to think big assets (like The Chicago Tribune or New York Times) make them indestructible. Instead, they can easily become albatrosses.
New competitors need not fear large, entrenched competitors. They are most often unlikely to do anything about a successful new competitor. Early entrants not only get in the Rapids, but are often allowed to stay there an amazingly long time (and they longer they continue Disrupting and using White Space the longer they can stay).
by Adam Hartung | Apr 2, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Top oil industry executives were on Capital Hill yesterday being questioned about their profits (highest ever) and the tax breaks they receive for exploration and production. (Read AP report here under headline "Oil executives defend huge profits".) Let’s not be naive. As officers of their corporations, they have an obligation to maximize the value of their companies – otherwise they could be sued by investors. No matter their personal opinions, they have to defend their profits and their product prices. So reading that they did so should not be unexpected.
It’s not the headline that’s interesting, however. It’s how they reacted to questions about the future. After all, reported profits are the past. What does the industry see in the future, and how is it preparing for it?
Does anyone doubt that crude oil is being consumed faster than it is being produced? We’ve known that since – 1940! The 1970’s "oil price shock" certainly taught all of us that petroleum is a finite resource, and we’re using it up. It’s not whether we will run out of crude – but when. So the interesting question is, when will that happen and what are our biggest "energy" companies doing to prepare for it?
Unfortunately, this isn’t a big topic for these behemoths. Typical of the industry leaders, when the Chairman of BP America was asked what he wanted for America’s future he replied "We need access to all kind of energy supply" with the writer noting "adding that 85% of U.S. coastal waters are off limits to drilling." In other words, more of the same! Drilling more holes, possibly in environmentallyl dangerous locations, does not solve the real problem – world petroleum consumption keeps growing while the pools of oil underground are being used up.
Don’t get me wrong, I grew up in the Oklahoma oil patch. I had lots of relatives that poked holes in the ground, sold oil leases, and worked in oil companies. The industry was very good for my home state, creating jobs and raising the standard of living. But that was then. What we need to address is the future. What are these companies doing to replace these massive revenues as oil gets harder and more costly to find? What are their future scenarios, and how are they proposing to help create a wonderful future? Together, according to the article, the major oil companies spent $3.5b on other options besides oil last year (solar, wind, biodiesel). Their tax breaks – $18billion. Their profits last year $123b!
These companies are incredibly Locked-in. They aren’t energy companies, they are oil companies. Right now, they are making lots. But look at history, and they have sure had their down years (or, rather, decades). These companies are the sort that make good money 5 out of every 20 years. Oil companies have never been a great, consistent, long-term sort of investment. Right now, they are making a lot of money. Shouldn’t they be taking action to make the future better than the past? Wouldn’t it be good for investors, employees and customers if they invested in something besides more oil wells to improve their consistency and growth prospects? Wouldn’t all parties enjoy these companies developing a path to long-term success, even as the oil supplies diminish? As stewards of investor value for the long-term, don’t they need to have a resolution for growth besides merely higher prices? Don’t they need to find ways to actually make more energy and add real growth to their business?
Lock-in is allowing these companies to invest in a marginally declining value proposition. More holes, and more risk. They keep doing what they know how to do, what they’ve always done. What’s needed is White Space where the best minds could really work hard on new alternatives. These companies need to give real Permission to develop a new Success Formula – not just window dressing. The amounts they are investing are small not only compared to profits, but compared to the alternative investments they make in deep water drilling or inhosptible location projects. These oil projects as well cost in the billions of dollars. So the companies aren’t truly resourcing White Space either.
We all know the oil will run out. As investors, we should be looking for leaders that are seeking new ways to compete. New solutions. It will be the new solutions that create long-term above average rates of return. But these leaders didn’t exhibit much interest in anything but Lock-in and more of the same. And that’s too bad for the industry – and all of us customers as well.
by Adam Hartung | Mar 31, 2008 | Uncategorized
It was around Christmas in 2005 when I was in an oversized van with 5 execs from a major U.S. newspaper touring India. We’d already traveled the disastrous roads of Mumbai and Chennai for a few days, and discussions of bad infrastructure, squalor and absolute poverty had grown tired. Looking for a new topic I commented, "you know, within a few years there will be hundreds – or thousands – of Americans coming to India for surgery and other medical treatments."
The group broke into hysterical laughter. But I persisted. "Look," I said, "health care costs in the U.S.A. are skyrocketing, many people are without or losing insurance benefits (or insured with many uncovered treatment options), and the population is aging. This all leads to expecting demand to outstrip what people can pay. At the same time, many of the best and brightest in India have gone to the U.S. for medical training and they are returning home. Think of all the folks – retirees, truck drivers, farmers and others – who will need hips, livers and heart surgery. They could come to India and get the procedure, plus 8 weeks of great therapy, for 10% of the U.S. cost."
I wanted to get the group to thinking about big themes. The world is always changing. We see the data, but we don’t use it. We don’t change our expectations for the future. And we don’t build our plans to meet the emerging future world. Instead, we rely on what has always been continuing to be. In this case, the emerging healthcare "crisis" in the U.S. is bound to lead to some unusual solutions – and we would be a lot better of if we plan for them.
Last Friday the front page of The Chicago Tribune had the lead "For big surgery, Delhi is dealing" (read article here). The article went on to discuss benefits of India-based medical care, a growing trend for Americans to use it, and how even insurance companies are considering programs for their insureds to take "medical vacations" in India for costly procedures and recovery.
The point isn’t that I got one right. Rather, we should re-evaluate how we do planning. Most of us, and our businesses, plan by obtaining information on the past and projecting it into the future. We love our Lock-ins, based on past economics, markets, competitors, products and services. We love to take for granted that the way things used to work is the way they will work in the future. It makes life easy, and allows us to laugh at the notion that Americans would fly to India for bypass or liver transplant surger. That’s fine as long as everything remains the same. But things change. And when underlying factors change, the future often comes out very different than the past.
We should plan by thinking out scenarios for the future. Start by identifying big themes – like rising healthcare costs in America, higher oil prices, instability in countries that produce lots of oil, increased use of grains for fuel rather than food, global sourcing of products and labor, aging population demographics in American and Europe, long term weather changes, etc. and then say "if these trends continue what will the world look like in 3, 5, 10 years?" Build scenarios. What if the price of diesel hits $12/gallon (that’s only a tripling from today – just one big bomb in Tehran or sunk tanker – which is what happened in the last 3 years as we went from $1.30 to $3.90/gallon)? What would happen to distribution systems, railroads, airplane travel, grocery cost, vacation destination hotels? Figure out scenarios, and then bring them back home to today. What does it mean for your business if these themes really happen?
Obviously, the impact of Google, Craig’s List, internet news sites and blogs on newspaper advertising has been huge. Far worse than any of my colleagues that fateful day were predicting. They were basing forecasts on historical models, and expectations that the business would come back as it always had. They were grossly underestimating just how far advertising rates could fall – and as a result they were not really considering radical changes in their Success Formulas. Just like they didn’t want to consider Americans flying to Delhi for surgery, they didn’t want to consider that newspapers might become a product needed by dramatically fewer readers – and less valuable to advertisers with many new options. Their plans were based on the past – not a potentially very different future. To avoid becoming obsolete, our planning must be based on planning for the future – not the past.
by Adam Hartung | Mar 29, 2008 | Defend & Extend, Disruptions, General, In the Whirlpool, Leadership, Lifecycle
Boy oh boy did the Chicago press decide to beat up on Motorola (chart here) this week. With the company’s announcement that Motorola does intend to split into two seperate entities – by spinning off the mobile handset business – the press decided it was time to unload. Headlines: "Pulling wings apart a risk for Motorola" (link here) – "Expert’s advice: Cut red tape and deliver" (link here) – "Motorola breakup ends comeback effort" (link here) – "Motorola must think beyond its batwings" (link here). Reading these articles, you would think the people running Motorola were dullards and miscreants with limited skills and poor business sense. But do you really believe that?
The management at Motorola is filled with very bright, hard working people. Most of them have been quite successful inside Motorola or from outside and recruited in. So the question becomes, if they aren’t stupid, how can this happen? As I’ve blogged before – leadership did a decent job of Disrupting initially, and all of Motorola opened White Space that launched new projects and products. Growth followed. But in mobile handsets leadership allowed the early success of Razr to succumb to old-fashioned notions of maximizing product revenue and profit. Management wasn’t stupid, it just listened to the siren’s song of "maximize profits by seeking market share and using volume to seek lower costs in manufacturing, sales and distribution." Who would argue with that? It made a lot of money really fast. It just left the company vulnerable to competitors – who acted fast and leapfrogged Motorola. And it allowed Defend & Extend practices, well entrenched in Motorola, to re-instill themselves.
So if management wasn’t stupid, what’s next?
First, Motorola does need to split. One business needs to keep doing the right things in DVRs, WiMax, headsets and 2-way radios. It needs to keep the funds from its success to re-invest in more White Space projects and not divert money as well as management attention into cellular handsets. The first business is Motorola – always has been – and justifies its brand image. This business is in the Rapids. This business has found ways to Disrupt its old Lock-ins, sell off busineses (like auto products) that don’t perform, bring in new acquisitions and set up White Space to find new growth markets.
The handset business needs to get out on its own – and either fail or turn around. Literally. Whereas the other part of Motorola got itself from the Swamp back into the Rapids, handsets isn’t just in the Swamp, it’s in the Whirlpool. The business would have gone into bankruptcy already if not supported by the rest of Motorola. These two businesses are in very different parts of the lifecycle, and require very different management solutions. So push it out the door and give it a chance, albeit a small one, to turn around.
The handset business needs to start over. New name, and a new leadership team willing to Disrupt abruptly. The key requirement is to so Disrupt the business that old practices are quickly abandoned – since they are what is causing the company to falter. The people, who know they are in trouble, have to see that old Lock-ins to practices like product reviews and technology stability – practices that are seen as good management – are what has gotten them into trouble and they have to be ignored. Those who have administered the best management practices – the Status Quo Police – have to be removed. Those who reinforced abiding by old practices have to go so that new best practices can be created around faster product launches and more market participation.
New handset leadership needs to very quickly give Permission for these bright people to unleash their skills. Permission has to be granted to rethink the technology, the products, the distributors — all aspects of the business. Handsets can’t win by doing what it did before, better. The business has to transform and that requires Permission to break all the rules – and White Space in which to try new things and see what works. Fast.
Great companies learn to let go early and fast. Quite simply, not all ideas pan out. Some products are huge successes, and some aren’t. Great companies keep Disruptions and White Space alive – launching new products and services. But if expectations aren’t met they cut quickly. They review why things didn’t work out as planned, and move on. Maybe too early, or too late, or wrong technology. But move on. Get over it, quit spending where its not making money. Love your launches, but don’t marry them. Keep nimble. Look at the businesses GE has entered, and exited, over the last 20 years. But Motorola, filled with truly innovative employees, spent too much energy on the "selection" process, launching too few products for the market to evaluate, and tried forcing them into success far too long. Does anyone remember Iridium (the failed effort at a satellite-based mobile phone network)? The faster the current distraction (handsets) is thrown over the wall the faster the rest of Motorola can get back to Disrupting and growing new Success Formulas in new markets.
And those in handsets have to learn to launch new products while existing products are still growing – and to let the customers decide what technologies and products are good rather than internal vetting and management. Whatever you call your company – you can’t move too fast finding a new Success Formula. With the size of ongoing losses, you’re in the Whirlpool fast on the way to extinction. It will take serious outside-the-box launches (like Apple launching itself into the music business with iPod and iTunes) to turn around your business. Only by Disrupting – recognizing the depth of your horrible situation publicly and as a team- then giving yourself Permission to overcome all the old Lock-ins and using White Space to redefine a new company can you hope to turn around.
It’s not about whether management is stupid. That is almost never the case. The issue is about managing, and overcoming, Lock-in. Those who learn to manage Lock-in by using Disruption and White Space keep themselves in the Rapids. It’s really, really easy, however, to follow the siren’s call of maximizing profits by letting Lock-in promote reduced innovation, reduced new product launches, reduced distribution experiments while maximizing sales and profits of existing products and services. Only by ignoring those calls can leadership turn around businesses by refocusing on Disruptions, giving Permission for truly different behavior and using White Space to develop new Success Formulas.
by Adam Hartung | Mar 27, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
We all find ourselves watching the news, or reading a newspaper, then shaking our head and saying "Why’d they do that?" When it all seems so obvious, why do leaders take action that seems counter to their goals?
Take the recent case at Wal-Mart (see chart here). A 52 year old employee gets hit by a truck and brain damaged. Wal-Mart’s insurance pays out $470,000 in health care costs. Yea! Great PR story for how WalMart sticks by employees that sign up for health insurance. But that wasn’t the story printed in the newspaper. When the family, at their own expense, sued the trucking company for lost future wages, pain and suffering and future care needs – winning $417,000 after expenses. But, that still wasn’t the story getting attention. No, what got a lot of attention was when Wal-Mart sued the now invalid and institutionalized former employee to get back its $470,000, won, and admitted it was taking the money away from her! (Read account of story on CNN.com here.)
Let’s just skip over whether Wal-Mart was right or wrong – legally or ethically. More practically, how much does Wal-Mart spend on Advertising and PR every year? Let’s see, $360B revenue at just 1% would be over $3B. So Wal-Mart wants customers to think well of the company and shop there.
As a result of the company’s lawsuit it gets back $470K – that’s .013% of its ad/PR budget. About enough to buy a couple of major market TV ads. Meanwhile, the airwaves (and blogsphere) get flooded with the story and its negative sounding impacts. MSNBC on its Countdown show labels Walmart "the worst person in the world" (see video here.) CNN puts the video onto its hourly loop for everyone to see (see video here). Anderson Cooper makes it a feature discussion on his television show. Even the L.A. Times writes a negative opinion about it in the newspaper (read here.) What would all of that PR cost WalMart to acquire for a positive story? Millions if not tens of millions of dollars. But it could have avoided all that cost for a mere $470,000.
Today WalMart is far from being a beloved company. There are those who like Wal-Mart, but there are those who don’t. For shareholders and employees, converting those that don’t like Wal-Mart into someone who does is beneficial, as it can raise sales, margins, future expectations for performance and even the stock price. As a simple business decision, why would anyone at WalMart decide to go after $470,000 when the risks are so enormous? Why not let this one go? Why do that (make the decision to sue this woman)?
Unfortunately, Locked-in organizations have no choice. When the Lock-in becomes too great, no options really present themselves. There is no room for creative thinking – even if that thinking were intended to help reach the goal. Behavior is no longer goal driven, but instead becomes executing the Locked-in Success Formula no matter what the potential outcomes. Just read this quote from Wal-Mart’s spokesperson (taken from the above referenced CNN article) "Wal-Mart’s plan is bound by very specific rules… We wish it could be more flexible in Mrs. Shank’s case since her circumstances are clearly extraordinary, but this is done out of fairness to all associates who contribute to, and benefit from, the plan." No room for flexibility, no matter the impact or outcome.
If every employee donated $.40 it would recover all the money Wal-Mart apparently saved by suing the damaged woman. But did Wal-Mart ask its employees if they would rather donate $.40 or sue her? Did anyone at Wal-Mart say "you know, this could cost us $10million in damaging PR – maybe it would be more valuable to our employees if we skipped this lawsuit." Obviously not.
When you wonder "Why did they do that?" remember this story of Wal-Mart. Locked-in organizations completely lose sight of their objective when making decisions that serve to Defend & Extend the Lock-in. And once decisions are made, the Status Quo police and all the rest of the organization jump to its defense — rather than think through what was going on. All any executive had to say was "oops, I think we blew this one. Let’s tell that to the press, drop the suit, and give this woman a $20,000 bonus while offering her husband a job in janitorial" and the bad press would have been diffused – possibly leading to a positive spin. But that’s not how Locked-in organizations behave – and that’s Why They Did That.
by Adam Hartung | Mar 25, 2008 | Disruptions, Leadership, Lock-in, Openness
Whenever we want change too often we can’t. Everyone will agree to change, but we are so Locked-in that we we can’t seem to behave differently, even though we realize poor performance requires change and we agree we have to do things differently. That’s why Disruptions are so critical. Disruptions cause us to stop – and realize other options are possible.
As we ended the 1970s the U.S. was struggling with a host of problems, and some pretty poor performance. The 1970s had seen a huge jump in petroleum prices, runaway inflation with interest rates nearly 20% on everything including corporate debt and mortgages, job stagnation with high unemployment, and tense international relations as American diplomats were trapped in a multi-month hostage situation in Iran. The decade’s last President (Jimmy Carter) referred to America as being in a "malaise". American GDP was going nowhere as Japanese producers looked like they were quickly taking over global manufacturing as well as demonstrating superior quality in a wide range of products.
So what happened in the 1980s to turn this around? President Ronald Reagan implemented a Disruption that changed the way almost everyone thought about many issues. Unlike any other President, early in his presidency Mr. Reagan fired all the striking air traffic controllers. This was unprecedented. He risked the recently deregulated airline industry, the image of government paid jobs (air traffic controllers were FAA employees) as "untouchable", his reputation and decades of labor/management relations by simply refusing to negotiate with the striking controllers and setting up a program to replace them all. In days, everyone in America knew something very different was happening. Whether they agreed with Mr. Reagan or not, everyone knew that this was not going to be "business as usual." Right in the core of American employment, the federal government, a leader had said he was going to do things very differently. And everyone saw he meant business.
This was an enormous Disruption. Not just to airlines and the flying public. This Disrupted how the federal government worked, and how employees and legislators thought about how government would lead. The Disruption was so dramatic that it caused people to say "what else could be different? If we don’t have to negotiate with unions, what else could be changed?" Within months Mr. Reagan took to Congress, and the American public, a radical idea popularized by a fairly obscure economist named Arthur Laffer saying that lowering taxes would actually increase government revenue. To all traditionalists, and most people, this seemed absurd. But in the Disrupted environment post strike-firings Mr. Reagan said "why don’t we give this a try. What we’ve been doing hasn’t worked. Maybe this will. We need to give this a try." And Congress passed the most extensive income-tax rate reduction in American history – literally halving the rates on top taxpayers and cutting rates for everyone else.
The Disruption opened the door to White Space. And once he had White Space, Mr. Reagan used it. He offered as experiments new programs to cut taxes, new user fees to fund parks and other government facilities, and the increased use of outsourcers to cut the cost of government operations. All of these had an impact on rapidly changing what was happening in America – and all were made possible by first Disrupting and then creating White Space to try new approaches. Helped by a release of the hostages on his first day in office, dramatically falling oil prices, and a much more effective federal reserve run by monetarists that had finally gotten control of the money supply leading to much lower interest rates and inflation, Mr. Reagan was able to try a lot of new things which changed the direction of America. But without Disrupting, none of his ideas would have been tried and who knows what the outcome would have been.
America’s Labor movement has never recovered from the Disruption Mr. Reagan implemented. As the attached chart shows, strikes have almost disappeared. And average incomes in America have not kept up with basic inflation, much less core costs like health care, for 25 years. But no one can doubt that Mr. Reagan changed things. And it all started by firing the air traffic controllers – a Disruption that caused people to stop, altered how everyone thought, and created the opportunity for White Space.
