by Adam Hartung | Nov 30, 2007 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lifecycle, Lock-in
Motorola’s on the bubble. Today we learned the CEO is being replaced (read article here).
It’s easy to forget how bad things were at Motorola (see chart here) when Ed Zander took the helm. The company had been laying off thousands, and most analysts were calling for more reductions. Many people wondered if Motorola would survive. But Ed Zander didn’t cut a lot of jobs, instead he opened up a lot of White Space. He altered where Motorola invested, and made many acquisitions in businesses keeping Motorola at the cutting edge of digital television, wireless data and wireless communications. Ed Zander made a lot of Disruptions at Motorola, and he encouraged thinking to move the company forward – rather than trying to find past glory. Some people forget that he was CEO of the Year in the business press 2005.
But he didn’t do enough, fast enough, to leverage fast wins in mobile phones. His White Space project with Apple, for example, didn’t move fast enough or hard enough to be a leader, and ROKR is barely known while iPhone is gadget-of-the-year. Enterprise data applications from Symbol still aren’t even identified with Motorola, despite being a Lotus Notes sort of application. Even though all the Comcast Digital Video Recorders come from Motorola, too many people only know the name TiVo. Lots of great White Space – but not enough results fast enough, as profits from RAZR evaporated.
No rest for the weary is never more true than in growth companies. It’s not important what you did last year, only what you’re doing now. Despite Disruptions and White Space, there weren’t enough results.
Now the press is talking about how the new CEO is from the telephone business – as if going back to previous markets will save Motorola. Do analysts want to go back to thousands of lay-offs and cost reductions? Or should the company go forward, continuing its path into new markets, new applications, new growth opportunities?
When RAZR profits fell, Carl Icahn came calling. This grim reaper investor doesn’t care about Motorola’s long-term health. He wants to suck cash out for himself. If pulling the cash kills the company’s long-term prospects he doesn’t care. He just wants a short-term payoff. And he got Mr. Zander to blink (or maybe Motorola’s Board). New programs slowed, new rollouts slowed, market share efforts stopped as the organization turned to old approaches. Faith in Disruptions and White Space evaporated as Defend & Extend practices returned. And Mr. Zander’s demise became predictable.
Mr. Zander turned around Motorola, lest we not forget. But what will happen next? If the company forgets how it unleashed innovation and returned to growth, things could get a lot worse before getting better. Our biggest regret has to be that Mr. Zander didn’t do a better job of keeping his Board and investors aligned with his programs – and of not pushing his White Space teams to produce more results more quickly. We can hope the new CEO will return to Disruptions and White Space rather than Defend & Extend practices which will push Motorola back to where it was before Ed Zander arrived. Going back to the past may sound comforting, but success is all about the future.
by Adam Hartung | Nov 30, 2007 | In the Rapids, Leadership, Lifecycle, Openness
There is no doubt that it’s more fun running a business in the Rapids than one stuck in the Swamp. But it’s surely no walk in the park! Even in high growth markets, competition is fierce and the demands for growth are merciless. Recently Starbucks (see chart here) admitted to a 1% decline in store traffic (see article here). The stock was punished, dropping to it’s lowest price of the year.
Businesses in the Rapids have to grow, grow, grow. There’s no time to relax and count the money. Even a very small hiccup scares the devil out of investors. As it should, because a growth stall could mean a very quick trip from the Rapids to the Swamp. Starbucks has felt this fear palpably.
It is inevitable that Starbucks store growth will slow. Honestly, no matter how good the product or store ambiance, there is a limit to how many Starbucks we need. If we view Starbucks as a one-trick pony, just out to replicate its Success Formula by opening store after store, then investors should be very wary of this company. If Starbucks is Locked-in on selling coffee in its stores, that Success Formula has a half-life and there’s plenty of reason for concern.
But, is that true about Starbucks? Let’s see, they’ve started adding sandwiches and other food to their stores – which could well lead to an increase in the average check size and continue growth even if number of stores and number of customers per store doesn’t grow. They don’t sell coffee just in their stores, but also in grocery and other outlets. They are still moving Starbucks liquor into more liquor retailers. They still produce music, and are the Starbuck’s agency just this year added Paul McCartney to the list of musicians represented. And the movie production company that put out Akeelah and the Bee is still alive and kicking. When we look at all these other businesses, we can see that Starbucks doesn’t rely just on store foot traffic for individual coffee purchases to create growth. They have a number of other businesses, many not just Defending & Extending Starbucks but actually White Space, as growth vehicles.
Starbucks does not do a good job of educating investors about all it does. And its White Space does not get much attention. That’s too bad, because investment analysts like simple stories – and they oversimplify Starbucks when discussing the company’s future. Yes, a drop in foot traffic – even a mere 1% – is something to be concerned about. But the important question is whether any of the other Starbucks initiatives are powerful enough to keep the company in the Rapids. We need to know more about those programs before writing an epitaph for a company showing lots of Disruptions and White Space.
by Adam Hartung | Nov 16, 2007 | General, In the Rapids, Innovation, Leadership, Lifecycle
Five newspaper giants are banding together to sell internet ads (see article here). Now that’s creating some White Space to help their businesses grow. Good luck to Tribune, Gannett, Hearst, Media News Group and Cox.
Readers of this blog know I’ve been brutal on Tribune,, in particular for staying Locked-in on newspapers and focusing management on short-term metrics while implementing a leveraged buyout by a real estate developer. That effort looks like a Defend & Extend action trying to salvage a troubled ship called "the newspaper", and shows little hope of success. After all, journalism is about "news", not "paper", and efforts to salvage the oversized document thrown on my doorstep daily can’t be viewed optimistically. When readership is declining as people go elsewhere for news and entertainment, and advertiser spending is dropping at more than 10%/year, it’s not hard to predict the future.
But this new venture is White Space for these companies. Their individual web sites focused on displaying news. Interesting for readers, but what’s the business proposition? These companies have been so Locked-in to old paper-based business practices they didn’t know how to make money from their web sites. But this venture is focusing on the business side of journalism – the ads. And marrying advertisers with the content created and distributed by the journalists. Focusing on the business aspects, and in the extremely high growth internet ad market (just look at Google and Yahoo! to recognize the growth in internet ad sales), this venture has the opportunity to create a new Success Formula these companies can use to turn around their companies – and save their journalistic heritage.
My only disappointment is I see no Disruption to existing Lock-ins. It appears this venture is totally outside the traditional organizations. The risk is that this venture learns how to sell ads, but the 5 investors don’t Disrupt themselves in order to migrate away from old ways and toward the new market. If they don’t migrate, this venture may succeed but the traditional companies most likely won’t. So the White Space is good, but these companies need to go further to Disrupt their existing Lock-ins and create opportunities for rapid adaptation to the marketplace this joint venture develops.
Nonetheless, we have to be encouraged by this venture. Instead of just giving up the market to upstart Google they are finally starting to compete. Let’s hope the venture is given permission to ignore its investors’ old Lock-ins and do whatever the market requires for success — and let’s hope the investors fund this sufficiently so it can grow and succeed. This offers real hope for some very tired Success Formulas in traditional newspapers.
by Adam Hartung | Nov 7, 2007 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
Today GM (see chart here) announced one of the biggest losses in corporate history. Believe it or not, GM announced a third quarter loss of $68.85 per share – double the value of the stock (read article here).
Surely you aren’t surprised. GM has sworn to its Lock-in. The company has refused to set up White Space. Leadership keeps saying it can somehow improve it’s broken Success Formula and thusly turn the company around. They’ve sold assets, including most of GMAC, to raise cash for keeping the broken Success Formula breathing – barely.
But GM has been failing for more than 20 years. Why would anyone think that changing its handling of employee health care costs would improve its competitiveness (a recent much-ballyhooed management action)? Let’s wake up and realize that GM has been going out of business for a very long time, it’s just now that people are seeing the real risk. We’d like to believe in the Myth of Perpetuity – that large companies will simply go on forever. But that’s not true. Montgomery Wards, Polaroid and Wang are just a few examples of companies that were large and once profitable but that disappeared.
When management refuses to accept that it’s Success Formula is failing it dooms the organization. If management refuses to create White Space, and use that White Space to develop new Success Formulas and migrate the organization, it assures failure. EDS, Hughes and Saturn were all projects that had the opportunity to define a new, successful GM. But GM dismantled these projects and sold assets to keep the old Success Formula on life support.
As investors, employees and suppliers if we are surprised it’s our own fault. Size is meaningless in today’s information economy. Companies can fail very fast when customers can move to new solutions with the click of a button. GM may not declare bankruptcy in the next 2 years. But if it does….. will you be surprised?
by Adam Hartung | Oct 28, 2007 | In the Rapids, Leadership, Openness
I talk frequently with small businesses. Many with revenues under $1million. And for many of these owner/operators they wonder how it can make sense to maintain White Space. After all, they say, as a small business isn’t even more important to focus on the primary business? The allure of doing one thing is high, but in the end the best businesses always utilize White Space.
The era of drive-in theatres is almost gone. But many of us remember when every town had one. Did you ever wonder how Drive-ins started? I bet you thought someone in the movie business invented the concept. Or perhaps someone with a traditional theatre. But that would be wrong. In 1933 it was a parts store/gas station owner who wanted to increase his night business that opened the first drive-in theatre. He started by experimenting with a projector and a sheet between trees. He launched what became an entirely new theatre concept, and it became a lot bigger than his gas station. (For more on the history go here.)
Businesses of all ages and sizes need White Space. It’s in this part of the business where anything goes, not encumbered by Lock-in, that we are the most creative and capable of trying new ideas. None of us know what will lead to the Rapids, and fast, profitable growth. Even though lots of small businesses think they know what they should do, until they hit the Rapids and grow at double digits they are still in the Wellspring. And the Wellspring breeds the highest number of business failures – usually because enterpreneurs Lock-in before they hit the Rapids and they don’t know what will grow. Maybe you think you’re in the gas station business, only to learn your night movies are worth more than parts selling. Only the marketplace will determine if you’re in the Rapids.
Domino’s thought it was in the pizza business. For 20 years Domino’s did not grow, nor did it make any money. But when the founder realized he was in the prepared food delivery business, rather than the pizza business, he hit the Rapids and became a billionaire in just a decade. No business is too small to benefit from White Space – and avoid the traps Lock-in lays to thwart growth.
by Adam Hartung | Oct 23, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
The greatest euphemism in business is "mature." Frequently executives and analysts will describe low growth as "maturing", as if this is OK. Just today CBSMarketwatch (read article here) reported an analyst from Fifth Third Bank said WalMart (chart here) is a mature business — and then goes on to say this is a good thing! Incredibly, he thinks slower growth will lead WalMart to paying more in dividends and buy back more shares raising the stock price as it stops investing in stores.
That’s what we used to call "milking" the business. And we now know that simply doesn’t work. The thinking used to be that the cash flow was sound, due to market domination, so the cash could be paid out. But just look at WalMart. It’s having to spend plenty of money just trying to stay in place as competitors (Target, Kohl’s, JCPenney and others) keep stealing customers and revenues. Last week WalMart cut prices on 15,000 items, which will cost billions of gross margin dollars, in an effort to get customers back into stores for Christmas shopping. And because WalMart growth has slowed dramatically (sales in same stores are up only .8% compared to a year ago – less than inflation) the company is desperate to invest in things like Japanese grocery stores seeking something that will grow. So the money is still flowing out of WalMart in plenty of big ways, without going into the pockets of shareholders. Or employee pockets as they still work without benefits or overtime pay, and sometimes even over breaks – as we learned in a Pennsylvania lawsuit.
Businesses are not genetic material. They have no biological requirement to "mature." And businesses can’t afford to "mature." They have to constantly grow. Without growth, they quickly will be consumed by competitors. If we say WalMart is "mature", that is a very, very bad thing. I agree wtih the UBS analyst who said that WalMart needs a turnaround. But that won’t happen any time soon at Locked-in WalMart. For investors, employees, vendors and customers, the word "mature" is more devastating in business that it even is in life.
by Adam Hartung | Oct 22, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
So readers of this blog know I am no fan of Wal-Mart. The company has yielded no benefits to its investors, employees or major suppliers for almost a dedace (see equity chart here.) Management loves being Locked-in to the outdated Success Formula, even though it does not produce satisfactory growth.
So, given that the last 4 years Wal-Mart has failed to meet expectations for its Christmas season sales you would think it was about time they came up with a new approach, wouldn’t you? And what did they do? According to USAToday (see article here) the company decided to whack prices down on 15,000 additional items. Let’s see, last year they cut prices on 6,000 items and revenue did not meet expectation. So this year the obvious this is to do………….. more of the same, of course. What didn’t work will surely work if the company simply does more of it – right????????? Does this in any way remind you of doctors that believed in blood-letting?
Wal-Mart is so stuck in the Swamp it can’t even think of doing anything new. More of the same is not a strategy. When the tactics become too easy to predict the company becomes too easy for competitors to attack (and make my blog writing too easy.) More of the same is a death sentence when the growth slows. With lower prices Wal-Mart’s revenues and profits will suffer more, not improve. And it’s unlikely this will even benefit consumers very much, since most of them have already said they prefer to shop at Target, Kohl’s, JC Penney and other retailers with better selection and better ambiance.
by Adam Hartung | Oct 9, 2007 | Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in
When I was a kid – way too long ago – a comedic television show named Get Smart featured a mock spy who was terrible at lying. When he would get caught telling a fib he would immediately try to change his story, and his first line was always "Would you believe?". It was clear that you couldn’t believe, or trust, this guy.
General Motors (see chart here) has apparently reached a new agreement with the UAW. And the headlines screamed "Deal Gives GM Grip On Costs" (see article here.) The Chicago Tribune article goes on to quote several industry analysts/gurus making claims that GM has now resolved the issues that caused them to fear bankruptcy just 2 years ago. For example, the chairman of the Center for Automotive Research said "I think they’re competitive on cost now. There are no excuses after this." The consensus is that GM can now refocus on products, and regain lost share.
Would you believe……. ? Does anyone remember the auto company’s situation back in the 1970s and ’80s? They all cried "foul" that they could not compete effectively with Japanese competitors who had the benefit of a very favorable Yen exchange rate. Because the dollar was stronger than the Yen, the auto companies claimed they could not compete. Well, it was only a few years before the dollar fell more than 30% against the yen. And now, following a long decline, the dollar is at an all-time low versus the Yen, which is extremely cost favorable for GM. But do we hear any auto executive saying that their competitiveness versus the Japanese has improved? Rather, attention has shifted to labor contracts.
Companies in the Swamp and Whirlpool leap from disaster to disaster. Their Success Formulas are broken, and Lock-in keeps them producing poorly. They blame poor performance on factors outside their control, because they hope the world will return to conditions which will allow their Success Formula to produce better. They want the world to evolve toward their needs, rather than they evolve toward meeting market Challenges. Good luck with that approach.
GM has seen its market share steadily erode for 3 decades. And a look at the company’s stock price chart shows that long term investors would have received no value (other than dividends) over that same long period. Shifting its health care charges under a new labor contract does not change GM’s competitiveness. GM does not design, manufacture, market and sell its products as well as its competitors. And it has not developed any new businesses with higher growth and better profits. Most of GM’s competitors now make a large percentage of their cars in the U.S. just like GM, even though they are offshore headquartered, and they are growing sales, market share and making more money.
GM needs a Disruption and White Space – like the old Saturn division once was – to design a new Success Formula. GM’s new labor contract merely extended its demise a little longer. Investors, employees and suppliers need to beware of big promises, anticipate business-as-usual, and prepare for more pain.
by Adam Hartung | Oct 8, 2007 | Defend & Extend, In the Swamp, Leadership, Lock-in
Defend & Extend managers love to believe that by sticking to the Success Formula they produce the best results at lowest risk. But, Lock-in is not free. It has costs related to lost opportunities, as well as direct costs. Take for example Wal-Mart (see chart here) which has offered investors no gain for over 5 years.
As detailed in previous blogs, Wal-Mart is horribly Locked-in. It’s efforts to grow internationally have failed miserably, because the company tries to extend its Success Formula into other markets where it simply doesn’t work with clients. Now we’re seeing that Wal-Mart is struggling to extend that model even in the USA (see article here). Everyone knows how Wal-Mart started in the rural markets, then went to mid-size cities and eventually into the suburbs. Each step Wal-Mart merely did what had previously done better, faster and cheaper. Wal-Mart did not develop the capability to adapt, but merely to further optimize.
Now Wal-Mart is hoping to grow in the U.S. by entering major cities. But in each city, such as New York, they are being shut out. In 2006 they targeted Chicago. Almost shut-out, they obtained permission for 1 store via the first ever veto of Chicago’s Mayor Daly. But now, growth has stalled and there are no new stores opening any time soon. As the first page of the Chicago Tribune headlined "Wal-Mart Strategy Stumbles." So as America becomes more urban, Wal-Mart is losing the opportunity to enter its last remaining domestic marketplace.
Most people are aware that part of Wal-Mart’s Lock-in is to never allow unionized employees. And Wal-Mart is merciless when controlling employee time. In Philadelphia Wal-Mart’s Success Formula cost the company $62.3million, on top of a previous award of $78.5million, as a judge ordered the company to pay workers for its labor practices (see article here). Wal-Mart might like to brag about its ability to be low cost, but when that capability starts being judged in courtrooms, and judges order large fines, it is clear that Lock-in is standing in the way of progress rather than aiding it.
Lock-in is not free. Companies that succeed long term learn how to update their Success Formulas by overcoming Lock-in. Unless Wal-Mart Disrupts soon, its shareholders, vendors and employees can’t expect much of a return.
by Adam Hartung | Sep 22, 2007 | In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Lots of people have the idea that you can "milk" a business of cash. The notion goes that you can take a viable, but slow (or no) growth business and stop investing. Then "milk" the cash out of it. What a great idea. Too bad it doesn’t work.
Take Sears for example (see chart here). Eddie Lampert got KMart out of bankruptcy, and then bought up Sears. He quit investing in Sears, and revenues and profits dived. He told investors that was OK, because he was improving profit margins. He said he would keep flying the plane well, just at a lower altitude. But sales and profits have continued to dive even further. Just recently (see article here) Sears had to announce that profits were off yet another 40%. Margins have declined from 28.4% to 27.7T. Even though the company has been buying its own shares to prop up earnings per share, even that figure is down almost 40%. And, revenues are down (not the growth rate down, the actual revenues have again declined) by 4%. Same store sales at both Sears and KMart are down by about 4%. The President of Sears, Aylwin Lewis, said he was disappointed. Oh really?
Many investors have said not to worry about Sears slide. After all, they said Mr. Lampert would "milk" Sears of its cash to make hedge fund investments – which are supposed to be wildly profitable. Especially since that is ostensibly Mr. Lampert’s forte. But, there are now more hedge funds than you can shake a stick at. The price of deals has been bid up, and returns have fallen. So those investments haven’t paid off. Now the Sears war chest has declined by almost 50% – so much for "milking" to maintain cash.
Sears went into a growth stall, and those who ignored it have lost 27% on their equity investments. The reality is that in today’s competitive global marketplace, no one has the option to slow investing and "milk" the business. Competitors swoop in and push you down faster, and harder. Competitors find those who want to "milk" easy prey. Especially when they are as good as Target, Kohl’s and JC Penney – or as large and desperate for growth as WalMart.
When a Success Formula grows old and tired, the portfolio notion of "milk it" so you can invest in another investment is, well, hopelessy out of date. Portfolio theory is a great idea, but do you really think slow-growth, defensible cash-rich businesses exist? Let’s get real. When a Success Formula stops producing good returns management has to move fast to set up White Space and MIGRATE to a new Success Formula. That’s the only option to keep from losing everything in the Whirlpool. "Milking" is not possible. Migrating is what management has to do. By migrating to a new Success Formula companies can be reborn- like the Phoenix. But Sears has no White Space – none. Leadership keeps bleeding out cash, revenues fall, profits fall, and there’s no great saving alternative investment. With every month, that option gets farther away for Sears and its inevitable demise becomes clearer.
I posted to this blog the day Lampert announced his acquisition of Sears that the company would not resurrect. But a lot of people wanted to believe in Mr. Lampert. Better to believe in reality. Company’s have to migrate toward a new Success Formula by using Disruptions, White Space and working hard at it. Not by wishing for portfolio theory, clever transactions and efforts at "milking" to somehow miraculously create value.
