by Adam Hartung | Sep 7, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Kraft, the venerable American producer of cheese and other branded foodstuffs, has performed terribly for several years (see chart here.) It’s operating margin is lowest in its peer group, its revenue growth has been nonexistent, and it has sold off valuable, and growing, brands – like Altoids – to fund its outdated Success Formula by Defending such old brands as Velveeta. This last year Kraft was fully spun away from previous owner Altria (the old Phillip Morris), and a new CEO was put in place. But so far, investors and employees have nothing beneficial to show from these changes.
On Tuesday the CEO said she intended to improve the performance at Kraft by setting higher goals, and tying compensation to those goals (read article here). Her plans include incentive compensation ties to profits, cash flow and revenue growth. And she intends to link how much is paid to Kraft’s ad agency to the growth in brand sales. All of this may sound good, but it is unlikely to make any difference.
Any reader of this blog could decide to set a goal of improving their income by 50% this year. And readers could promise that spending on hobbies would be directly linked to growing income. But, would that make any difference? If you go to your boss and tell him your plan he’s likely to say "that’s interesting", but will that help you reach your income goal? Of course not. Changing the goal is not enough. What’s critical is Disrupting the Lock-ins so that it’s possible to find a new Success Formula leading to that goal. For example, to achieve a 50% revenue increase might well require getting additional education – which would likely mean killing the Lock-in to watching weekend football or enjoying evenings out with a spouse. Or it might mean changing employers and careers, which could entail killing the Lock-in to a short commute, or to the corner office acquired over time, or even to the company 401K or pension plan. Those Lock-ins stand in the way of Disrupting yourself, and that’s what really stands in the way of achieving higher goals.
CEO Rosenfield at Kraft has not created any Disruptions. Nor has she set up any White Space. Quite to the contrary, she is proposing to cut headcount – a typical business disturbance that increases Lock-in by reducing resources. She has complained about rising costs of the grains and other raw materials going into Kraft products, but has done nothing to create White Space which would address this issue – thus leaving declining margins at the ongoing mercy of those outside Kraft. She keeps trying to incrementally improve the Kraft Success Formula, which is obviously woefully out of date and thus producing insufficient returns.
Setting new goals and linking compensation to goals is a nice thing to do. But it is meaningless unless Disruptions are implemented that create White Space where new Success Formulas can be created that will result in achieving higher goals. Tweaking the model by cutting heads, and blaming outside cost factors, only serves to keep the Success Formula Locked-in. Unfortunately for investors and employees, Kraft’s new goals will make no difference unless the CEO starts attacking the Lock-ins that are keeping Kraft results below average.
by Adam Hartung | Sep 2, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in, Openness
A few weeks ago this blog talked about the mistake Ford (see chart here) was making by selling off its most profitable group (Jaguar and Land Rover) in order to generate cash to Defend & Extend the broken Success Formula in traditional Ford business. Ford is selling it’s White Space for cash to defend in its old business. Just the opposite action Ford should take to turn itself around.
And one very savvy competitor has seen the opportunity. Tata Group of India is not well known outside its home country (see website for Tata here). It’s best known business is TCS (Tata Consultancy Services) which provides IT services globally. But inside India Tata is known for everything from electricity generation to automobile manufacturing. While Tata makes a complete line of vehicles, from large trucks to very small cars, in India (see website here) these are not known outside it’s domestic marketplace. The company has recently made a splash by developing a quality automobile that it will sell for only $2,000, and potentially taking this new vehicle global (see article here.)
While Tata Motors is not yet regarded on the world stage, the company is very serious about learning how to compete. And the commonly held view is that Tata should produce a cheap car, which is not expected to be very good, and eventually try to migrate up market. This slow approach is what the Japanese auto companies did, and more recently the Korean auto competitors. But Tata Group is very astute. And they recognized an opportunity to take a very different approach.
It has been reported that Tata is considering buying Jaguar and Land Rover (see article here.) And this sort of Phoenix Principle thinking is why Tata has become a very successful, high growth and extremely profitable company. This acquisition would give Tata a fast growing and very profitable auto company operating across the globe. Tata already knows how to make inexpensive high volume automobiles. These companies would give Tata global market access, and two very positively positioned brands. Tata could then migrate its business toward the global marketplace, learning what will work from its acquisition, while developing new skills and capabilities in its very large, domestic business. These acquisitions will provide the White Space that can help Tata Motors continue its rapid growth by developing a new Success Formula which can meet future market needs and help Tata become a world -class competitor.
Ford should have migrated its Success Formula forward with the White Space it has in its premier auto gruop. By selling these businesses it effectively hands over its White Space, probably its most valuable assets, to an emerging competitor very willing, eager and capable of learning from these businesses to accelerate its growth. In effect, Ford will create a new global competitor that may well help accelerate the demise of Ford itself.
Tata has been brillliant in its efforts to expand its information services business globally. It is one of the world’s largest suppliers. And while TCS results are not reported, it is well known in the industry that TCS’s performance is right up there with Infosys (see chart here) – the fastest growing and most profitable competitor on earth. Now, Tata is looking to move forward similarly with its auto business. And Ford is handing the knowledge keys to Tata for some money to short-term protect its badly outdated traditional business. When the fox comes home to eat the eggs, Ford will only have itself to blame.
by Adam Hartung | Aug 18, 2007 | Defend & Extend, General, In the Swamp, Leadership
Thursday of last week Dell (see chart here) announced that it would be restating four YEARS of previous accounts because the numbers had been manipulated at the request of senior executives. The company admitted that account balances were reviewed by senior exexcutives with the goal of seeking adjustments to meet quarterly objectives. The Dell CFO said that the company had found evidence of fraud in revenue transactions that would have to be completely redone. (see article here)
This shows the power of Lock-in when an organization finds itself stuck in the lifecycle Swamp. The business is Locked-in to its Success Formula, but a market shift causes the results to no longer be as good as they used to be. Although the overall market continues to grow, the company doesn’t do as well. From the prosperity of the Rapids leaders find themselves fighting to find faster water as growth, for them, slows. And in most companies, Dell being stereotypical, the answer is to try working harder, doing more, and seeking to be somehow cheaper in order to save the poorly performing Success Formula. When the results just don’t meet expectations, huge pressure is felt to Defend the Lock-ins & Extend the Success Formula. And, in too many cases, under great pressure to perform executives will resort to financial machinations. Sometimes these accounting tricks are completely legal. But, sometimes pressure causes leaders to falsify records in order to preserve the Success Formula.
As we saw during the infamous trials at WorldCom and Enron, (and more recently Tyco and Conrad Black) leaders vocally proclaim all innocence. They become so blinded by their Lock-in, and the need to protect the Success Formula which previously served them and investors so well, that they slowly inch toward taking more dangerous acts. When they start realizing they cannot meet objectives simply by operating the Success Formula, they look for more creative methods.
While some few execs will likely get blamed for this 4-year fiasco, in reality Michael Dell and the existing executives are equally to blame. They remained so Locked-in and unwilling to consider modifying the Success Formula that they created the environment which bred this problem. Dell has never maintained White Space, nor has it ever tried to migrate to new solutions for market Challenges. Dell kept pressuring management to do more, better, faster, cheaper. And with that approach he created a no-win environment for divisional presidents and vice-presidents. They didn’t have the option of using White Space to find a better solution, and with that avenue cut off they either fell on the sword of failure or they had to find some way to keep the emporer feeling he was wearing beautiful clothing.
I blogged months ago that Dell was stuck in the Swamp. Now we know it is. A 4-year (I still can’t believe it) ongoing accounting falsification goes to show just how deeply the company is stuck. It takes a significant commitment to Lock-in to overlook something being wrong for that long. And Dell’s current answer is that the errors were not really significant. Give me a break – any time someone can get away with chicanery for 4 years it’s a significant problem. And just by taking that point of view Dell reinforces its intent to remain Locked-in and stuck in the swamp. The company still shows absolutely no indication it will ever set up some White Space to evolve forward to a better competitive Success Formula.
Once stuck in the Swamp fewer than 7% of companies ever get out alive. Most fight off the aligators and mosquitos only so long before being pulled into the Whirlpool of failure. Dell looks to be far too deep in the Swamp to ever get out. And that’s too bad for a lot of suppliers, employees, customers and investors.
by Adam Hartung | Aug 14, 2007 | Defend & Extend, In the Swamp, Leadership, Lock-in
So, has the American consumer quitting its spending, or are some retailers running weak Success Formulas? That’s really an important question to answer when assessing management at Wal-Mart [see chart here].
Today Wal-Mart missed its earnings forecast (again) [see article here.] After sorting through all the financial machinations from previous year divestiture charges, this year’s tax adjustments, etc. this most recent quarter had earnings per share exactly equal to last year. Does anyone not think this number was manipulated to be sure it wasn’t worse by 1 cent? Wal-Mart blamed its problems on the fallback in consumer spending. Of course, Wal-Mart’s primary customrs have long spent 100% of their bi-weekly pay, so what is supposedly different now? Are we to presume these lower-income folks are saving more now? As their real estate prices and saving rates are falling?
Interestingly, stock market analysts built on the Wal-Mart announcement to beat up the entire Dow Jones Industrial Average [see article here.] Analysts at Wall Street firms like Jefferies & Company said that if Wal-Mart is doing badly, it must mean that consumer’s are spending, and going to spend, less. The assumption in this logic is that Wal-Mart is running a good Success Formula allowing its results to be a proxy for all consumer spending. To accept this, investors have to believe that Wal-Mart’s Success Formula is meeting customers needs so well that it would not be possible to serve customers and get a better performance than Wal-Mart.
In reality, the Wal-Mart Success Formula is seriously out of step with consumer needs. Sheer size does not make Wal-Mart a proxy, because once Wal-Mart’s Success Formula misses serving customer needs consumers keep spending – just somewhere else. Sears Holdings has been missing targets for a long time, but no market analyst says the misses at Sears and KMart are not considered market barometers because market analysts know the Success Formulas there are problematic.
The DJIA has seen higher volatility lately (see chart here). And it is off of its recent highs. Is the cause weak consumer spending? Certainly no one focused on consumer weakness as the cause the last two weeks. But Wal-Mart saw this market destabilization as an opportunity to make an excuse for its poor performance. And via size, some important people are buying that excuse. But the reality behind Wal-Mart’s poor performance has nothing to do with the U.S. economy, aggregate spending patterns by consumers or even changes in the money supply affecting interest rates. The problem at Wal-Mart is Lock-in to an outdated and poorly performing Success Formula. And everything else is just making excuses for not using White Space to solve this problem
by Adam Hartung | Aug 12, 2007 | General, In the Swamp, Leadership, Lifecycle, Lock-in
Frequently investors look for "good markets" when seeking a place to put money to work. On the flip side, frequently management that is performing poorly will blame their weak results on a "bad market." Listening to this, it would be easy to conclude that if you want to make money you need to be in "good" markets, while avoiding "bad" ones. And that begs the question, what’s a good or bad market?
When Tom Monaghan entered the home-delivered pizza business with Domino’s restaurants were growing at less than 3 percent a year, the competition was largely cut throat small pizzerias with no entry barriers, and there was a huge, dominant, branded player in pizza restaurants named Pizza Hut which was owned by PepsiCo and had enormous resources. Was that a good or bad market? Tom Monaghan became a billionaire competing there.
When Sir Richard Branson launched Virgin Atlantic his prime competitor, British Airways, had 90% market share and was losing money. The only other competitor was Freddie Laker, and he had just gone bust. Were airlines a good or bad market? Sir Richard made more than a billion dollars from Virgin Atlantic.
Now, Virgin America is launching service (see article here.) United has just emerged from protracted bankruptcy, while Delta and Northwest are on the brink. All the major national airlines (except Southwest) are claiming that fuel and labor costs are so high they can’t re-invest to upgrade their aging fleets. Meanwhile they are laying off workers, cutting customer services and on-time performance is declining as they struggle to fly planes. So is Sir Richard crazy? Are U.S. airlines a good or bad market?
Rupert Murdoch of News Corp. fame has just paid an enormous premium to purchase Dow Jones & Company (read article here). But investors have been bailing out of newspapers for 6 years. Knight-Ridder busted itself up selling its assets. Tribune Company is going private to try and cut additional costs. Subscriptions and advertising revenues have declined for 4 years as customers have left for internet news in droves. Is Murdoch crazy? Are newspapers a good or bad market?
Success in business is not about "good" or "bad" markets. Success requires understanding how to compete in the future. When customers have a demand, but old Success Formulas produce poor results it indicates an opportunity to make money. Just not using the old Success Formula. Virgin America will not be like United or American. It has a new approach to customers, and therefore it has a plan to operate a different Success Formula and make money. Likewise, News Corp intends to radically change the Wall Street Journal, including putting a lot more emphasis toward the on-line editions. If Murdoch successfully Disrupts Dow Jones, and invests in White Space to create a new Success Formula, he has a tremendous opportunity to make money. People want to fly in North America, and people want to read business news on this continent as well. The problem is that the existing management teams are so Locked-in to their Success Formulas that they accept lousy results as they do the same things day after day. These new competitors don’t need a "good market", they just need to apply new Success Formulas to these old markets.
The myth is that growing markets offer an easier place to compete. That growth creates more resources is true, but growth also attracts a lot more competitors. When you find a gold nugget, within minutes you’ll be surrounded by hundreds of additional prospectors. While the gold may be more available in that part of the stream, those trying to grab it are far more plentiful as well. No matter what the growth rate, high or not, returns go to those businesses that develop new Success Formulas which overcome market Challenges. And that is what we’re seeing at Virgin and News Corp. The leaders of these companies are not afraid of any market. And they have shown they can make money by building new Success Formulas that reap profits while Locked-in competitors stall and fail.
by Adam Hartung | Aug 3, 2007 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
The headline in the business section of The Chicago Tribune screamed "United Doubles Up On Profit" (see article here). You would think United airlines (see chart here) was a great story of turnaround success. After all, the airline only returned out of bankruptcy about 18 months ago. And the stock has doubled from its 12 month lows. But is all well at UAL?
When we read the article we learn that profits are up largely due to United’s ongoing cost cutting programs. They keep beating up on employees to do more work for less money. And United used bankruptcy to strip down much of its pension payouts, further giving to employees (past and present) on the chin. United didn’t improve it’s performance with customers or improve its productivity and thereby improve profits. It just spent less.
Closely tied to United’s long-term profits is its charges for airplanes. And a different article (see article here), which preceded the earnings announcement by 3 days, stated that United was falling behind on its new airplane orders. United has stopped buying replacement planes, and that has helped the company lower its expenses. In other words, United is squeezing down the company to be smaller, and not reinvesting even for maintenance, much less growth. In fact, according to the article, United is so far behind on placing orders for new planes the company is at jeopardy of being able to get any replacement aircraft to keep its fleet in the air! The aircraft manufacturying industry capacity is sold out for several years into the future, and United isn’t on the list to get any new equipment.
So while United is cheering about its LAST quarter, its FUTURE prospects look bleak. UAL has literally traded its future for today. Management is de-investing in order to produce current profits, while simultaneously asking employees to sacrifice in order to keep the company alive. This is the ultimate in Defend & Extend Management, where the leadership gives up the future, and gives up its employees future, in order to defend its own decisions and actions. The United leadership team is so Locked-in to trying to present its outdated Success Formaul as capable that it is killing the company in its effort to present immediate profits.
Investors should not cheer this latest profit news. Rather, they should recognize that United has probably turned the corner from the Swamp into the Whirlpool. Without the wherewithal to purchase more airplanes, in the future there will be no airline. No matter what last quarter’s profits were.
by Adam Hartung | Jul 24, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Wal-Mart has been stumped in finding a growth path for several years (see chart here). Once one of America’s fastests growing companies, Wal-Mart now trails Target, Kohl’s and JCPenney’s growth rates – and profit margins. Dropping prices only went so far with shoppers in a highly competitive retail marketplace – as merchandise selection, store ambiance and store personnel also contribute to the selection of where to spend our money.
Nonetheless, Wal-mart keeps plugging away at doing the same old thing. Never one to recognize a Challenge to its out of date Success Formula, Wal-Mart maintains its Lock-in to "low price" as the only tool for competition. They demonstrated that they would even fire any executive with the nerve to try changing the merchandise mix when they publicly humiliated the last VP of Marketing while giving her the heave-ho. Last Christmas they tried cutting prices to drive revenue, only to be met with yawns by shoppers.
So, what is Wal-Mart doing now? According to CNNMoney.com (see article here), they are….. take a guess…… cutting prices (cymbal crash heard in the distance). Another 16,000 items are intended to see the scalpel applied, with even deeper discounting than in the previous holiday season. We know for sure that will cut further into margins. Whether it will drive same store sales growth….. well….. it hasn’t worked for the last 6 years.
A slave to its Lock-in Wal-Mart follows the adage "if at first (or second, or 65th time) you don’t succeed, try, try again." But successful businesses know that in a dynamic marketplace that strategy is death. The better phrase would be "If at first you don’t succeed, learn something from what you did and try a different tack." But that would require Wal-Mart be willing to Disrupt itself and use White Space to find new solutions. And that seems to be the one thing Wal-Mart’s leaders are completely unwilling to consider.
by Adam Hartung | Jul 21, 2007 | In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
The CEO with the hottest seat in corporate America right now is probably Ed Zander of Motorola (see article here, see chart here.) And well it should be hot, as recent negative results now verify Motorola is once again in a Growth Stall (see article here). After a great couple of years, the last two quarters have been back to back negative ones. Fewer than 7% of companies recover from a growth stall to consistently grow a mere 2%.
This isn’t the first stall for Motorola. There were several before, and just 3 – 4 years ago many investors felt that Motorola may not survive. But a new CEO (Zander) came in, implemented a slew of Disruptions, opened up a bevy of White Space projects and Motorola started to really improve. He ignored analyst calls for massive, widespread layoffs and instead rapidly moved new products to market (like RAZR) and started building new businesses in Motorola. Results were stellar, and Zander was widely applauded for the changes including being named CEO of the Year by popular journals.
But these latest earnings announcements demonstrate that a post-stall recovery is very hard to maintain. Motorola was desperately Locked-in to its failing Success Formula when Zander took over. Despite all his Disruptions and White Space projects, Motorola did not fully develop a new Success Formula, nor did it complete a migration to a new Success Formula, before slips started happening in the traditional business. Profits dipped, and then Carl Icahn started a raid on the company.
Unfortunately, leadership then hiccuped. Reacting to Icahn, and the cries of stock analysts, instead of doing more Disruptions and creating more White Space to keep its focus on growth, Motorola started trying to Defend & Extend its old strategies – announcing an 11% (7,500 person) layoff would begin. The company shut down an R&D facility at the University of Illinois in Champagne (one of the top engineering schools in the world) to save money. And it began "reorganizing" (see article here) The company even took to financial machinations as it focused on engineering the P&L instead of new products – as can be seen in the latest earnings news.
From his early actions it appears Zander knows the right thing to do. And he has continued following the original path, such as the announcement early this month that Motorola has agreed to acquire Leapstone Systems, further bolstering the network division – where growth rates and profits both exceed the mobile handset business (see article here.) What Motorola needs now is not another change in CEO, but rather more Disruptions and White Space to push Motorola further away from the old behaviors and Lock-ins which got it into so much trouble in the 1990s, then early this decade, and now more recently. It’s not Zander that is the problem, but the truncated effort to use White Space to develop a new Success Formula and then mobilizing Motorola toward that Success Formula.
Motorola was an incredible turnaround story. Disruptions and White Space were allowing this Phoenix Principle company to regain flight. But right now the Phoenix is in the crosshairs of many analysts and Icahn – who are collectively calling for the CEO’s head when they should be screaming for more Disruptions leading to more growth. Motorola will not save its way to prosperity. It must develop a new Success Formula that puts Motorola back in the Rapids – and keeps the company out of the Swamp. If investors and employees aren’t careful they’ll accomplish their goal of unseating Zander, Icahn will swoop in, and then we can expect yet more heads to roll, businesses to be sold, more product development to be shuttered and after Icahn gets his cash back he’ll leave Chicago with a shell where once a great company stood.
Better to let the Phoenix take flight. If the Motorola organization and its leadership have the guts to get out of the broken down old nest and really test its wings.
by Adam Hartung | Jul 16, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Readers of this blog know I am no fan of Sears Holdings. Bringing together Mr. Lampert’s Lock-in to private equity cost cutting behavior with Sears’ out of date Success Formula was like finding out you have cancer shortly after suffering a heart attack. One very sick situation.
For months investors played along with Mr. Lampert’s story that he would somehow save his way to prosperity for investors. But now, after 6 years of declining revenue, and a recent report that same-store-sales are down for the second consecutive quarter (see article here), the company equity value is down almost 25% from it’s April peak (see chart here). True to form, Mr. Lampert has proposed propping up the stock price by increasing the share buyback. At the end of the day, this financial machination will leave Sears with only one store and only 1 share of stock, but somehow Mr. Lampert indicates magic comes from this plan.
Mr. Lampert tapped into a long-held business myth. Even though we see businesses fail every year, most of us do not really think the companies we work for, or invest in, will fail, We adopt old-fashioned notions of business lifecycles that assert "mature" companies should accept a low growth rate, and maximize profits instead of revenues. This Myth of Perpetuity allows people investing in, selling to, or working for even failing companies to have faith – long after such faith is poorly placed.
The reality is that businesses either grow or die. Businesses exist in a competitive marketplace. If they don’t grow, they get clobbered by more successful competitors. You aren’t allowed to stand still, because that makes you food for the aggressive competitor running hard to succeed. Mr. Lampert acted as if Sears could stop growing and "milk" the business. What he ignored was the fact that the lions were watching, and while he’s trying to "milk" Sears of cash Target, Kohl’s, JC Penney, Lowe’s and even Home Depot have eyeballed this "cash cow" and decided to simply kill it. They don’t see any reason to allow Mr. Lampert the time to cut costs slowly and generate cash. Not when they want those customers, the revenue and the profits they can make from increased sales — something Sears can’t produce because it’s Success Formula is so out of date.
It was clear 2 years ago that Sears was unable to succeed. Now it has hit a growth stall, and statistically it has only a 7% chance of ever again growing even 2%. Those investors that believed in Mr. Lampert believed in myth. Not just the myth of his heroic skills, but in the Myth of Perpetuity — because they would not accept that the venerable Sears company was heading straight into the Whirlpool.
by Adam Hartung | Jul 10, 2007 | Defend & Extend, In the Swamp, Leadership, Lock-in, Quotes
Do you remember the old Smith, Barney television ad where the professorial actor said “We make money the old fashion way. We EARN it.”?
More executives appear to need reminding of this. In today’s market report from Merrill Lynch (see info here, page 2) we learn that in the first quarter of 2007 the S&P 500 spent an incredible $117BILLION on share buybacks. So much was spent buying back shares that it added from a full point to 1.5 points to EPS for the quarter! In May and June IBM, WalMart and Home Depot announced share buyback plans of $50Billion (and keep in mind, just yesterday Home Depot announced real earnings would be down 18% this year! [see page 1 of same link]). Conoco and Johnson & Johnson are announcing plans to buy back $25Billion of equity between them.
When businesses are growing they spend money on hiring employees, building plants and offices, traveling to see customers and making new products. When they want to Defend & Extend their existing business they take the money out of such productive long-term uses and spend it instead on buying back their own stock. An action which does not create a single job, nor new product, nor help the business create enhanced growth in revenue or profitability. We have to be careful not to confuse financial machinations with real growth.
