by Adam Hartung | Jul 8, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
When was the last time you enjoyed an airplane flight? Flying is one time when as a customer the more you consume, the less happy you become. I don’t know anyone flying commercial U.S. airlines that enjoys the experience. It’s amazing, ever since deregulation annual customer surveys point to unhappy customers – and every year satisfaction declines further.
The Locked-in airlines will tell us that customers can’t expect service and low price. And customers keep picking price. That’s not true. Customers really don’t have much choice. Airlines have Locked-in on their Success Formulas, and they pay more attention to their money-losing direct competitors than they listen to customers. When everyone (Southwest accepted) gives lousy service, can’t be on time and loses bags– and they control 90% of the gates across America — it’s not like the customer has much choice. So they blame the customers for being unhappy. Give us a break!
The Chicago Tribune ran front page articles today on just how badly the airlines are performing – looking at plane crowding, delays, lost baggage and customer complaints (see articles here and here). So what are the airlines doing about the situation? Are they creating White Space to try new solutions? Unfortunately, no. Their answer is to do More, Better, Faster and Cheaper operation of an airline system that is cracking all over the place, and producing horrid results. How will we get better service, after 3 decades of decline, by doing more of the same?
The first action the airlines promise is MORE flights. How will that improve the situation when the system is already overcapacity, causing computer breakdowns at the airlines and in the FAA? More flights have never solved the problem.
United reacted by hiring a Walt Disney executive pledging to help the airline be BETTER at customer service. Sorry, but the airlines aren’t amusement parks, and customers are trying to get from A to B on time and with their bags. The solution isn’t about trotting out Mickey Mouse to put a smile on someone’s face when they are 6 hours late, tired of the uncomfortable airport seating, and out of money for the overpriced airport food and lodging. Trying to apply a veneer of happiness on top of a broken Success Formula producing lousy results will only make investors and customers more angry.
The airlines are asking for a change in work rules so they can try to move the airplanes FASTER. When the gates are sold out, and the system is working so close to capacity that even high wind can cause 2 hour back-ups at major airports as ripples flow the system, changing the job description for a baggage handler or gate agent isn’t going to solve the problem.
And, of course, the airlines never tire of talking about ways to cut costs so they can be CHEAPER. They never grow weary of hammering on their employees (often unionized) that they have to take pay cuts – when many no longer even earn a living wage (especially in the major cities where airlines hub.) Haven’t the airlines heard customers? Prices are already low. Lower prices don’t matter when you can’t get where you want to be on time and with your bags!
More, Better, Faster, Cheaper are the 4 words of Defend & Extend managers who have no idea how to do anything other than maintain Lock-in to a broken Success Formula. And in this case vendors (except for the airplane manufacturers), employees, investors and customers are all bearing the brunt of an industry that is more interested in Defending & Extending what doesn’t work than in creating some White Space to develop a new solution.
by Adam Hartung | Jun 30, 2007 | General, Leadership, Lifecycle
I was in a heated argument this week with a stock broker. His claim was that all anyone should care about is earnings. I told him that was not true. In fact, what is most important to investors is the business growth which can lead to future cash flow.
Take WalMart for example. The company has continued to grow it’s EPS the last few years, but the stock has been mired in a trading range over the same period (see chart here). Why doesn’t WalMart stock price go up with earnings? Why does the price/earnings multiple decline? Because investors are very unsure how the existing management team will ever grow the business as it previously did, given that efforts to expand in Europe, South America and China have fallen flat. Wal-Mart is now trying to cut costs and buy back its stock in an effort to dress up earnings per share, but investors aren’t fooled as they see all the problems WalMart has faced and how the company’s old Success Formula simply isn’t as competitive any longer.
Or take a look at Tribune Company (see chart here). Just a few months ago Tribune announced it was repurchasing all its equity via a Sam Zell led leveraged buy-out, But recently the stock has fallen below the repurchase price. Investors have been made aware of how the management team manipulated earnings and cash flow last year to "dress up the pig" for market, and there is now risk if the bonds can be sold to generate the cash to buy the remaining stock (see article here.) When there is no growth in the business, such as the no growth scenario at Tribune, even debt investors realize that they cannot expect a return on their investment.
Just a week ago I quoted in this blog a Merrill Lynch daily report by David Rosenberg to be careful and not confuse financial re-engineering with business building. Rosenberg went on to quote the New York Times this week "a raft of bond offerings for recently announced deals… have been scaled back after facing resistance from investors." And "the term ‘loan covenants’ is making its way back into the investment lexicon." (see source here page 2.) Within two days Rosenberg said "there was supposed to be a $250bln corporate bond pipeline in the next few months to fund all these deals that have been announced, but in a sign this is no longer an ‘issuers market’, many are being scaled back or postponed" (see source here, page 3).
If you don’t keep growing your business, your value cannot grow. No matter if you are public, or want to be private. You must have a Success Formula that meets competitive customer needs and keeps you in the Rapids. You can’t count on unthinking debt investors to give you money, hoping you will let them "clip coupons" as you lazily sit in the Flats. Investors are wisening up, and realizing that you have to keep your business in the Rapids of business growth to create value – or you quickly lose value. And no one wants to be stuck in a ship without a current of growth pushing it.
by Adam Hartung | Jun 26, 2007 | Uncategorized
All businesses and people Lock-in. Lock-in is beneficial at helping us to be productive. We work faster because Lock-in helps us use assumptions to move rapidly toward a goal, using a Success Formula as a guide. The goal of The Phoenix Principle is to help us be aware of and manage Lock-in, and find opportunities for new Success Formulas that can produce better results.
This was driven home to me just today. I was talking with a company in a very high transaction business. They outsource transactions for other businesses. In transitioning up a new customer the company agreed "to move 80% of volume to the offshore facility" by a certain date. When I read this I was anticipating they were in big trouble, because the company was considerably away from handling 80% of transactions in the new offshore facility.
When I asked the company President about this he looked at me and said "we transferred all the complex transactions offshore first. Once we get those set up the simple ones transfer easy and fast. We’re doing well over 80% of the work hours in our offshore facility, since complex transactions take many multiples of the work hours required by simple transactions." Bang! Was I Locked-in, or what? I jumped to volume = transactions. Volume didn’t mean transactions, but rather work hours! Imissed that not all transactions are equal.
I was reminded that we all have to be aware of how easily we Lock-in (myself included). We have to seek out input from others who don’t have our Lock-in and be open to really listen to that feedback. "Outsiders" can provide different interpretations of what we see with our own eyes – but unconsciously modify through the lenses of our Success Formula.
by Adam Hartung | Jun 24, 2007 | Defend & Extend, In the Rapids, In the Swamp, Leadership, Lock-in
You know I’m no fan of McDonald’s (see chart here.) As detailed in previous blogs, the leadership is horribly Locked-in to its old Success Formula, and is expending lots of company resources to protect that Success Formula in the face of unhappy investors and competitors. Yet, when talking about competitors what do you hear McDonald’s discuss? Wendy’s, Burger King, Carl’s Jr. – other businesses focues upon hamburgers -with an occasional mention of Kentucky Fried Chicken or another traditional fast food outlet.
We all know where the big threat is though. And that’s Starbucks (see chart here). Far from a mere coffee shop, Starbucks has used White Space to unleash itself in several markets. And last week Starbucks showed its willingness to use White Space to expand into the marketplace McDonald’s has owned for decades – fast lunch – by announcing it will be launching premier salads.
McDonald’s started selling salads totally as a defensive move. McDonald’s new customers were staying away because mom or dad simply couldn’t eat a burger and fries, or preferred not to. So McDonald’s offered a second-rate salad product at a hefty price to try and keep the parents from saying "no" when the kids asked if they could have a burger. Salads weren’t intended to bring in new customers to eat salads, they were intended to Defend & Extend the old hamburger-based Success Formula by stopping client exodus.
Starbucks is taking a positive move into salads (see article here). It is an expansion of their Success Formula definition to include a full lunch entree. It is a shot across the bow of McDonald’s, which has conveniently ignored this emerging competitor for several years. And McDonald’s didn’t see it coming, and would now most likely say they don’t think of Starbucks as a competitor. After all, Starbucks doesn’t sell a burger, or fries.
The national airlines (United and American) never dreamed that Southwest would one day be national, have much higher customer satisfaction and be more profitable. Sears never imagined that a low-cost discount chain like Wal-Mart could eclipse its powerhouse status. DEC never imagined that AutoCad could drive it out of business. Lanier and Wang never perceived that Microsoft with a simple application like Word could kill the word processing marketplace. Once businesses devote their energies to Defending and Extending their Success Formula they completely miss the new competitors, and they don’t react until they are so far down the river that they can hear the Whirlpool sucking them under.
by Adam Hartung | Jun 22, 2007 | Defend & Extend, Leadership, Lock-in, Quotes
This week Blackstone, one of the world’s largest private equity firms announced it was likely to soon go public. Ironic that a business based upon taking companies private is now going public… Reflecting upon this, Merrill Lynch today ran the following quote (see page 5 of report here) in it’s daily North America Morning Market Memo by David Rosenberg. His topic is what happens after a business is purchased by a private equity firm:
"All of a sudden managment is focused and will do anything to maintain or increase cash flow. Here’s the usual list: Cut spending, workers, officeds, factories and advertising, and with tech companies now in play cut R&D, their lifeblood. Don’t mistake financial engineering for company building."
Well said Mr. Rosenberg.
by Adam Hartung | Jun 13, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Too often Locked-in companies literally race toward the exit of their business. And such seems to be the case with Ford (see chart here). Back on 3/15/07 I blogged that Ford was Defending and Extending its bad business by selling one of its good businesses, Aston Markin (link here). Now the company is following that same destructive path as it considers selling both Jaguar and Land Rover (see article here.)
From the late 1980s into the 1990s Ford started to develop a new future via acquisition of Aston Martin, Jaguar, Land Rover and Volvo. These were combined into its Premier Auto Group, which could have served as White Space for developing a new Success Formula that would effectively compete with Toyota, Honda, and BMW. But instead of letting this be White Space, with funding and resources to develop a new Success Formula, Ford tried to force its old Success Formula onto this group. Executives at Ford pushed to have these new acquisitions "leverage" Ford by using common parts, common engineering and common approaches. The result was a negative impact on Jaguar and Land Rover, as the old Ford Success Formula drove down the value of these brands. Instead of migrating Ford toward a new Success Formula, leadership tried to integrate these premier brands into the old Success Formula focused upon supply chain optimization and cost reduction.
Instead of becoming a great new company that led the market, Ford leadership turned Premier Auto Group into another Edsel. Something intended to be valuable, but not coming close to meeting anyone’s goals.
Jacque Nasser had an idea of how to transform Ford when he made several of these acquisitions and kept them outside of Ford. But William Ford, Jr. started the process of destroying long-term shareholder value when he rejected learning from these acquisitions and instead put company focus on old fashioned "big iron" – a claim he bragged about in ads for the Mustang. The new CEO appears to be a man after the Chairman’s heart as he tears apart the future opportunities of the company in search of cash to Defend & Extend the low-yielding Ford Success Formula. Too bad for investors and employees.
by Adam Hartung | Jun 12, 2007 | Uncategorized
Very little is really known by most managers and investors about how Boards of Directors operate. There is knowledge that Boards are the investor representatives, and that they have some legal authority to oversee management. But what a Board actually does, and how it operates, is largely unknown by the vast majority of us. But, every once in a while a glimpse is offered – usually through a lawsuit.
And that has been true of the Board at Hollinger International (now called the Sun Times Group). The Chairman/CEO and his CFO were sued for creating self-dealing agreements that looted the company of money, at shareholder expense. The suit took years to get to trial in Chicago, but now it is up (see article here). And testimony has been revealing about just how little a Board of Directors actully oversees management. Caught in the crossfire has been the former very popular governor of Illinois, Jim Thompson, who was on the Hollinger Board and chairman of its audit committee.
Testimony in this case, as in Tyco, Enron and WorldCom, has revealed that Boards are one of the more Locked-in work groups in business. Often, the Chairman invites people onto the Board not because they bring particular insight to the most critical issues of the company – but rather as a personal relationship or based upon fame. And rarely are Board members given all the information in the company. Rather, it is a management selected subset intended to aid the Chairman and CEO in achieving agreement to their desires. As a result, members, such as Governor Thompson, end up with lofty titles and responsibilities but little more than a rubber stamp to use in wielding their power. As a result, when the wrong things are happening the Board members, such as Governor Thompson, don’t ask sufficient questions, don’t know enough about what is happening, and agree to management actions which are unethical – and in Hollinger’s case – illegal. The bad news is that investors suffer. And, as in Governor Thompson’s case, a huge credibility loss for the Board member with a possible loss of his legal license and the balance of his career.
Congress passed the Sarbanes-Oxley act in an effort to Disrupt these Board work groups. The goal was, and remains, to change what happens on Boards, and between Boards and management, in order to improve the oversight given by Boards. Of course, management has had a thunderous negative reaction. Television programs, such as on the business channel CNBC, bring on executive after executive complaining that the effort and cost to implement SarbOx (as it is nicknamed) are hurting their business. Some even complain that SarbOx is driving them to delist as a public company and consider going private.
These complaints are not really about the cost of SarbOx. Rather, they are complaints about changing the Success Formula of Boards of Directors – something that the majority of CEOs do not want. There is no doubt that the SarbOx Disruption is good for holding Directors accountable to investors. As a result, SarbOx has resulted in more and better transparency into business finances and decisions. It has not hampered competitiveness, and the argument can well be made that competitiveness has improved due to better Board involvement.
Just as companies become Locked-in, so do work groups. Boards are no exceptions. Locked-in groups do not find it easy, or often desirable, to change. Yet, new Success Formulas for groups can lead to far better performance. And that is true for corporate Boards. New Success Formulas for work groups, as for companies, require Disruptions. And that is the role of SarbOx. Once more Chairmen and CEOs take these Disruptions to heart, and begin opening up White Space for their Boards to develop a new Success Formula, we will have far more valuable and productive Boards – leading to more valuable and productive management teams – and eventually more effective companies.
by Adam Hartung | Jun 11, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
My last email on WalMart prompted a comment from Barney. He asked my opinion of the 5-year, 10-year and 30-year prospects for Wal-Mart. Great question, worthy of a response to all readers.
The longer out the timeline, the more bearish I am. Strategy sees its results long-term rather than short-term, so given more time the impact becomes more evident. Predicting share prices short-term is hard, even for stock traders and mutual fund managers. But WalMart is definitely NOT a long-term buy-and-hold investment.
Five years out I believe Wal-Mart will be in a similar situation to today, but much more defensive about itself. The years of external attack will wear away the veneer and some of the barbs will lead to noticable wounds. The company will not succeed internationally, nor will the company substantially increase any new businesses. The traditional WalMart and Sam’s Club same same stores sales will not keep up with inflation, and new store growth will diminish (as management has said they intend). Management will waiver between investing in trying to maintain share, via ongoing lurches into price wars, and buying company equity stock in order to defend itself from investor attacks. There will be some ups and downs for the stock price, but it will not keep up with the market. Although WalMart will still be America’s largest retailer, it will not be competitively advantaged.
Ten years out WalMart will have taken a dramatic act, or two, to try and further Defend & Extend its Success Formula. It will start using cash to make acquisitions, in an effort to find some "retail synergy". It will buy into some area where it claims it can use its "core competency" in volume and supply chain to better serve customers – like furniture retailing. It will probably try to do something dramatic on the internet, albeit more than a decade late, like purchasing NetFlix, or Amazon, in hopes of re-positioning itself. But there will be no synergy, nor any value creation. Just lots of confusion for investors. And the company value will, again, not keep up with the economy or the market. It will have become a perennial also-ran investment.
Thirty years out, WalMart is today what General Motors was in 1977. People will talk about what once was a great company. WalMart will be trying to use size to defend itself, but finding that impossible as better competitors match WalMart’s skills with additional benefits.
WalMart is horribly Locked-in, with no signs of a meaningful Disruption on the horizon. Senior leadership is taking the opposite actions, buying back stock and otherwise using cash in efforts to Defend & Extend its outdated Success Formula. WalMart is in the Swamp, and it will stay stuck in the still water until something negative happens that pulls it toward the Whirlpool. WalMart will find lots of great retail companies there – in the Whirlpool – Woolworth’s, Montgomery Wards, S.S. Kresge, TG&Y and of course Sears and KMart.
by Adam Hartung | Jun 2, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
WalMart’s valuation has gone nowhere for more than 5 years (see chart here.)The equity today is worth 12% less than it was in 2003, meanwhile the Dow Jones Industrial Average (of which WalMart is a component) is up something like 25% (see chart here). Yesterday WalMart’s executives capitulated that their business has lower growth prospects, and the equity value jumped more than 3%. Say what?
I’ve beaten up WalMart a few times in this blog for being completely Locked In to an old Success Formula that no longer meets market requirements, allowing Target, Kohl’s, JC Penney and other competitors to eat into their growth. Yesterday the company admitted as much saying that it would scale back plans for growth (see article here). Instead of putting money into more stores, management would start buying back shares in order to reduce the size of the equity pool and thus hopefully raise its value. In other words, if the company can’t make more money for investors it will reduce the investors. Instead of growing the numerator (returns) it will decrease the denominator (investment.) This is nothing more than financial machinations intended to hide the inability to meet growth targets.
And investors said "great." With no return for several years on their investment they are happy to see someone buy them out, even if it’s just the company. The move up is not an endorsement of the company’s strategy or its leadership. It’s a sigh of relief that some investors will find it easier to get out.
WalMart is not improving its competitive position, it is further Locking-in that position. Instead of using its ample cash to open White Space and figure out new ways to compete WalMart is going to use its cash to reduce investors that aren’t happy with the current results. This does not signal a new beginning, but rather just another step in the Swamp toward the eventual Whirlpool of decline.
Interestingly, in just the last week the former head of Marketing at WalMart filed court documents (see article here.) Included are considerable allegations of insider dealing creating benefits for executives and family members of executives. Of course, amidst all the executive scandals of the last few years its doubtful if many investors would be surprised to learn that top executives were feathering their own nest using corporate power and position. It merely reinforces that the executives at WalMart are benefitted by doing more of what they’ve done, not trying to do anything new. Most telling, Ms. Roehm (the fired exec) said that "WalMart decided to fire her because executives had become increasingly uncomfortable with her ideas and cultural change adn they were looking for some way to revert back to their old, price-based approach to sales without embarrassing themselves by reversing the high-provile decision they had made to hire her just nine months earlier."
Less is not more. WalMart is horribly Locked-in and unable to meet changing market requirements. It’s growth options are slowing. It is Defending its old Success Formula with firings, lawsuits and financial machinations. All signs of a company heading toward the Whirlpool. It takes time for a ship bigger than the Titanic to sink, but there’s clearly some big gaping holes emerging in the hull of WalMart.
by Adam Hartung | May 29, 2007 | General, Lifecycle
Last week Coca Cola (see chart here) announced it was ponying up over $4 billion to buy Glaceau, a company with only $355 million in revenue (see PR announcement here, see article here). Rarely are such lofty prices paid for a company not in high tech, so investors have to wonder if Glaceau is worth it. After all, Glaceau’s products are just another form of flavored water – in this case vitamin enriched water and energy drinks.
There are two criteria which determine if the price is right on this acquisition. Firstly, where is Glaceau and its products in the life cycle? If late in the cycle, then such a premium is not warranted. But if you believe that these are a new category of drink, and that this category will have rapid growth by eating into plain water, traditional sodas and possibly sport drinks you could claim that these products are just at the beginning of their lifecycle. And this is critical. Coke has had practically no White Space, so the company has nothing early in the lifecycle. Organically, Coke could spend years trying to develop something on its own, and who knows if they could pull it off. If you believe that Energy Brands have the potential to grow like sports drinks, then this price will look absolutely cheap in just a few years.
The second criteria is how will Coke manage this acquisition? Should Coke decide to buy the company and integrate its products and marketing into Coke then this would be just $4 billion thrown down the proverbial rat hole. The Coke Success Formula is so powerful around traditional soft drinks it would kill the learning necessary to grow a new Success Formula and develop this new market. As we can read in the press release, Coke has chosen to keep Glaceau as a completely separate business unit, and the existing management team has been given 3 year contracts to stay and run the business. In a nutshell, Coke is setting up White Space for Glaceau, and that dramatically improves the chances of the acquisition fulfilling its potential and value.
If Coke can follow through on allowing Glaceau to develop its new market, this could be an important turning point for the moribund Coke organization. Glaceau could develop a new Success Formula which Coke could migrate toward. Revenue could regain old growth rates, and margins could improve as focus shifts to innovation rather price wars. Big companies need new businesses which are early in the Rapids – not just a lot of Wellspring ideas. They need to catch waves early, give the new business White Space (money and permission to try new things) and then learn how to migrate forward. And Glaceau could be just the right acquisition for Coke. If Glaceau can help migrate Coke forward, and out of it’s Locked-in ways, then $4.1 billion was not too much to pay at all.
