by Adam Hartung | Aug 30, 2005 | General, In the Swamp, Leadership, Lifecycle, Openness
Last Christmas we were horrified by videos of people who went out to pick up shells on the beach in Thailand only to be overwhelmed by the tsunami which rushed in and created total devastation. Some people (most) thought the situation was a mere outgoing tide (larger than usual, to be sure). A few, however, recognized this was no mere tide, but a tsunami about to unleash. Instead of going to the beach, they ran as fast as possible the other way. These few saved themselves.
How do business leaders know when a problem in their business is merely the tide going out, and when it will be a tsunami challenging (possibly wrecking) their business model? This question is critical for leaders and investors. When the business is in the Rapids, and short-term problems can be fixed, then staying the course is the right thing to do. But, if the problems are actually signals of much deeper challenges then a lot more is needed before the business is dumped into the swamp and returns become elusive.
Wal-Mart stock has been dumped lately. Due to concerns about hurricane Katrina’s impact driving gas prices higher, investor’s have driven Wal-Mart’s value down to levels similar to the market collapse after terror on 9/11/01. Is the tide going out on Wal-Mart, sure to come back in and raise Wal-Mart to greater value, or should we be more worried about the future?
The key is to move beyond short-term concerns and look at longer-term trends. Wal-Mart has been struggling to maintain its value since peaking in the dot.com boom. Since 2000, the stock has gone sideways. Why? There have been a series of problems for Wal-Mart: Union problems/threats, store failures in Europe, lost customers to more trendy Target and Kohl’s, rising costs from energy prices, employee lawsuits over discrimination, government investigation for hiring illegal immigrants, and top executives fired for misappropriation of expense monies to wage illegal union-busting activities. Problems with customers losing discretionary spending dollars to high gas prices is merely the most recent in a series of concerns about Wal-Mart’s ability to re-invigorate growth and its profits.
One reason we review quarter-to-quarter results is it helps us determine if a company is in the Rapids, or not. When in the Rapids businesses can tweak their operations to recover from problems. But, when in they move into the Swamp we see recurring problems that aren’t easily overcome. Results are always promised to improve – and historical glory regained. Improvement is always just around the corner from China expansion, investments in lower-cost distribution, and store extensions. And internal problems are diminished by explaining away lawsuits and executive misdeeds as "one off" occurences. In the Swamp, there are so many alligators and mosquitos nipping at the operations we wonder if management has time to focus on how to get back into the Rapids!
Everyone wants large and successful institutions to regain their glory. But that is rare. Smart leaders have to know how to recognize when the market is changing, and they are looking at a tsunami – not just the outgoing tide. Long-term success requires honestly seeing the recurring problems as the symptoms of something much worse – and not always doing what was done (picking up the fish on the beach) but instead taking much more drastic action to address fundamental challenges.
by Adam Hartung | Aug 30, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Warren Buffet is often called the Oracle of Omaha. His track record at making money for investors in his company – Berkshire Hathaway – was remarkable for several years. Many have heard the story about how a mere $1,000 invested inthe late 1970’s is worth over $80,000 today. But, if you look closer, you’ll see that the company stock is about the same today as it was in 1998. Buffet really hasn’t made a lot of money for investors the last several years.
It’s foolish to attack an investing legend, yet it is worthwhile to look at whether what worked for Buffet for years is still working. As we know, the future is not the past and any company is subject to lock-in and deteriorating returns.
Last year Buffet’s Berkshire made a big investment in Pier 1 Imports. This helped prop up Pier 1’s stock price for a few months, but since then the company’s value has declined about 50%. This year the company suffered it’s first quarterly loss in history. According to Business Week, the company’s CEO has admitted he’s ashamed of company performance. Oops! Buffet hasn’t commented.
About 8 years ago Buffet’s Berkshire made a big investment in Coca-Cola. Such a large investment they put him on the Board. After that investment Coke’s market value doubled by 1998 – but then it started a slide that has Coke’s value back again to about what Buffet paid. Other than dividends, Berkshire hasn’t made any money. Oops! (And if you invested after Buffet you would have lost money.)
Buffet made a huge fortune with a strategy that worked incredibly well. But will it work going forward? He enjoyed buying companies that had a large asset which he perceived as undervalued and then hanging on while that asset rose in value. But increasingly these kinds of assets aren’t able to regain their old value. Companies like Pier 1 and Coke have hit growth stalls that have been deadly. Attempts to implement short-term fixes to their business models have been ineffective in the face of larger challenges to those models.
No one bats 1.00 (to use a baseball analogy) on their investments. But it’s increasingly obvious that Berkshire Hathaway’s strategy hasn’t been hitting so well. Their insurance and re-insurance investments aren’t producing like before, and even Mr. Buffet has been required to give testimony on intercompany relationships with scandals such as AIG. Oops! (This is not to impune Mr. Buffet – there have been no accusations of wrong doing by him or Berkshire Hathaway.)
Has Berkshire Hathaway hit a growth stall itself? Is the Oracle of Omaha locked-in, and possibly missing opportunities to improve shareholder return? Time will tell, but short term (looking at the last 10 years) Buffet shows all the signs of lock-in, and a stall – and that would trouble me if I owned Berkshire Hathaway stock. Mr. Buffet well deserves his opportunities on the public stage, yet it’s worth some hard thinking the next time you’re tempted to follow his lead on investments.
by Adam Hartung | Aug 21, 2005 | Disruptions
Today’s Chicago Tribune had a front-page article on declining innovation in the midwest (Illinois Could Use a Few Good Edisons). Rightly so that this should make the front page and not just the business section. Declining innovation is often a harbinger of economic decline. People in Illinois should be worried.
Looked at individually, the leaders in Illinois innovation (Motorola, Abbott, Caterpiller, ITW, etc.) all took actions since 2000 to improve their performance. No one has faulted them for cutting costs – especially in an area where the payoff is as long-term as R&D. (A companion article discusses the strategy at Motorola for curbing its appetite for patents.) Moving the focus to better profits has, generally, pleased analysts and supported their stock price. Each of these companies has acted to defend and extend their business model.
But looked at by an outsider, the implications are really shocking. Illinois is now the 22nd state in patents – 22nd – even though it’s home to some of America’s biggest companies. What the Tribune can see no locked in company can. That from the inside, cutting these innovatoin expenses looks very different than it looks to someone from the outside.
It’s important for businesses to listen to outsiders. There is no way that any business can avoid having blinders. The quest for profits simply leads to lock-in and focus. Outsiders often see what insiders simply can’t.
by Adam Hartung | Aug 20, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Some of you may remember the old war movies in which the soldiers say "it’s the bullet you don’t hear that gets you." There have been a lot of movies in which the people who are killed make the point that it’s not what you see that gets you, it’s what you don’t see. There is no "Cry of the Banshee" prior to receiving the deadly blow. In business, it’s the same thing. It’s not the factors you plan on that kills your profitability, it’s what you don’t see. It’s not the threat from the direct competition that makes you business model unviable – it’s something that you never expected.
During 2005 there are two remarkable businesses that never saw it coming – and now they are facing great pain. They are household names with tremendous legacy and unbelievably profitable histories. But I can’t find any analysts who think they have growth in their future – and even the companies themselves admit they are facing a lower growth future. And their market values, employees, vendors and customers are all facing difficulty
Wal-Mart and Merck.
Wal-Mart has done about everything a discount retailer can do right. They’ve cut costs, appealed directly to their customers with lower prices. Created tremendous careers for their employees. But what they didn’t predict was a tripling of gasoline prices taking a relatively huge bite out of the discretionary incomes of their target customers. Now, with energy costs eating up the money they’d spend at the Wal-Mart stores the company is struggling to find a way to keep up its growth history.
Merck was the darling of Wal-Street in 1987. It was the highest P/E in the DJIA. It’s growth was spectacular. Not one analyst thought you could go wrong by buying Merck stock (and in all fairness if you bought it then you would have made a lot of money). But no one ever figured that one questionable drug (Vioxx) could destroy billions of dollars in shareholder wealth. The Merck business model made them rich while improving the lives of millions of people. But that same business model pushed Merck to aggressively market drugs directly to patients (rather than to doctors only), and to possibly push drugs into market use a bit quicker. And now the very health of Merck itself is in question.
Both these companies have been undeniably successful. World leaders. And they honed and pruned their business models to perfection for the competitive marketplace they were in. They locked-in that business model, and worked to defend and extend it as fast as possible. And that lock-in to the successful past practices meant they never saw it coming – they didn’t see what would cause them to stall. They didn’t see what could eventually knock them off their top spots.
by Adam Hartung | Aug 20, 2005 | In the Swamp, Leadership, Lock-in
This story hurts almost too much to tell.
This last spring a friend of mine for 25 years called asking for help with his small 2-year old business. He was competing in a fiercely competitive wireless data marketplace, where the rewards were potentially huge but no sure thing. His ambition was high, but his performance was struggling.
I met with him, and all too quickly realized that he was locked into management practices he had learned 15 years earlier as a successful executive in a very, very large wireless company. He was trying to run his new company, his much smaller company, the same way he ran the very large division of the much larger corporation. He wasn’t nimble, he wasn’t agile. He wasn’t holding the door open for extensive innovation amongst his 80 person staff, but instead he was trying hold to "hold everyone’s feet to the fire on performance" (against standards he was setting.) He wasn’t experimenting with new options, new ways of competing and disruptive market practices – instead he was trying to compete head on with much larger and better healed (although unprofitable) competitors.
I worked with him for two weeks trying to increase his agility. I offered him lots of options. He wasn’t willing to try new approaches, but rather he wanted someone to help make his business model more productive (and successful). At one point I pointed out that he wasn’t being as flexible as he might consider, to which he responded "I’m not inflexible, it’s just that there’s only one way to do this kind of business."
He stayed locked in to his business model, to his behavioral model and to his single-minded approach. I learned within the last two weeks that he’s now out of his company (his investors pushed him out) and the company is floundering – likely to be shut down shortly.
Lock-in can afflict any company of any size or age. Lock-in doesn’t only apply to large and mature organizations. And no matter where lock-in takes hold, it is both painful and deadly.
by Adam Hartung | Jul 21, 2005 | General, In the Rapids, Leadership
Since you’re reading this on-line, odds are very high you’re reading it via Internet Explorer from Microsoft – your web browser. Do you remember who invented the first web browser and took it to market? Spyglass – a Chicago company. They were rapidly followed by Netscape and only months later by Microsoft. Netscape was bought by AOL and disappeared from view. What happened to Spyglass? You probably think it went belly-up.
Wrong. When Microsoft launched IE they simultaneously brought everyone into the world of the web. They made surfing common. And they crushed their competition. But the leadership of Spyglass didn’t simply die. While most high-tech entrepreneurs get so wedded to their Success Formula that they let such market changes doom their enterprise, Spyglass didn’t (See article in Chicago Tribune).
Spyglass used the lost market share and financial losses to spur a Disruption, and then they redirected their energies into new markets. They moved from PCs to specializing in internet access for TVs, cell phones and other devices. The company was sold to OpenTV in 2000 for $2.4billion – right, billion. After their market position was destroyed by Microsoft.
All businesses have to be ready to disrupt and adapt. Not just big, mature companies. Even small companies have to watch their markets and remain flexible to develop new success formulas. And smart leaders that can sustain success across years are like the leaders at Spyglass – flexible, adaptable and ready to use White Space.
by Adam Hartung | Jul 21, 2005 | Defend & Extend, General, In the Swamp, Innovation, Leadership, Lifecycle
Motorola announced a great profit leap this week. Sales keep going up in all markets, and most notably sales of Motorola handsets have been gaining share. It was just 2 years ago that most analysts had given up on Motorola. They tagged the company as unresponsive to customers and a bad investment. But now, analysts all over are trumpeting the success at this aged, but recovering, company and recommending investors buy the stock (as well as the products).
Unfortunately, the same can’t be said for Kodak. Since dropping off the DJIA Kodak has been struggling to re-orient the company toward markets and renewed growth. Kodak announced a loss last quarter, and longer delays before returning to profitability. Although Kodak has been working on its "turnaround" for over 5 years (from film to digital photography) they still are saying that reaching their goals is at least 18 months away. Eighteen months ….. that’s longer in the future than Motorola has been executing its turnaround. And analysts are far from optimistic about the Kodak’s future.
Motorola is opening two new R&D centers, while Kodak is planning to lay-off 20,000+ employees.
Last January (2004) Motorola undertook a pattern interrupt and launched a host of new white space initiatives. The new leader (Ed Zander) escshewed massive layoffs in favor of reigniting his employees and seeking new growth markets. In fairly short order, Motorola has unleashed creative energy trapped in the organization and taken new products to market which are growing the company again. Motorola, in about a year, moved from the Swamp back into the Rapids by effectively disrupting itself then creating and managing White Space projects.
On the other hand, Kodak keeps trying to Defend and Extend its old business while "transitioning" to a new future. The leaders at Kodak won’t let go of the past and unleash their own organization to seek the future. Kodak has plenty of talented people, a great brand, and good distribution. But it keeps trying to defend its past instead of taking the actions to reignite growth in new markets. Its a shame, since Kodak was one of the early pioneers in digital imaging (they held many of the first patents) and its employees have had a clear view of "the future" for 20 years. But management has let lock-in to an old success formula keep them from unleashing their own resources.
Two big and "mature" companies found themselves stuck in the Swamp. Growth had stopped and financial results tanked. One followed the Phoenix Principle, and the other followed traditional management practices. One is now regaining share and growing again, the other remains seriously troubled.
by Adam Hartung | Jul 15, 2005 | In the Rapids
Apple Computer has done something rather amazing. Fewer than 10% of companies that hit a growth stall ever regain growth. But Apple has done it spectacularly.
Just a few years ago Apple was described as one company caught in the grips of the Innovator’s Dilemma by Clayton Christensen. Sales of Macs became so large that the company abanded its efforts to develop what became the very large PDA market (remember the Newton?). Apple began focusing on Defending and Extending its Mac business, and innovative product markets were abandoned. Then Macs fell victim to a market shift toward Wintel PCs and Apple faultered horribly – with layoffs and a risk of failure.
Now, after a series of CEO changes, Apple has taken the lead in the on-line digital music business with its iPod. Third quarter sales were up 75% versus a year ago, leading to a five-fold increase in profits (see Chicago Tribune report.) And share prices are near 5 year highs. That’s great…. so long as Apple doesn’t succumb to the siren’s song of now trying to be just an iPod company. What turned around Apple was using white space to find a new product market overlooked by Sony and other traditional music industry players trying to defend and extend their outdated business model.
What Apple must do is continue disrupting itself, creating white space projects and developing new product markets. In the fast cycle-time world of personal electronics, the requirements for success are applying the Phoenix Principle and avoiding the lure of trying to defend and extend a hit product/market.
by Adam Hartung | Jul 13, 2005 | Defend & Extend, Leadership
Today Bernie Ebbers was sentenced to 25 years in prison. For some it is seen as a signal to all CEOs they had better not commit fraud. For others it’s revenge for the ruination of a large corporation. For others it’s yet another sign of America’s misguided business leadership. And for others this is just an isolated, and irregular, activity by a wildman CEO. No matter what the view, unless this decision is overturned on appeal it’s very likely Bernie Ebbers will die in prison.
What we know from the trial is that Bernie Ebbers worked hard to pursue quarterly revenue and earnings goals. He never for a moment took his eyes off the P&L. He was so single-minded, he was found guilty of altering his books in a massive fraud in order to produce those desperately sought after results. Yet during his leadership at WorldCom he was hailed as a great leader by those in and out of his company who admired his single-minded behavior and focus on results.
Ebbers forgot the basic rule – the P&L is about RESULTS. You don’t create results, they happen because of the business decisions you make. When results don’t come in as favorably as desired it’s not the results you should focus upon, but instead the business decisions which create those results.
Bernie Ebbers is nothing more than another manager who fell victim to Defending and Extending a broken Success Formula. He went farther than most – to the point of fraud – in order to defend and extend that Success Formula. As such, he represents just how far Locked-In management can go to practice D&E Management. All managers who fall into the trap of D&E thinking, and D&E practices, run the risk of facing the reality that the RESULTS simply aren’t what they projected. Then they face very, very difficult choices.
There are other such victims in management today. Some are going through the wringer for it – AIG, Enron, Healthsouth to name a few. And there are many, many more that aren’t on the front page of today’s business section or under investigation. But all represent a common threat to their organizations and investors. The threat created by locking-in, focusing on the results and thereby not preparing to make strategic shifts when market changes require them. Then these managers don’t know what to do when the RESULTS aren’t what was projected.
It appears that Bernie Ebbers may well die in prison because of the decisions he made. Everyone loses – the wiped out WorldCom shareholders, the laid-off employees, the stranded customers, the defaulted suppliers and now the leader himself. And this could have been avoided if Worldcom management (led by Ebbers) simply hadn’t locked-in on that Success Formula and become single-mindedly devoted to Defending and Extending it. And that is the lesson for us all, we have much to fear from Lock-In and D&E Management practices.
by Adam Hartung | Jun 29, 2005 | Defend & Extend, In the Whirlpool, Lock-in
Can you recognize a leadership team (and business) in the Whirlpool?
Today’s Chicago Tribune quoted UAL as saying their losses were the result of "brutal" fuel costs. If it just wasn’t for those darn high fuel prices, why they could break-even.
And if pigs could fly….
For many years United’s management has had one excuse after another as to why they couldn’t make money. Unions, too many planes, high gate costs, insufficient ridership, too much competition…. fuel costs… Their business model is broken and it can’t make money. They have no idea how to fix it. They keep trying to find a way to Defend what they’ve done and Extend it in some fashion that will save the company. But nothing works. And it won’t. Yet, they can’t seem to get the gumption to disrupt themselves and try to really do something new before everyone loses their jobs (they already wiped out the shareholders) and leave creditors owning a bunch of planes.
Why, if they could just get those pigs to fly….
