Scared money…
I heard a radio announcer say the phrase “Scared money is dead money.” How true! During the tough times and periods of uncertainty do you play it safe or take risks to take advantage of the disruption?
Belo’s woes part 2 – Problems vs. Challenges
Belo’s problems continue with a whole raft of shareholder lawsuits. So what do you do when you have a problem? You solve them.
So, when Belo admitted to the inflated circulation, it set out to solve the problem. They did that by finding guilty parties and firing them, and they made restitution to their advertisers. And in focusing on the problem they made a big (and excruciatingly common) mistake. They didn’t look for the external challenge that is the root cause behind all these problems.
What’s the challenge? The company’s Success Formula has become obsolete and they are struggling financially. So, is firing some guilty parties going to solve that? No. Maybe those people should have been fired. Fine. Now what? What will Belo do about the challenge?
Just as I wrote about Merck’s crisis, Belo has the opportunity to really take advantage of this situation. They could create a disruption by seeing this as an indictment of their strategic assumptions and decide to reinvent them. However, if they stick with the actions they’ve taken thus far, this whole unsavory event will amount to a mere disturbance—an annoyance that the company has to deal with so they can get on with business as usual. And if that happens, we may not have to wait long for the next negative headline…
$25 Billion in a day???!!!!!
It isn’t every day that a company loses $25 billion (yes BILLION) dollars of stock value in a single day… or a company has the courage to do the right thing even knowing they’re going to get hammered for doing so. But that’s what Merck did.
Merck & Co. on Thursday recalled its arthritis drug Vioxx after an ongoing trial confirmed the medication increases the risk of heart attack and strokes. The news sent stock down nearly 27 percent and erased $25 billion from its market value.
Merck’s pulling of their blockbuster drug Vioxx off the market was an act of courage and integrity that is almost unheard of in an age of Enrons and Tycos . But instead of focusing on that, everyone seems to be wondering who to blame. Well that’s the wrong question and the wrong line of thought.
I would be asking, “who’s going to be the hero at Merck that seizes on this challenge and uses it as an opportunity to create a breakthrough for the company?” This event has created a disruption at Merck—there’s white space in the shadow of this disaster that will allow them to make just about any changes they want to make—and this sort of opportunity is very hard to come by.
Normally, companies are so hide-bound by their locked-in behaviors and organizational structure that they can’t break out of the status quo to make the important strategic shifts that would position them for a brighter future. SO, as bad as this situation is for Merck, it is also a golden opportunity. The big question is what will Merck do with it?
What could they do? Well they could leverage the integrity of their action to create trust with a customer base that has grown wary and cynical about drug companies—what would that be worth? They could re-examine their assumptions about the viability of the drug company model that puts them in feast-or-famine mode depending on the next great blockbuster drug to emerge from the R&D labyrinth. What changes could they make that would diverge from the industry norms and give them a real advantage?
What ideas do you have?
New Metaphors
As we move into the new millennium, we’re also moving into new models of organization–interdependent, networked, organic. This change will call for different metaphors than those we’re used to, which are dominated by machine references and war words. I think women will have a lot to say in creating these new metaphors.
Check out Kirsten Osolind’s website. Kirsten offers marketing services to women-owned businesses. I find the metaphors in the cycle shown on the “process” page to be very different from those you’d normally find in business. Quite organic.
Checking out her reinvention model, you will find some steps that are usually ignored, like getting real by discussing the undiscussable. However, what isn’t evident is a step to disrupt the current mind-sets and organizational lock-in to create the space for innovation. I wonder how she addresses that?
Quote: All great truths…
All great truths begin as blasphemies.
—George Bernard Shaw
Belo’s Embarrassing Misstatement
A colleague described his new employer, LRN, to me over lunch last week. LRN is one of a growing number of companies devoted to helping companies strengthen their ethical standards and compliance. In light of Sarbanes-Oxley and the post-Enron climate, businesses such as LRN are booming.
It is clear that setting standards, training people, and increasing attention on and visibility of ethics is making a difference in companies. However, I asked my colleague if there might be more to ethical breaches than just these factors. Could it be that performance pressures might lead even ethically aware people to bend or even break the rules?
We believe that the dramatic rise of ethical violations like that at Enron and others was in large part due to desperate people trying to meet their performance goals. Because the business isn’t giving customers what they want, the customers aren’t buying. As a result, desperate employees are resorting to desperate measures. This seems to be what happened at Belo Broadcasting.
According to articles published last week in Dallas Morning News, Belo Corporation, (publisher of the Dallas Morning News) has admitted to the inflation of circulation numbers that misled advertisers. Belo attributes this to “aggressive pursuit of goals set by former managers and inadequate monitoring of distribution and return practices.” Belo goes on to report that circulation for the six-month period ending today is down about 5.1 percent and 11.9 percent on Sundays compared with figures reported a year ago. A companion article reports that Belo is cutting 250 jobs due to a lag in the DFW market.
Instead of just thinking about this situation as a couple of bad apples who broke the rules, we would invite Belo to take a hard look at their business. It’s clear that their customers are going to other sources for their news. There are so many substitute providers for obtaining more timely daily news than just a newspaper. For a newspaper to compete, it has to offer something else, something different and better.
What can Belo do? Belo should turn this event into a disruption that would have them seriously rethink their business. How could they reimagine their business model to reinvigorate the business and jumpstart growth and restore profitability?
Unless Belo makes significant changes to its Success Formula, we predict that the company will continue to struggle. Perhaps they won’t have any other ethical breaches, but their problems will show up in other ways, like being forced to lay off employees due to slowing sales …
Napster – Seek Profits Now!
Napster absolutely must start making its profits now—regardless of what it does with its Success Formula. This will require that the company focus less on growth and more on efficiency and effectiveness so that it can make its profits now. But wait, you say. Isn’t market share the eventual pathway to profits and long-term success?
Well, no. That would be another aspect of the Myth of the Flats. There is little evidence to support that merely being big has any advantages at all for generating above average performance. It is well documented) that the company with the largest market share in an industry does not have a better likelihood than pure chance of having the highest performance in the industry. Companies must be distinctive in a way that matters in the market, and it’s becoming increasing difficult for big companies to do so.
Another basic tenet of the Phoenix Principle is Reap in the Rapids. There’s no evidence anyone is making profits in the online music industry during its current growth phase, which is a common mistake driven by The Myth of the Flats. According to the myth, companies should grab market share and not worry much about profits while growing. Then when the market slows, the dominant companies will be able to control margins and earn huge profits. Well, that’s a myth. In today’s copycat economy, there are no above-average profits in the Flats, you have to earn them on the way up—you must “Reap in the Rapids.”
So what should Napster do? One thing it could do is pursue any of the well-documented approaches to operational effectiveness available in the marketplace today. Another, less obvious but equally important action to take is to change its staffing mix.
People can be loosely grouped into two types, Explorers and Stabilizers. Explorers are hard-wired to be more comfortable with change and ambiguity and tend to be dominant in the early lifecycle stages, which is why efficiency takes a back seat. In contrast, Stabilizers are mentally wired to prefer making processes and practices consistent and dependable. Stabilizers are important in the early stages of the business—the Wellspring and the Rapids—to provide operational stability. Many companies in the Internet boom failed because they lacked the discipline and cautiousness that Stabilizers provide.
It is possible that Napster can make the changes needed to ensure enduring success. Whether they do or not depends on how locked in they are to historical methods for competing and seeking long-term success.
What are your thoughts: is Napster’s strategy solid or a setup for failure?
A New Life for Napster?
After terrorizing the recording industry and almost single-handedly ushering in the future of the music business, Napster is going mainstream. Gone are the rule-breaking, paradigm-busting pioneers—replaced by traditional thinkers and strict adherence to the law. Napster lost its battle with the music industry and for a while lingered in bankruptcy, and now wants to play by the rules and make a go of it as a legal music service. Unfortunately, it is no more likely to succeed this time around.
Why? Even though Napster is a small startup in a hip new industry, it is already racing ahead to the Flats portion of the business lifecycle, and will soon be entering the Swamp along with all the other players in the online music market. Roxio, Inc. purchased Napster with the intention of leveraging its famous name into a large share of the music download market. That’s a tenuous hope at best.
One of the basic tenets of the Phoenix Principle is “be distinct or be extinct,” and Napster is not yet distinct. This is a crowded market with very little differentiation among the players, and new companies are still getting into the market. The latest heavy-weights to enter the fray include Microsoft, Virgin, and Yahoo (through its purchase of Musicmatch). Napster’s strategy, to provide subscription services, is already being offered by established music services and it puts forward nothing new there. Nor are its marketing ploys such as pre-paid gift cards and targeting college students with giveaways likely to distinguish it from the crowd. These are simply too easy to copy.
The online music services industry is still in high growth mode, projected to grow at a double-digit rate for several more years. That puts it in the Rapids, so all the players should enjoy high growth for a while. But what happens when the music stops (so to speak), that is, when growth slows and the market becomes saturated? Commoditization, that’s what. When that happens everyone who doesn’t have a differentiated service offering will be plunged into the Swamp, and companies will begin to fail or consolidate in a Defend & Extend effort to find and preserve some profits.
Napster isn’t earning any profits now and won’t for a while, so Roxio is depending on $100 million in cash to keep it afloat. That won’t be enough. Napster needs to revisit its Success Formula now and devise a truly distinct value so that when the industry stops growing, it will remain strong. For instance, it could leverage its bad boy image in many ways—constantly “tweaking the nose” of the majors might help it develop a huge and loyal following among the rebellious youth.
The Phoenix Principle predicts that Napster is already set up to fail and the clock is ticking. Perhaps it would have been better for this industry icon to remain a martyr than to end up as just another business model gone belly-up.
Who bought the donuts?
Krispy Kreme is dead in the water. Two years ago a friend of mine was looking at the stock price chart for Krispy Kreme Donuts (KKD) and asked me if it was still a good investment. The stock had gone from it’s IPO of around $10 in early 2000 to $45 by end of 2001. Was the 2002 pullback a good buying opportunity? Not likely, I commented.
Krispy Kreme has been a “one-trick pony.” The company had a simple Success Formula: open more stores. A good product, a good concept, and they were using investor dollars to geographically expand as fast as possible. I asked my friend, “what will this company do when we have enough donut shops? What will happen when tastes change; and it won’t take much of a change when you live on one product sold 24 hours a day?” Krispy Kreme was putting no energy into understanding how locked-in they were to a fragile Success Formula built upon great promotion for their one product. They were projecting all the future by merely extrapolating the past.
Surely, the challenges came. Atkins diets became a challenge to a carb-laden product. As good as Krispy Kreme’s were, their expansion was taking them head-on into markets already laden with donut shops (including Dunkin’ Donuts) and grocers capable of “jumping on the bandwagon” in their local markets. Now, KKD execs are saying they have too many U.S. shops. Growth has disappeared as they are trying to find “profits” rather than “growth.”
Their one-product, simple success formula was too fragile for a dynamic marketplace, and too easily targeted by other competitors. What profits were to be made in their shops needed to be made during the rapid growth. Finding more profits now will be very, very difficult. They have gone from a growth company, to a retrenchment company. Krispy Kreme missed their golden opportunity to make the company into a great long-term brand. They should have found new avenues to build and grow. But, instead they locked-in and now they are struggling to compete.
For those who bought on the IPO, the stock is within a hair of the offering price. If you bought it then, and held it, you would have made a little capital gain (provided the price slide stops), but no dividends. If you bought anytime after the IPO – you’ve lost money and received no dividends. The lesson learned is to not invest in small companies with narrowly defined success formulas that are tightly locked-in to their competitive model. The risks are too great for any long-term investor.
Business is not an Olympic sport
As the world watches the Olympics this week, I was struck at how different sporting competition is from business competition. Those business leaders that make positive analogies are doomed for problems – and most likely failure.
The Olympic gymnast is a great athlete. Designed and practiced to be the best at his sport. He might have been a great baseball player, or swimmer, but he is, today, a finely tuned athlete capable of competing – and winning – at gymastics.
Likewise, the Olympic Greco Roman wrestler is a great athlete. He too is practiced to be the best at his sport. And, he too could have been a football player, or other competitor. But today, due to repetitive practice and a determined focus he is ready to compete in his one sport of wrestling.
Both of these are potential gold medal winners. But which is the more “fit”? That is impossible to say, for each is now finely tuned to a narrow field of competition. What would happen if the coach asked them to switch sports? It would be disastrous. They are capable of winning at one game, and have limited competitiveness in any other area.
What will become of these athletes when the game ends? Both will hope for endorsements and great fortune. Perhaps they will have one – at most two – more possible trips to the Olympics. And endorsements may last for a year or two. But they are almost sure to not compete in any other athletic endeavor. For, as good as they are, they are so highly specialized that their skills are not transferable to compete in another game. They will have to find entirely new careers in short order.
For business this is a recipe for disaster. Specialization leads to obsolescence. Any business that optimizes itself to compete so specifically will find itself upset by another competitor that makes a slight alteration in the “rules of the game.” The dynamism of markets, and competition, assures us that no highly specialized competitor can survive long. Glory may reign for a short time, but the specialized competitor will be upset in short order.
Today’s business success requires adaptability in the face of changing market conditions and competitors. New rules are created often, and the abilty to move across markets with wide skills is required for any business to remain powerful for more than a few years. Even great size, as with the wrestler, will not protect the competitor when the rules change slightly favoring speed or agility over size.
Business is not an Olympic sport. We should not confuse the testosterone laden thrill of a gold medal with the success of creating returns for shareholders. Instead, we should remember that Olympic winners are the 1 in 100,000 that made it to success. The odds were stacked far against them before they began. In business, the ability to change the competitive rules means that the odds can be stacked in your favor – as long as you remember to be adaptive in thinking and behavior in order to keep your competitor guessing and yourself in the lead.