by Adam Hartung | Jun 22, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Rapids, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Web/Tech
For years business leaders have sought advice which would allow their organizations to become "evergreen." Evergreen businesses constantly renew themselves, remaining healthy and growing constantly without even appearing to turn dormant. Of course, as I often discuss, most companies never achieve this status. Today investors, employees and vendors of Apple should be very pleased. Apple is showing the signs of becoming evergreen.
For the last few years Apple has done quite well. Resurgent from a near collapse as an also-ran producer of niche computers, Apple became much more as it succeeded with the iPod, iTunes and iPhone. But many analysts, business news pundits and investors wanted all the credit to go to CEO Steve Jobs. It's popular to use the "CEO as hero" thinking, and say Steve Jobs singlehandedly saved Apple. But, as talented as Steve Jobs is, we all know that there are a lot of very talented people at Apple and it was Mr. Jobs willingness to Disrupt the old Success Formula and implement White Space which let that talent come out that really turned around Apple. The question remained, however, whether Disruptions and White Space were embedded, or only happening as long as Mr. Jobs ran the show. And largely due to this question, the stock price tumbled and people grew anxious when he took medical leave (chart here).
This weekend we learned that yes, Mr. Jobs has been very sick. The Wall Street Journal today reported "Jobs had liver transplant". With this confirmation, we know that the company has been run by the COO Tim Cook and not a "shadow" Mr. Jobs. Simultaneously, first report on the Silicon Valley/San Jose Business Journal is "Apple Claims 1M iPhone Sales" last weekend in the launch of its new 3G S mobile phone and operating system. This is a huge number by the measure of any company, exceeded analysts expectations by 33-50%, and equals the last weekend launch of a new model – despite the currently horrible economy. This performance indicates that Apple is building a company that can survive Mr. Jobs.
On the other side of the coin, "Walgreen's profit drops as costs hit income" is the Crain's Chicago Business report. Walgreen's is struggling because it's old Success Formula, which relied very heavily on opening several new stores a week, no longer produces the old rates of return. Changes in financing, coupled with saturation, means that Walgreen's has to change its Success Formula to make money a different way, and that has been tough for them to find. The retail market shifted. Although Walgreen's opened White Space projects the last few years, there have been no Disruptions and thus none of the new ideas "stuck." Growth has slowed, profits have fallen and Walgreen's has gone into a Growth Stall. Now all projects are geared at inventory reduction and cost cutting, as described at Marketwatch.com in "Higher Costs Hurt Walgreen's Profits."
Now the company is saying it wants to take out $1B in costs in 2011. No statement about how to regain growth, just a cost reduction — one of the first, and most critical, signs of Defend & Extend Management doing the wrong things when the company hits the Flats. And now management is saying that costs will be higher in 2009/2010 in order to allow it to cut costs in 2011. If you're asking yourself "say what?" you aren't alone. This is pure financial machination. Raise costs today, declare a lower profit, in order to try padding the opportunity to declare a ferocious improvement in future year(s). This has nothing to do with growth, and never helps a company. To the contrary, it's the second most critical sign of D&E Management doing the wrong thing at the most critical time in the company's history. When in the Flats, instead of Disrupting and using White Space to regain growth these actions push the company into the Swamp of low growth and horrible profit performance.
We now can predict performance at Walgreen's pretty accurately. They will do more of the same, trying to do it better, faster and cheaper. They will have little or no revenue growth. They may sell stores and use that to justify a flat to down revenue line. The use of accounting tricks will help management to "engineer" short-term profit reporting. But the business has slid into a Growth Stall from which it has only a 7% chance of ever again growing consistently at a mere 2%. This is exactly the kind of behavior that got GM into bankruptcy – see "The Fall of GM."
The right stuff seems to be happening at Apple. But keep your eyes open, a new iPhone is primarily Extend behavior – not requiring a Disruption or necessarily even White Space. We need to see Apple exhibit more Disruptions and White Space to make us true believers. On the other hand, it's definitely time to throw in the towel on Walgreen's. Management is resorting to financial machinations to engineer profits, and that's always a bad sign. When management attention is on accounting rather than Disruptions and White Space to grow the future is sure to be grim.
by Adam Hartung | Jun 19, 2009 | Boards of Directors, Books, Defend & Extend, eBooks, In the Whirlpool, Leadership, Lifecycle, Lock-in, Transportation
Of all the companies that typified America’s rise as an industrial superpower, none was more successful than General Motors.
What happened? Why has it fallen so far? GM at its biggest boasted some 600,000 well-paid employees. It will be left with something like 60,000 after it emerges from bankruptcy. How did that happen? Why did its stock price tumble from $96 per share at its height to 80 cents recently? Why did its market share shrink from one out of every two cars sold to less than one in five last quarter?
And thus begins the new ebook about the fall of GM. In 1,000 words this ebook covers the source of GM’s success – as well as what led to its failure. And what GM could have done differently – as well as why it didn’t do these things. Read it, and share it. Let folks know about it via Twitter. Post to your Facebook page and groups, as well as your Linked-in groups. As markets are shifting the fate of GM threatens all businesses. Even those that are following the best practices that used to make money. Let’s use the story of GM — and the costs its bankruptcy have had on employees, investors, vendors and the support organizations around the industry as well as government bodies — as a rallying cry to help turn around this recession and get our businesses growing again!
Download Fall of GM
by Adam Hartung | Jun 18, 2009 | Uncategorized
Yesterday we heard announcements about reforming the federal regulators and the systems they use to manage money and banking, and now the Treasury Secretary is out selling the program to Congress "Geithner Fields Revamp Queries" Marketwatch.com. It's touched off a big debate, as some people think the project has gone too far – and others think it hasn't gone far enough. That's interesting, because most people think something needs to be done so the events of last summer — a near melt-down in the banking system and a near collapse of the monetary system — are not repeated. So we might want to think about what was announced through the lens of The Phoenix Principle to see if we can expect much change.
Bruce Nussbaum is billed as "the innovation guru" on Businessweek.com. He reports "President Obama Failed At Redesigning the Financial System." Interestingly, his biggest complaint is that the President "didn't do what FDR did in the 1930s" and then attributes FDR with significantly Disrupting the government apparatus at the time.
I would agree with that assessment. FDR attacked a bevy of Lock-ins currently then in place. His attacks caused people to reconsider the approach then being used, which had remarkably high unemployment and long bread lines, and opened White Space to try all kinds of programs broadly referred to as "The New Deal." Ronald Reagan 50 years later was similar. He attacked what had become the conventional wisdom of the time, and his Disruption opened White Space which led to the greatest tax code reform ever, as well as significant changes in labor relations and government deregulation of industry. Both are examples of Presidents that first Disrupted, and then used White Space to develop new solutions.
President Obama has not Disrupted. He's definitely whacked the chicken coop a bit, ruffling a lot of feathers, by doing things such as pushing for the firing of GM's Chairman/CEO. But so far, even though he espouses change, his administration hasn't attacked any old Lock-ins. He keeps talking about changes "within the system." As The Phoenix Principle would predict, this sort of approach to change usually aggravates everybody – even your own supporters – and results in little significant change. Perhaps some marginal adjustments, but since the underlying Success Formula is not attacked all the recommendations lie within it – and the Status Quo is largely preserved.
Mr. Nussbaum, in an interview on BusinessWeek.com entitled "What Should A.G. Lafley Do Next?", recommends the President appoint the former head of Proctor & Gamble to be the nations Chief Innovation Officer. Although a novel idea, it won't make any difference. Mr. Nussbaum's consultant-style recommendation is the kind that gets a lot of executives in trouble who end up with lofty goals, but no chance of success. Such a move would put an embarrassing end on Mr. Lafley's career, and be an embarrassment for the President.
The federal government is a series of silo fiefdoms controlled by individual secretaries. Mr. Nussbaum would like Mr. Lafley to use "design theory" to cut across fiefdoms in order to innovate. Mr. Nussbaum gives Mr. Lafley credit for reorganizing P&G this way to success. But, how exactly is someone who works for the President supposed to re-organize the administrative branch of the federal government? Fiefdoms with their own individual mandates, leaders, staff and budgets. Especially without a dramatic Disruption that forces everyone to agree on such a massive reorganization. No commitment from the President will matter when the silo kings are allowed their silos. Probably a lot of recommendations – long the domain of Presidential commissions – that say there should be more cross-departmental work. But without a Disruption, something that rocks the apparatus to its core, there's no hope of this happening.
Despite the President's lofty goals and ambitions, he risks becoming somebody who talks about change – but doesn't accomplish much. This may upset you, or you may be happy, depending upon your point of view. But as a practical matter, should we expect that health care reform will be something radical – like social security and medicare were – or something much less dramatic? The answer is now clear. Lacking Disruptions, and when we look at the financial services reform proposed yesterday, we should expect something that will be an extension of the current system. A bit of tweaking to how things are currently done, but largely the same. Financial system reform left 95% of the players and their products untouched – and focused on small changes to a few institutions and a few products that are identified as central to the problems last summer. We should expect that health care reform would leave 95% of the system and products unchanged as well. Despite whatever rhetoric is extolled from politicians and pundits of either party.
This is not to say that the federal government does not adapt. When attempting to do more of what it has always done better, faster, or cheaper we regularly see that such sustaining innovations are picked up quickly and used effectively. And this was demonstrated this week when we learned that the State Department and other federal agencies were relying substantially on Twitter to receive information from Iran, and communicate with people in Iran.
For years the government apparatus relied on journalists for lots of two-way international communications. This often created a somewhat cozy relationship between very large newspapers with feet on the street in remote and unfriendly locations with people in government. This coziness had the really bad side effect of causing America's enemies to think most journalists were American spies working for the CIA, etc. So what worked for journalists all too often got them jailed and sometimes killed. But this system completely broke down the last 2 years as traditional journalism, and the newspapers, started going broke. The journalists were laid off in droves, and the government lost its primary info feed from offshore.
What's replaced journalists for readers has been a market shift to the internet. People have turned to bloggers, media sites and social networking for information. This dramatic shift has wiped out the profits at newspapers, and shut down a lot of properties. For media companies this represents wholesale change.
But government users quickly adapted. In their effort to Defend & Extend their roles, they became quick users of these sites as well. And when Iran refused to allow traditional journalists outdoors – or even to report on uprisings – the government officials turned to Twitter. And, just like the government used to ask the newspapers for help, they had no trouble asking Twitter – as reported in "U.S. asks Twitter to stay on line because of Iran vote" on MSN.com. And, much like how The Washington Post or The New York Times responded in the past, Twitter obliged. It was a remarkable example of "business as usual" for the government agencies – just done a little faster, better and probably cheaper. And this, of course, reinforced to international leaders their claims that Twitter and social media sites are "tools of the U.S. governement." In what appears "the more things change the more they stay the same" we see how easily the status quo can be reinforced, even amidst a dramatic change for the participants.
There can be reform in any government. There even can be innovation. But obtaining that reform requires
- Someone develop very clear scenarios about the future that describe the need for change
- A recognition that competitors will do better and we'll do worse if we don't change
- A Disruption – an attack on Lock-ins that support the Status Quo
- Using White Space to test new solutions toward which the organization can migrate as pieces are demonstrated successful.
It works. We see it work for individuals, work teams, functional groups, businesses, industries and even for governments – like exemplified by Franklin Roosevelt and Ronald Reagan. FDR did a marvelous job of describing a future at risk if America didn't start working again, otherwise international competitors would take over the country. And Ronald Reagan similarly described a future that would be entirely different (free of inflation and stagnation) if changes were made – and one at risk of its long-term enemy the USSR if changes weren't made. But if you try to shortcut these steps you get only marginal change.
by Adam Hartung | Jun 16, 2009 | Uncategorized
Let's say you've had a great business selling to auto companies. What do you do now? Wait for the American auto industry to get better, or……
Let's say you've had a great business selling to airplane manufacturers. What do you do now? This week is the biggest week in the airplane business. It's the Paris Air Show, or as many call it "La Bourget" which is the name of the suburban Paris town where the show occurs. It's the "mother of all conventions" as manufacturers of planes (and lots of military equipment beyond things that fly) try to book orders from international governments, airlines and corporations. This year, it's doom and gloom as Marketwatch points out in "Is Paris Burning?". Even the President of Brazil's very successful commuter jet manufacturer Embrear is saying it's too early to call a bottom in aviation sales in his interview "Not There Yet".
There are many American businesses selling to the aviation industry. Aviation doesn't cycle as fast as automotive, because the prices are much higher and the product lives much longer. So it's easier to predict market moves. We now can predict that the business will be soft for a few additional years with high confidence. Some will choose to "double down" and try to grow share while the recession is on. An expensive effort to find a lower cost while volume drops. Another option would be to cut output, lay people off and wait it out. But, unfortunately for both these options, when sales resume you can't be sure some new suppliers won't have entered the market with new products or new technology. Both approaches could well find prices down and competition up – or even worse the market recovers with new aviation products and you're in a pitched battle to supply the industry against new competitors against whom you have no advantage.
A better idea is to move resources. You don't have to abandon the old business, but why keep trying to live in a worsening environment? If the market is shrinking, isn't it smart to find new markets.
Take for example the behavior in retail. We all know that Circuit City went out of business, and lots of other retailers like Mervyn's and Filene's Basement have filed bankruptcy. It's tough on retailers. Especially those who keep trying to do the same thing. But some are taking actions to change in order to be more competitive. Nine West and some other retailers are changing their approach as reported in, "Gap, Specialty-retail stores mixing up brands."
"Consumers are interested in the best of the best. Not the best of what your brand has to offer. Retailers are learning not to put all their eggs in one basket. If it doesn't work, you just get rid of it." Now that's some advice worth listening to, offered by Marshal Cohen of NPD Group. When markets shift, you have to shift. Waiting around for customers to come back to you is not a viable option.
Retailers that are growing are using test markets to try new things. Like Nine West partnering with New Balance on a new shoe that is attracting a lot of young shoppers. Not everything works, at Cache the store tried some new brands but the test reinforced that people were looking for the Cache brand rather than the products Cache tested. That's the benefit of testing, you can learn. As you learn, you can adapt and adopt new behaviors.
Retailing is going through a massive market shift. Those who survive have to learn a lot more about individual stores versus malls, and on-line versus in-store. They have to learn about brands and about store brands and what people now want. Those who don't have ongoing White Space tests are failing. Those who are have a much better chance of surviving.
So, if your market is shifting, you need to MOVE. Whether you make car parts, aviation parts, furniture, windows,
clothing, candy – anything – you will see your market shift because of
the globalization of new technology. When markets shift, the thing you shouldn't do is "wait it out". That is not a viable strategy. That's putting your head in the sand. Just because you aren't certain what to do doesn't mean you don't take action. And that's why White Space projects are critical – because the only way you can develop a new Success Formula is by trying it in the marketplace. You don't want to end up like all those going out of business because they keep trying to do what they always did, only cheaper, faster or better. You have to start doing different things. And NOW, because the market keeps shifting more every day.
by Adam Hartung | Jun 15, 2009 | Defend & Extend, General, Leadership, Lifecycle
Harvard Publishing recently posted an article from a professor at the London Business School, Freek Vermeulen "Can we please stop saying the market is efficient?" The good professor's point of view was that he observed a lot of companies that were efficient which didn't survive, and several not all that efficient that did survive. He even took time to point out where some Harvard professors had identified that companies who implement ISO 9000 often see their innovation decline!
Unfortunately, the good professor is all too correct. If markets were efficient, we'd see performance move in a straight line. But any follower of equities, for example, can show you where the stock of a company may have gone up, then declined 20%, then gone back to a new high, maybe to even fall back more than the original 20%, only to then climb to even greater highs. If the market for that equity were efficient, it would never have these sorts of wild price gyrations.
Likewise, the market for products, things like copiers, aren't all that efficient. A case I describe pretty deeply in Create Marketplace Disruption. When Xerox brought out the 914 copier it changed the world of office copies. But it didn't take off. Instead, for years companies maintained their duplicating shop in the basement, using small lithographic offset presses. This went on for years, and usually the basement shop was closed when (a) the operator retired, (b) the printing press simply gave up the ghost and was ready for the scrap heap, or (c) when the company realized it had so many copiers the basement would be better served to house copiers instead of the printing press. The fact is that marginal economics – the very low cost of continuing to operate an alread-paid-for-press meant that it was easy to simply keep using presses long after they had any economic advantage. Not to mention all kinds of kinks in the decision apparatus that funded things like a print shop just because the budget "always had." But eventually, as the retirees and metal scrappers started accumulating, the market shifted. What had been a "mixed market" of presses and Xerox copiers suddenly shifted to almost all copiers. Xerox exploded, and the small offset press makers disappeared.
That wasn't efficient. There was a huge lag between when the benefits of copiers were well known and the demise of print shops. In the end, those who had debts or equity in printing press companies suffered huge losses as the business "fell off a cliff." There was no "orderly migration" out of the marketplace. In a very short time, the market shifted from one solution to another.
As recently as 2007 almost every home in America had a newspaper delivered. By 2009 the market had begun to disappear with subscriptions down over 60% in some markets. For advertisers, the purchasing of print ads dropped by over 50% in just 24 months. Yet, the growth of web usage and internet ads had been growing for almost a decade. In an efficient market there would have been a smooth transition between the two, with say 5% of ads shifting every year. Again, the economists' "orderly transition" would have applied. There doesn't seem anything orderly if you're in a market where the newspaper has disappeared, filed for bankruptcy, or cut its pages 40% – and you're wondering how to get the local news or even the TV listings you once found in the newspaper.
Market shifts are sudden, and big. In the later half of the 1980s the PC market shifted from 60% Macintosh to 80% Wintel in just 5 years – while growth for PCs exploded. It didn't feel very efficient to people at Apple, the suppliers of apps for Macs or the user base. Thousands of people in corporations were told "surrender your Mac and get a new PC next week" with no discussion, explanation or concern.
Companies that fall victim to market shifts aren't without strategists, planners or quality programs. Many have robust TQM or Six Sigma projects. But these are all about optimizing performance against past performance – not necessarily what the market wants. When you optimize agains the past you depend on minimal change. When markets shift, these "efficiency" programs can cause you to be the last to know – and the last to react.
People like to think of evolution as sort of like Continuous Improvement. Get 5% better every year. Like a variety of mammal might lose 1/4" of tail each generation until it no longer has one. We now know that's not how it works. There are winners. They keep reproducing, get stronger and more of them every year. Like mammals with long tails. Meanwhile, an alternative develops – like a mammal with no tail. Then suddenly, without expectation, the environment changes. Tails become a big hindrance, and those with tails die off in a massive exodus. Those without tails suddenly find they are advantaged by the lack of tails, so they begin breeding fast and getting stronger. In short order, perhaps a single generation, the tailed mammals are gone and the no-tails become dominant. Not very efficient, or orderly. More like reactive to an environmental shift.
If you want to do good tomorrow, I mean one day from today, the odds are that you can accomplish that by being just slightly better at what you did yesterday. But if you want to be good in 5 years, you may well have to do something very different. If you wait for the market to tell you – well – you've waited too long. By the time you know you're out of date, the competitor has taken your position. You have no hope of survival.
We live with a lot of myths in business. The value of efficiency, and the belief in efficient markets, are just a couple of big ones. Kind of like the old myths about blood-letting. Before the USA, never before in history has anyone ever tried to establish a government of self-rule. And self-rule led America to a country dominated by businesspeople. No longer did the king determine winners, losers, prices and behavior. Now markets would do so. The people who would make these markets were the emerging business folks. But nobody knew anything about markets – except some theories about how they "should" work written by an Englishman who had grand thoughts about open-market behaviors. So most people accepted the earliest theory – with its ideas about "invisible hands" that would guide behavior.
Markets are dramatically inefficient. Just look at the prices of equities. Look at the bankruptcies all around us. GM, your local newspaper, Six Flags and your neighborhood furniture store. People who were often efficient, but didn't understand that markets shift quickly, and very inefficiently. They don't move in small increments – they change all at once. And if you want to survive, you have to
prepare for market shifts. Simply working harder, faster and cheaper won't save you when the market shifts. If you aren't ready to be part of the shift, you get left behind and won't survive.
Markets are shifting today faster than they ever have. Telecommunications, internet connections, massive amounts of computing power, television, jet airplanes – these things have made the clock speed on changes much faster. Market shifts that used to be seperated by decades are compressed into a few years. If you don't plan on market inefficiencies – on market changes – you simply can't survive.
Lots of people misunderstand Darwin. The prevailing view is that his study on the origination of species says that the strongest survive. In fact, his conclusion was quite the opposities. What he said was that it is not the strongest that survive, but the most adaptable.
by Adam Hartung | Jun 11, 2009 | Uncategorized
"The Evolving CMO" is the Brandweek headline. According to this article, increasingly CMOs (that's Chief Marketing Officers) are becoming quite nerdly. Whereas top marketing folks were once seen as "big idea" folks, now recruiters like Heidrick & Struggles (quoted in the article) are looking for top marketers to be analytical types who pour through on-line data to discern ad effectiveness and response rates.
It's not at all clear this is a good trend.
Ever since marketing has been around it's been an easily derided function. Unlike Sales, which has hands on daily contact with customers, marketers were considered more staff-like. And much more easily let go. Especially in companies that aren't consumer goods oriented, the first people let go in a downsizing are usually marketers. Some companies, like Computer Sciences Corporation in services and many manufacturers of industrial products, don't have any marketers at all! There are a lot of executives that believe marketing is a waste of money – you just need to focus on Sales.
So how should marketers deal with this lack of respect? Increasingly, they are turning to numbers. It appears that marketers want to overcome their Rodney Dangerfield position by being more like other parts of the company. Product Development and engineering tend to be loaded with engineers, who like to push around numbers. Operations folks like to analyze the plant output and quality numbers to death. And everybody in finance tends to use numbers to make their argument. Strategists and planners obsess over trend numbers. Even salespeople talk about salescalls, orders, total revenues, margins – numbers. So it seem marketers are starting to think that to gain respect they need to adopt personal, or role, Success Formulas much like others in the organization.
The problem is that numbers tend to focus you on the past, not the future. Yes, on-line ads and click-throughs offer us a bounty of new numbers on the efficacy of ads, placements, messages, hits – all kinds of things we can run through the same analytical tools used by the rest of the company. But does studying the recent behavior, upon which we have numbers – such as ad clicks – or of links to facebook pages – or the volume of tweets – or the respondents to a Linked-in group query — do these things tell you what big trends are emerging? Do they tell you whether your product line could be made obsolete by a new competitor? That is far less likely to happen.
All this number crunching may make marketing look more scientific, but the important question is whether it helps the company grow. Unfortunately, most trend numbers tell us what worked well in the past. Yet knowing that still doesn't tell you what will work in the future. Number crunching is great for execution of a designed plan. Midway through an ad program, analysis can help you tweak it in order to catch more viewers and grab a few more sales. Midway through a promotion, analysis can help you understand the impact of a price change, or a product pairing, or a sales blitz so you can tweak it for maximum results. Analysis is great for understanding what to do right now. But we have to run our business not just for right now. We have to run businesses to position the company where the market will be in a year, two years, five years and beyond.
There's a tendency to think that the person who has the most numbers, or does the most analysis, is the better businessperson. I don't know how this proclivity developed, but it did. The desire to "engineer" a business so that it has no risk, and will generate ongoing growth and profits is a powerful desire. But reality is that we live in a highly dynamic world. We cannot predict the future. Most 3 to 5 year forecasts aren't off by 2% or 5% – they are off by 50%! Having all the numbers imaginable about the past won't give you much help for dealing with a market shift. And that's the big problem in business today – dealing with these radically shifting markets and the changes they bring so quickly. Analysis depends too much on the future being like the past, and that just isn't so. The world keeps changing.
Lehman Brothers, Merrill Lynch, Bank of America, Chrysler and GM were/are full of peoples deeply skilled in how to "run the numbers." Business training the last 30 years has given us thousands of skilled analysts, deeply ingrained in how to dig up and analyze vast amounts of data – using newer and more powerful computer tools every year. Yet, for all this analytical skill we aren't producing more revenue growth, nor more profits. Throughout the last 30 years growth rates have declined, and profit rates have dropped. And recently we fell off a business cliff into an amazingly deep recession. Yet, we're drowning in a sea of data and Powerpoint slides full of analysis. The link between running numbers and improving performance appears broken – if it ever existed at all.
Marketers should be all about growth. And growth comes from moving beyond executing static promotional programs on existing products. To grow you have to be flexible to enter new markets, pioneer innovation and generate new solutions. Somebody has to lead the charge to do scenario planning that opens the collective vision to doing new things – things not visible in the numbers. Somebody has to understand the behavior of competition to recognize the holes they are unable to address because of their Lock-in to past practices. Somebody has to reach beyond the numbers to offer Disruptions which allow the company to move from making computers to making consumer electronics (like Apple), or from making cars to making airplanes (like Honda). Somebody has to be willing to manage market tests that teach you how to create new markets where you have fewer competitors and higher profits as growth takes off. And all of this work is well beyond analyzing the numbers.
I advocate that all executives pull their heads out of the numbers to undertake these tasks for growth. Many CEOs of now defunct companies could memorize pages and pages of financial and market numbers. They could recite market shares, product margins, product variable costs, plant fixed costs, employee costs and segment profits from the top of their heads. Yet, the businesses are now gone (Multigraphics, AB Dick, Wang, Digital Equipment, Western Auto and TG&Y are just a few that no longer exist). Having a deep understanding of the numbers means you know the past. But unless you use that to be adaptive, to prepare for and launch Disruptions, all those numbers simply get in the way of being successful. You can know all the trees, but end up unable to save the forest.
Marketers are not given their due. Usually they see market shifts before anyone else. They are able to generate scenarios that are possible, but often ignored because they require change. They know the limits of a product, and they realize when the variations and derivatives are getting long in the tooth – causing margins to
slip as the cost of sales and new launches keeps rising. They also know the company weaknesses and how they must be addressed if the company is not to become irrelevant. They shouldn't retreat to the bastion of numbers to try and make themselves more likable. Rather, they should lead the charge to make sure planning is about the future, not the past. They need to keep executives paranoid about competitors. They need to constantly bring up company shortcomings left vulnerable due to Lock-in. And they need to champion test after test after test to keep the company growing. In these roles, they are more important than anyone else in the company. And vital to growth and viability. Without marketers and the application of their skills all companies become out of step with shifting markets and inevitably fail.
by Adam Hartung | Jun 10, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
As I've given presentations around the country the last year I'm frequently asked about the role of leadership in Phoenix Principle companies. All people can bring Phoenix Principle behaviors to their work teams and functional groups. Yet there is no doubt that organizations do much better when the leaders are also committed to Phoenix Principle behaviors.
Unfortunately, all too often, top leaders are more interested in Defend & Extend Management. BusinessWeek's recent article "How to Succeed at Proctor & Gamble" talks about replacing CEO icons such as Charles Schwab, Michael Dell and Jack Welch. Unfortunately, only one of these was a real Phoenix Principle leader – and the others ended up coming back to their organizations when the replacements tried too much D&E behavior – leaving their shareholders with far too low returns and only dreams of rising investment value. Even more unfortunate is the fact that too many management gurus simply love to wax eloquently about leaders of big companies – regardless of their performance. Such as Warren Bennis's description of A.G. Lafley at P&G as "Rushmorian." Those at the top are given praise just because they got to the top. Yet, we've all known leaders who were far from being praise-worthy. Even the mundane can be loved by business reviewers that rely on them for money, access, ad dollars and influence.
There's a simple rule for identifying good leadership. Grow revenues and profits while achieving above average rates of return and positioning the organizations for ongoing double digit growth upon departure. It's not the size of the organization that determines the quality of a leader, it's the results. We too often forget this.
Back to departing P&G CEO, Mr. Lafley. Preparing to retire, he's taken the high ground of claiming to be "Mr. Innovation" for P&G. Experts on innovation classify them into Variations, Derivatives, Platforms or Fundamental. Using this classification scheme (from Praveen Gupta Managing Editor of the International Journal of Innovation Science and author of Business Innovation) we can see that Mr. Lafley was good at driving Variations and Derivatives at P&G. But under his leadership what did P&G do to launch new platforms or fundamental new technologies? While variations and derivatives drive new sales – "flavor of the month" marketing as it's sometimes called – they don't produce high profits because they are easily copied by competitors and offer relatively little new market growth. They don't position a company for long-term growth because all variations and derivatives eventually run their course. They may help retain customers for a while, but they rarely attract new ones. Eventually, market shifts leave them weaker and unable to maintain results due to spending too much time and resource Defending & Extending what worked in the past. Mr. Lafley has done little to Disrupt P&G's decades-old Success Formula or introduce White Space that would make P&G a role model for the new post-Industrial era.
Too often, bigness stands for goodness among those choosing business leaders. For example, GM is replacing departed CEO Rick Wagoner with Ed Whitacre according to the Detroit Free Press in "Former AT&T chief to lead GM." Mr. Whitacre's claim to fame is that as a lifetime AT&T employee, when the company was forced to spin out the regional Bell phone companies he led Southwestern Bell through acquisitions until it recreated AT&T – as a much less innovative company. Mr. Whitacre is a model of the custodial CEO determined to Defend & Extend the old business – in his case spending 20+ years recreating the AT&T judge Green took apart. Where a judge unleashed the telecommunications revolution, Mr. Whitacre simply put back together a company that is no longer a leader in any growth markets. Market leaders today are Apple and Google and those who are delivering value at the confluence of communication regardless of technology.
Today, few under age 30 even want a land-line – and most have no real concept of "long distance". Can the man who put back together the pieces of AT&T, the leader in land-line telephones and old-fashioned "long distance service" be the kind of leader to push GM into the information economy? Does he understand how to create new business models? Or is he the kind of person dedicated to preserving business models created in the 1920s, 30s and 40s? Can the man who let all the innovation of Ma Bell dissipate into new players while recreating an out-of-date business be expected to remake GM into a company that can compete with Kia and Tata Motors?
Any kind of person can become the leader of a company. Businesses are not democracies. The people at the top get there through a combination of factors. There is no litmus test to be a CEO – not even consistent production of good results. But in far too many many cases the historical road to the top has been by being the champion of D&E Management; by caretaking the old Success Formula, never letting anyone attack it. They have avoided Disruptions, ignored new competitors, and risen because they were more interested in "protecting the core" than producing above-average results (often protecting a seriously rotting core). Much to the chagrin of shareholders in many cases.
Now that the world has shifted, we need people leading companies that can modify old Success Formulas to changing market circumstances. Leaders who are able to develop and promote future scenarios that can guide the company to prosperity, not merely extend past practices. Leaders who obsess about competitors to identify market shifts and new opportunities for growth. Leaders who are not afraid to attack old Lock-ins, Disrupting the status quo so the business can evolve. Leaders who cherish White Space and keep multiple market tests operating so the company can move toward what works for meeting emerging client needs. Leaders like Lee Iacocca, Jack Welch, Steve Jobs and John Chambers. They can improve corporate longevity by shifting their organizations with the marketplace, maintaining revenue and profit growth supporting job growth and increased vendor sales.
by Adam Hartung | Jun 8, 2009 | Current Affairs, General, Leadership, Lifecycle
Unless you have a lot of time to research stocks, you probably invest in a fund. Funds can be either an index, or actively managed. People like index funds because you aren't relying on a manager to have a better idea. Index funds can only own those stocks on the index. Like the S&P index fund – it can only own stocks in the S&P 500. Nothing else. Interestingly, the Dow Jones Industrial Average is considered an index fund – even though I don't know what it indexes. And that is important if you are an investor who benchmarks performance against the Dow. It's even more important if you invest in the Dow (or Diamonds – the EFT for the Dow Industrials).
GM is now off the Dow ("What does GM bankruptcy mean for Index Funds?"). Because it went bankrupt, the editors at Dow Jones removed it. But it wasn't long ago that the editors removed Sears and Kodak. But not because these companies filed bankruptcy. Rather, the Dow Jones editors felt these companies no longer represented American business. So the Dow is a list of 30 companies. But what companies is up to the whim of these Dow editors. Sounds like an active management (judgement) group (fund) to me.
Go back to the original DJIA and you get American Cotton Oil, American Sugar, Distilling & Cattle Feed, Leclede Gas Light, Tennesse Coal Iron and Railroad and U.S. Leather. Household names – right? As the years went buy a lot of companies came and went off the list. Bethlehem Steel, Honeywell, International Paper, Johns-Manville, Nash Motor, International Harvester, Owens-Illinois, Union Carbide — get the drift? These may have been successful at some time, but the didn't exactly withstand "the test of time" all that well. Even some of the recent appointments have to be questioned – like Home Depot and Kraft which have had horrible performance since joining the elite 30. You also have to wonder about the viability of some aging participants, like 3M, Alcoa and DuPont. So the DJIA may be someone's guess about some basket of companies that they think in some way represents the American economy – but it's definitely subject to a lot of personal bias.
Like any basket of stocks, when the DJIA is lagging market shifts, it is not a good place to invest. And the editors are greatly prone to lagging. Like their holdings in agriculture and basic commodities years ago, through holding big industrial companies in the 1990s and 2000s. And the over-weighting of financial companies at the turn of the century when they were merely using financial machinations to hide considerable end-of-value-life problems. When the DJIA is holding companies that are part of the previous economy, you don't want to be there.
The Dow should not be a lagging indicator. Rather, given its iconic position, it should hold the "best" companies in America. Not extremely poorly performing mega-bricks – like GM. GM should have been dropped several years ago. And you should be concerned about the recent appointment of Kraft. And even Travelers.
Those companies that will do well are going to be good at information, and making money on information. So who's likely to fall off (besides Kraft)? DuPont, which has downsized for 2 decades is a likely candidate. Caterpillar is laying off almost everyone, and cutting its business in China, as it struggles to compete with an outdated industrial Success Formula. Bank of America has shown it is disconnected from understanding how to compete globally as it has asked for billions in government bail-out money. And the hodge-podge of industrial businesses, none of which are on the front end of new technologies, at United Technologies makes it a candidate — if people ever recognize that the company would quickly disintegrate without massive U.S. government defense spending. Even 3M is questionable as it has slowed allowing its old innovation processes to keep the company current in the information age.
Adding Cisco was a good move. Cisco is representative of the information economy – as are Verizon, AT&T (which was SBC and before renameing, GE, HP, Intel, IBM, Microsoft, Merck and Pfizer (if they transition to biologics from old-fashioned pharmaceutical manufacturing ways – otherwise replace them with Abbott). But all those other oldies – like Walt Disney (sorry, but the web has forever changed the marketplace for entertainment and Walt's folks aren't keeping up with the times), Boeing (are big airplanes the wave of the future in a webinar age?), Coke (they've kinda covered the world and run out of new ideas), P&G (anybody excited about Swiffer variation 87?), and Wal-Mart – which couldn't recognize doing anything new under any circumstances.
As an investor, you want companies that can grow and create a profit. And that's increasingly not the DJIA – even as it slowly adds a Microsoft, Intel and Cisco. You want to include companies in leadership positions like Google and Apple. Their ability to move forward in new markets by Disrupting their Lock-ins and using White Space to launch new projects in new markets gives them longevity. As an investor you don't want the "dogs" – so why would you want to own DuPont, et.al.?
Investors may have been stung by overvaluations in technology companies during the 1990s. But that was the past. What matters now is future growth ("Technology on the comeback trail"). And that can be found by investing in the future – not what was once great but instead what will be great. Invest for the future, not from the past. And that can be found outside the DJIA. Unless the Dow editors suddenly change the portfolio to match the shift to an information economy.
(For additional ideas about recomposing the DJIA, see my blog of 3/12/09 "Dated Dow")
by Adam Hartung | Jun 6, 2009 | Uncategorized
"GM reaches deal to sell Saturn to Penske" is the latest GM headline. Although the management at GM could not figure out how to run a profitable Saturn, it has very quickly sold the business. And within a week of selling Hummer to a Chinese company. Sounds like a combination of low pricing, and better skills at hiring investment bankers than running a business.
The biggest lesson we can learn from this is that GM was so Locked-in to its old Success Formula that it was frozen in place, unable to take actions that would allow GM's revenue and profit to grow. After years of doing nothing more than layoffs, GM was able to find buyers for 2 of its 3 semi-autonomous divisions almost immediately. In other words, if GM management had to change to fix GM the team would rather fail — wiping out the shareholders, most of the bondholder value, and eliminating thousands of jobs – and sell assets (at a significant loss) than change. Rather than Disrupt and use White Space to create a new GM, management preferred to declare bankruptcy, beg for billions in aid (like some impoverished third world starving nation such as Bangladesh), and give away assets in an effort to preserve the Success Formula they believe in – but which failed in the market. These leaders have shown they don't care about anyone or anything more than they care about trying to Defend & Extend the GM legacy – Cadillac, Chevrolet, Buick and GMC. This management doesn't want GM to succeed, they want to wind back the clock, and they'll try anything possible to see if they can make it happen.
They can't. The clock won't rewind. And GM's management is demonstrating why they should not be allowed to run any company – much less a major auto company. Nor should you trust them to watch your dog – much less trust them with $60billion in financing. Trying to preserve the past will only prolong dismal results. They will not repay this money.
So what about Saturn? Some think this acquisition, coupled potentially with the new ownership of Hummer, marks another shift in the auto industry. In "Putting GM's Saturn on a different orbit" the Marketwatch commentator indicates that we may be seeing a shift away from an industrial model of manufacturers pushing cars onto dealers. Since Penske owns many dealerships, he thinks these new independent labels may let the dealerships take the lead. Manufacturing will have to respond, through a network of manufacturers something like Nike uses, to the retailers – who will be much more in touch with the market.
From the pixels displaying these articles to God's ear, paraphrasing an old maxim. It would be wonderful if both Saturn and Hummer, and the soon to be independent Saab, were driven by market requirements rather than internally entrenched management trying to Defend & Extend old practices. If they are, the odds are good that they'll push the losses at the remaining GM much higher, much faster than the management team (and probably the government overseers handing them money) expect.
But it does beg the question, if it's so easy to sell these divisions why doesn't the government simply dismantle GM and sell everything? These are supposedly the smallest, least viable parts of GM. And they are selling incredibly fast. Instead of these "one-off" sales, happening at distressed prices to buyers with little competition, why not create an open market to sell everything? Obviously the only way to get rid of the terrible GM leaders is to sell the business out from under them, leaving them with nothing to do. So, instead of handing these incompetent GM leaders another $40B, why doesn't the government turn over assets to the investment bankers and tell them to maximize the value of a sale? Create a bunch of bidders for the various assets (less toxic than nothing-down mortgage securities), ala the intent of bankruptcy law, so that people with new ideas (like Penske) can acquire these assets and use those ideas and innovations to convert the brands, product lines, supply chains and manufacturing plants into something more valuable?
In a sale, a new buyer could purchase plants to redeploy for windmill production, for example. A GMC buyer could attempt to converting the brand into a competitor of Caterpillar Tractor or Komatsu. Chevrolet might have better life as a U.S. motorcycle company. Someone might want to turn Cadillac into an airplane company. As crazy as these ideas sound, don't forget that Honda has entered airplane production and shows every sign of succeeding. We know that running any part of GM like it used to be run will not work. So why not give the innovators a shot at these tangible and intangible assets on the open market? Wouldn't you rather see someone new, like the team at Penske Enterprises, try to do something with the rest of GM – rather than leave it in the hands of the people who say they need another $40billion to keep it alive. Ever heard of the term "cut your losses"?
Those who listen to markets survive – even thrive. That's what creates optimism about the future of Hummer, Saturn and Saab. The concept that new owners will utilize new market-based scenarios with clear understanding of competitors to Disrupt these companies, then attack old Lock-ins in order to implement new behaviors, excites people. We can imagine these new leaders using White Space to convert the design, production and distribution processes into methods that give customers what they want when they want it – achieving profits as a result. After 3 decades of ongoing failure, we can't imagine the people running GM doing it.
We believed in Lee Iacocca primarily because he had been fired at Ford. He knew Chrysler was not well enough connected to customers – and that he was. This was a guy who would cut off the top of a production car with a skill saw in order to drive it around the block as a way to test relaunching convertibles. He wasn't afraid to develop cars people had never seen, like mini-vans, because he saw changes in customer needs. He wasn't afraid to Disrupt the status quo and he wasn't afraid of testing new technologies, new production processes and new markets. That's why he turned around Chrysler. And that's what it will take to turn around Cadillac, Chevrolet, Buick and GMC.
It's too early to really know if new owners will do the right things to make these fire-sale divisions into successful businesses. We have to look for the scenarios, Disruptions and White Space. But we know we won't see such behavior out of GM. If the government folks who are considering giving more money to GM really want to save jobs, grow the economy and keep the profit motive alive they need to pull back fast from funding this GM management team. Instead, use this immediate market input (from the dividion sales) to force the courts to bust up the rest of GM and sell it to someone who just might have a truly better idea.
by Adam Hartung | Jun 4, 2009 | Uncategorized
This week marks the 20th anniversary of the Chinese student uprising in Tiananmen Square, and its brutal put-down by the Chinese leadership. Ironically, the same week GM agrees to sell its Hummer division to a Chinese company. Quite a contrast in outcomes over 20 years. China was then a backwater nation having very little business with the USA, and GM was still considered a dominant U.S. industrial power.
We all know what China has accomplished in the last 20 years. From struggling poverty, the country is now the third largest economy – and the single largest offshore holder of America's debt. China is poised to be a superpower, and the world's largest economy within another 20 years. How?
Within months of the Tiananmen event, in which the Chinese military slaughtered thousands of its own citizens, the Berlin Wall tumbled. The Soviet Union evaporated, leaving behind a series of independent states poorly capitalized and ill prepared to compete internationally. The Chinese leadership recognized this as a major market shift, and wasted no time taking action.
Step 1 was recognizing that future scenarios no longer required investing massive funds defending the world's longest contested border. More tanks were on the Chinese/Soviet border than all the rest of the world combined – and the replacement of those tanks suddenly became non-essential. And the Chinese recognized this, and changed. With speed exceeding anything anybody imagined, the Chinese changed all their scenarios about the future. Instead of spending massive funds on military works, those funds could be spent elsewhere. By reworking their future scenarios, they realized they could undertake different opportunities. No longer were they required to do "more of the same" as they'd done for several decades.
Step 2 was recognizing the new competition. Instead of fighting a traditional war, the Chinese would be in an economic war with the smaller eastern European nations, and India. Dissolving the USSR meant the Indians, who had long sparred with the Soviets while also taking aid, suddenly knew they had to rely completely on the USA – and trade. And that meant the Chinese had a new #1 competitor, but in the new battle for trade rather than old fashioned aid. Where before China wanted money for armaments, now they needed to invest money in production to pull dollars from U.S. business. The new objective became competing with India, rather than the Russians.
Thirdly, they Disrupted their approach to world diplomacy. Instead of a closed country, they became open. Instead of investing in guns, they invested in power plants, roads and infrastructure. On the world stage, China wanted to become the biggest winner of foreign exchange. And the road to that win came through participating with American capitalists. The leadership realized it needed to totally change the country's investment patterns in order to make the country's low cost labor available, and it did so. Almost overnight. How, by recognizing and undertaking a Disruption in their investment patterns.
Fourth, China implemented White Space for job creation. Suddenly, almost every city had a development zone. They didn't need to figure out what infrastructure to buy. All they had to do was invite the Americans in and we'd tell them what we wanted. We'd describe the airports, power plants, telecom systems, roadways – everything we wanted to give them the work (and foreign exchange). All they had to do was listen and do it.
China is an example in doing things differently, changing how you
compete to be very efffective, without really changing values.
People often tell me they worry that The Phoenix Principle means you
have to give up your ideals. I disagree. Being a Phoenix organization
means you're willing to adapt to market requirements, and doing so does
not mean you have to change your "ethos," religion or personal values.
You merely have to adapt. If you want to be "green" or "sustainable" or "ethical" or even "religious" you can do so. You just have to make sure you are connected to the marketplace in ways that allows you to develop a Success Formula which creates growth.
Compared to India, the Chinese have been wildly successful. And that's saying lot, given how incredibly successful India has been. There is no doubt that India, too, has used outsourcing to raise foreign exchange, create jobs and grow. But compared to China, well there's no comparison. The Indian government is still trying to figure out how to build a highway, expand major (overcrowded) airports and provide consistent electricity to business parks in major cities. The Indian leaders don't suffer from a lack of smart – no way – but the government keeps trying to operate the way it always has. And that has held them back from making the investments and taking the actions which have catapulted the Chinese into the lead. While India had a head start in 1989 (largely English speaking leadership and a strong investment in education for the elite), China has eclipsed their growth and is chasing Japan and the USA.
Through all of this, China never changed its politics. Some people who go to China return talking about how "capitalistic" the country is. They forget the lessons of Tiananmen Square. China has been and remains a tightly controlled, Communist, centrally-planned country. "China scholars see little chance for political reform" is the headline describing how the politics of China are unchanged since the days when they shot thousands of their own students, and imprisoned thousands more. Several students taken prisoner have never been heard from again. Those that fled the country are not allowed to return – and their families were subsequently required to consider them bad Chinese. Many were held in prisons for years, and others are still in remote work camps. China is still China, deep inside. No more a market/capitalistic country than it ever was. It just learned to adapt to a changing world. (Something Chairman Mao tried to avoid – almost destroying the country.)
Coincidentally, my 21 year old son returned from a month in China yesterday evening. He was visiting manufacturing plants and engineering schools. We talked, and will talk more, about what the Chinese businesses and schools are doing. Why, and exactly HOW do these schools and factories affect competition? Competition to be a world-class engineer (he's a mechanical engineer prepping for his civil engineering master's degree), and competition for building things. As he summed it up before crashing to sleep "they do things entirely differently than we do in America – and I can easily see why they get things done cheaply. They do things in a uniquely Chinese way, but it meets the needs of American companies who want lower costs and market access. This may have been my first trip to China, but it won't be my last. It can't be if I want to remain competitive. Maybe I need to learn Mandarin or Cantonese so I can go to one of their schools for a year."
We all have to learn to adapt. The world changes. Every year. If we try to resist those changes, to Defend & Extend what we like to do, we grow further out of touch with market requirements and lose the ability to compete. You don't have to "sell your soul" to adapt. But you must adapt if you want to continue succeeding. You have to make your investments based upon what will make you a winner in the future – not what made you a winner in the past. You have to study competitors, and do those things that will make you a winner. You have to accept Disruptions by attacking old Lock-ins, and use White Space to develop new solutions. If you do that, even at the scale of the Chinese economy, you can have unbelievably successful results. Or at the level of an individual engineer. If you don't the results aren't pretty. Not pretty at all. Just ask the employees at GM.
