by Adam Hartung | May 18, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in, Web/Tech
"Newspapers face pressure in selling online advertising" is today's headline about newspapers. Seems even when the papers realize they must sell more online ads they can't do it. Instead of selling what people want, the way they want it, the newspapers are trying to sell online ads the way they sold paper ads – with poor results.
We all know that newspaper ad spending is down some 20-30%. But even in this soft economy internet ad spending is up 13% versus a year ago. Except for newspaper sites. At Gannett, NYT and McClatchy internet ad sales are down versus a year ago!
People don't treat internet news like they do a newspaper. The whole process of looking for news, retrieving it, reading it, and going to the next thing is nothing like a newspaper. Yet, daily newspapers keep trying to think of internet publishing like it's as simple as putting a paper on the web! What works much better, we know, are sites focused on specific issues – like Marketwatch.com for financial info, or FoodNetwork.com. Also, nobody wants to hunt for an on-line classified ad at a newspaper site – not when it's easier to go to cars.com or vehix.com to look for cars, or monster.com to look for jobs. Web searching means that you aren't looking to browse across whatever a newspaper editor wants to feed you. Instead you want to look into a topic, often bouncing across sites for relevant or newer information. But a look at ChicagoTribune.com or USAToday.com quickly shows these sites are still trying to be a newspaper.
Likewise, online advertisers have far different expectations than print advertisers. Newspapers simply said "we have xxxx subscribers" and expected buyers to pay. But on the web advertisers know they can pay for placement against specific topics, and they can expect a specific number of page views for their money. As the article says "if newspapers want to get their online revenue growing again, once the economy recovers, they have to tie ad rates more closely to results, charge less for ads and provide web content that readers can't get at every news aggregation site."
When markets shift, it's not enough to try applying your old Success Formula to the new market. That kind of Defend & Extend practice won't work. You're trying to put a square (or at least oblong) peg into a round hole. Shifted markets require new solutions that meet the new needs. You have to study those needs, and project what customers will pay for. And you have to give them product that's superior to competitors in some key way. Old customers aren't trying to buy from you. Loyalty doesn't go far in a well greased internet enabled world. You have to substantiate the reason customers need to remain loyal. You have to offer them solutions that meet their emerging needs, not the old ones.
Years ago IBM almost went bust trying to be a mainframe company when people found hardware prices plummeting and off-the-shelf software good enough for their needs. IBM had to develop new scenarios, which showed customers needed services to implement technology. Then IBM had to demonstrate they could deliver those services competitively. Only by Disrupting their old Success Formula, tied to very large hardware sales, and implementing White Space where they developed an entirely new Success Formula were they able to migrate forward and save the company from failure.
Unfortunately, most newspaper companies haven't figured this out yet. They don't realize that bloggers and other on-line content generators are frequently scooping their news bureaus, getting to news fans faster and with more insight. They don't realize that on-line delivery is not about a centralized aggregation of news, but rather the freshness and insight. And they haven't figured out that advertisers take advantage of enhanced metrics to demand better results from their spending. The New York Times, Gannett and other big newspaper companies better study the IBM turnaround before it's too late.
by Adam Hartung | May 17, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
"Gannett to shut down print version of Tucson newspaper" is the latest headline. Yet another newspaper either cutting staff, cutting content, cutting print days, or stopping printing altogether. That this would happen isn't really surprising. Even Warren Buffett recently said he didn't see any way newspapers could make money. (Yet, according to Marketwatch Berkshire Hathaway still owns shares in Gannett – primarily a newspaper company.)
What's surprising is that Gannett isn't doing anything to change the company. A quick visit to www.Gannett.com and you'll learn that the company has almost no on-line business. They company's profile says that it's online business consists of a 50% ownership in CareerBuilder.com and Shoplocal. That's it. No financial news site, no social networking site, no food site, no sites dedicated to the TV stations owned by Gannett, or the newspapers owned by Gannett. A visit to the page dedicated to the Gannett online network is actually a page where you can ask for a salesperson to call you for placing an ad on USAToday.com.
Everyone today has to deal with market shifts. Everyone. The newspapers are in a position where their very survival depends upon making a shift. This isn't new. It's been clear for several months – and for those in the media actually well known for a few years. So why hasn't Gannett done anything to reposition its business? Over the last year equity value has declined 85% – some $6Billion of lost value. Since June, 2007 the equity value has dropped from $60/share to $4/share (a loss of some $10Billion in value) [see chart here].
Leadership should not be allowed to behave like the lonely deer, caught on a rural road in the evening. The proverbial animal caught staring into the headlights of the car speeding directly at it – and sudden death. Leadership's job is to react to market changes in order to keep the business viable. Gannett has succumbed to Lock-in – unwilling to take actions necessary to keep its customers (advertisers and readers) engaged. Unwilling to help employees mobilize toward a new future, and help vendors identify growth opportunities. By simply doing more of what the company has always done, leadership is dooming the investors to lose their money, and their employees their jobs and pensions.
Everybody knows that the future for newspapers is bleak. All of us will face these sorts of market shifts in our careers. Doing nothing is not an option. Leadership must engage the workforce in open dialogue about what the future holds, taking great pains to discuss competitors and how they are changing the market. And leadership is responsible to Disrupt the Lock-ins, attacking them, so that new ideas can be brought forward and new investments can be made in White Space where the company can grow and migrate to a new Success Formula.
If somebody steals $100 that's a crime. But if you lose $10Billion in market value that's not. When market shifts are as obvious as those in newspapers, and management doesn't take action to reposition the company and engage employees in transition, not taking action seems criminal. No wonder shareholders file class action lawsuits.
by Adam Hartung | May 15, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle
"Chrysler delivers the bad news to 789 dealers" was yesterday's headline. Today the headline read "GM notifies dealers of shutdowns" as the company sent 1,100 dealers the notice they would no longer be allowed to stay in business. Thousands are losing jobs. Chrysler is bankrupt, and GM looks destined to file shortly. But wait a minute, GM was the market share leader for the last 50 years!! These big companies, in manufacturing, were supposed to be able to protect their business and become "cash cows." They weren't supposed to get beaten up, see their cash sucked away and end up with nothing!
About 30 years ago a fairly small management consultancy that was started as a group to advise a bank's clients hit upon an idea that skyrcketed its popularity. The fledgling firm was The Boston Consulting Group, and its idea was the Growth/Share matrix. It created many millions of dollars in fees over the years, and is now a staple in textbooks on strategic planning. Unfortunately, like a lot of business ideas from that era, we're learning from companies like GM and Chrysler that it doesn't work so well.
The idea was simple. Growth markets are easier to compete in because people throw money at the companies – either via sales or investment. So it's easier to make money in growing businesses. Market share was considered a metric for market power. If you have high share, you supposedly could pretty much dictate prices. High share meant you were the biggest, which supposedly meant you had the biggest assets (plant, etc.) and thus you had the lowest cost. So, low growth and low share meant your business was a dog. High growth and low share was a question mark – maybe you'd make money if you eventually get high share. High growth and high share was a star. And low growth but high share is a cash cow because you could dominate a business using your market clout to print money – or in the venacular of the matix – milk the money from this cow into which you put very little feed.
In the 1970s/80s, looking at the industrial era, this wasn't a bad chart. Especially in asset intensive businesses that had what were then called "scale advantages." In the industrial world, having big plants with lots of volume was interpreted as the way to being a low-cost company. Of course, this assumed most cost was tied up in plant and equipment – rather than inventory, people, computers, advertising, PR, viral marketing, etc. The first part of the matrix has held up pretty well; the last part hasn't. We now know that it's easier to make money in growth. But it doesn't turn out that share really gives you all that much power nor does it have a big determination in profitability.
We know that having share is no defense of profits. The assumption about entry barriers keeping competitors at bay, and thus creating a "defensive moat" around profits, is simply not true. Today, companies build "scale" facilities overnight. They obtain operating knowledge by hiring competitor employees, or simply obtaining the "best practices" from the internet. Distribution systems are copied with third party vendors and web sites. Even advertising scale can be obtained with aggressive web marketing at low cost. And so many facilities are "scale" in size that overcapacity abounds – meaning the competitor with no capacity (using outsourced manufacturing) can be the "low cost" competitor (like Dell.).
Thus, all markets are overrun with competitors that drive down profits any time growth slows. As GM learned, even with more than 50% share (which they once had) they could not stop competitors from differentiating and effectively competing. Not even Chrysler, with the backing of Mercedes, could maintain its share and profits against far less well healed competitors. When growth slows, the cash disappears into the competitive battles of the remaining players. Unfortunately, even new players enter the market just when you'd think everyone would run for the hills (look at Tata Motors launching itself these days wtih the Nano). Competitors never run out of new ideas for trying to compete – even when there's no growth – so they keep hammering away at the declining returns of once dominant players until they can no longer survive.
Competition exists in all businesses except monopolies, and threatens returns of even those with highest share. Today it might be easy to say that Google cannot be challenged. That is short-sighted. People said that about Microsoft 20 years ago – and today between Apple, Linux and Google Microsoft's revenue growth is plummeting and the company is unable to produce historical results. People once said Sears could not be challenged in retailing. Kodak in amateur photography. And GM in cars. Competitors don't quit when growth slows – until they go bankrupt – and even then they don't quit (again, look at Chrysler). High share is no protection against competition.
And thus, there is no "easy cash in the cow" to be milked. It all gets spent fighting to stay alive. Trying to protect share by cutting price, paying for distribution, advertising. And if you don't spend it, you simply vanish. Really fast. Like Lehman Brothers. Or Bennigans.
The only way to make money, long term, is to keep growing. To keep growing you have to move into new markets, new technologies, new services – in other words you have to keep moving with the marketplace. And that produces success more than anything else. It's all about growth. Forget about trying to have the "cash cow" – it's like the unicorn – it never existed and it never will.
by Adam Hartung | May 13, 2009 | Current Affairs, General, In the Whirlpool, Leadership, Lifecycle
"Invest in America – but Savings Bonds." I grew up seeing those signs. Of course, I'm over 50. They came from the World War era, when America asked people to buy "war bonds" to pay for involvement. At the time, pre-Bretton Woods, America was still on a gold standard. The country couldn't tust print all the money it wanted. To pay for war goods, Americans were asked to buy bonds. Not for the rate of return – nor even for the eventual gain on principle. It was pure patriotism. Buy bonds to pay for the war. As the clock turned, this patriotic thinking migrated to buying government bonds to help pay for highways, bridges, dams and other projects to help grow America.
I was reminded of this when I saw the Marketwatch.com headline "Ford raises $1.4billion in stock offering". I thought to myself, why would anyone on earth buy newly issued shares in Ford? It's hard to conceive of buying shares in the company as it exists, what with its very long history of weak profits, tepid product lines, limited innovation and lack of attachment to market trends. But to give the company new money, in form of equity with guarantee of a return on or of your principle…. Why that is simply befuddling. This money is not intended to go for new products or improving the company's links to customers. Rather, it all is intended to pay for part of a health care trust that might assuage growing total labor costs. Sort of like paying for part of a clean up on a previous toxic spill. Not something that makes money.
Ford is a company in the Whirlpool. It's odds of surviving are low. It's odds of making high rates of return and being globally competitive are almost nonexistent. Ford wants people to help management defend its past actions – which won't even extend past horrible perfornce – much less improve it. None of this mone is for White Space to do anything new. There is nothing in this offering to make you think Ford will ever be able to repay your investment – or even ever pay a dividend on it.
So I was left thinking that I guess you could buy this offering because you are patriotic. Sort of "Defend America by Defending Ford" and it's management ability to keep running a company that doesn't meet customer, investor or employee expectations. Henry Ford advanced civilization with his ideas for automation and how he applied them at his company – so we need to keep his namesake company alive, I guess (and conveniently forget he was opposed to civil rights, opposed to women's rights and opposed to all forms of organized labor.) And perhaps you want to invest in defending & extending America's involvement in auto production – even though we have a long history of being #1 in making something before exiting it - like shipbuilding, steelmaking and television set production. And maybe you just feel like its your duty to give money to Ford because it represents a great American brand – like RCA, Woolworth's, Studebaker and Hotpoint once did.
Or we can realize this is simply an investment intended to keep Ford alive for another year or two. A form of corporate life support hoping something new comes along to save the patient. For most of us, we're better off with the mattress. There are pension funds out there that receive cash quarter after quarter. They are always looking for investments. Some have billions of newly arrived dollars to invest. And for many, investing that money is done by "rules" rather than analysis. They have to invest x% in equities, and that's allocated Y% and Z% and A% into specific categories. And they will probably buy these shares, after their fund managers have some greatly expensive steak dinnbrs courtesy of the underwriters. Unfortunately, that doesn't make our pensions funds any healthier – but we have little or nothing we can do to affect those decisions.
Keep your money in companies that have White Space. Companies that don't fear Disruption in order to keep themselves aligned with market shifts. Invest in companies that talk about the future, and how their new products will open new opportunities for their customers to accomplish new things. Pay attention to those with long track records of above-average performance – like Google, Apple, Cisco – or Nike, GE and Johnson & Johnson. Invest in the Disruptors that are going to grow the new economy, not those hoping to suck off its benefits with no innovation or other contribution. That will more likely get your 401K back where you want it.
PS – for regular readers – I opologize for being offline without comments for a few days. Computer gremlins attacked me and it's been a struggle to regain control of the machine. Hopefully I'm back on track.
by Adam Hartung | May 8, 2009 | Current Affairs, Defend & Extend, Disruptions, Food and Drink, General, Innovation, Leadership, Lock-in, Openness, Television, Web/Tech, Weblogs
Where the people go, advertisers will follow. Why pay for an ad at the end of a never traveled dead-end street? The purpose of advertising is to reach people with your message. And now "Forrester: Interactive Marketing to grow 11% to $25.6 Billion in 2009" reports MediaPost.com. When print advertising is dropping (direct mail down 40%, newspaper down 35% and magazines down 28%), the on-line market is growing and expected to reach over $50billion by 2014. Search ads is the biggest, with over half the market, but social media is expected to grow the fastest at over 34%/year.
Such a market shift indicates that those who buy ads need to be very savvy about what works. Like I said, you don't want to be the fool who jumps into billboards, only to get placed on the one at the end of a dead-end road. Success means Disrupting your assumptions about advertising, and learning what work by entering White Space with tests and measurements.
In "Mobile Marketing Won't Work Here" Bret Berhoft explains why GenY simply won't tolerate intrusive ads – especially on their mobile devices. Social media are different conduits, with different users and different behaviors. Where older folks (and our parents) were content to be interrupted by ads – such as on TV – the avid users of new media aren't. And they've been known to create counter-movements attacking advertisers that don't adhere to their on-line behavior requirements.
What won't work is trying to do what Sears has done. Instead of learning how people use social media, and how you can connect with them to meet their needs, "Sears to Launch Social Networking Sites" we learn. Where everybody is using Facebook, MySpace, Twitter, Linked-in, etc., Sears decided to open two new sites called MySears.com and MyKmart.com. They hope people will go to these sites, register, and tell stories about their experiences in both retail chains. Then Sears intends to flow through good comments to Sears.com and KMart.com sites.
The horribly Locked-in Sears management keeps trying to Defend & Extend its outdated model. As people have left Sears and KMart in droves for competitors, they aren't looking for a site to "connect" with other people who are Sears centric. People use social networks to learn, grow, exchange ideas, keep up with trends. They don't register for a site because their parents used to shop there.
Sears has missed the basics of Disrupting its old Success Formula, so it keeps trying to apply it in ways that don't work. It keeps doing what it always did, only trying to do it in new places. These sites aren't White Space projects trying to participate in the social networks that are growing (like everything from illness questions to home how-tos). Rather, they are still trying to take the position that Sears is at the center of the world, and people want to be part of Sears.
Exactly how advertisers will capture the attention of participants still isn't clear. Some ideas have gone "viral" producing mega-returns for minimal investments. Other ideas have flopped despite big spending. The market is shifting, and variables keep changing (Marketers Search for Social Media Metric.) But for those who Disrupt their old Lock-ins, those who attack their assumptions, they can use White Space to learn what does work.
"Pizza Hut 'Twintern' to Guide Twitter Presence" is a great example of creating White Space to study social media advertising by participating. The new position will interact with Twitter users, and be a leader in how to interact with Facebook and other sites – even the notorious YouTube! where user content can include the very bizarre. By participating where the customers are, these leaders can develop insights to how you can consistently advertise effectively. Already Sony and Dell have demonstrated they can achieve high recall (Word of Mouth goes Far Beyond Social Media) beyond Social Media with their on-line efforts. These participants, who Disrupt their assumptions and bring in others to work in White Space will be the winners because they aren't trying to Defend & Extend the old Success Formula. They are trying to create a new one to which they can migrate the old business.
by Adam Hartung | May 7, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
Good public policy and good management don't always align. And the banking crisis is a good example. We now hear "Banks must raise $75billion" if they are to be prepared for ongoing write-downs in a struggling economy. This is after all the billions already loaned to keep them afloat the last year.
But the bankers are claiming they will have no problem raising this money as reported in "The rush to raise Capital." "AIG narrows loss" tells how one of the primary contributors to the banking crisis now thinks it will survive. And as a result of this news, "Bank shares largely higher" is another headline reporting how financial stocks surged today post-announcements.
So regulators are feeling better. They won't have to pony up as much money as they might have. And politicians feel better, hoping that the bank crisis is over. And a lot of businesses feel better, hearing that the banks which they've long worked with, and are important to their operations, won't be going under. Generally, this is all considered good news. Especially for those worried about how a soft economy was teetering on the brink of getting even worse.
But the problem is we've just extended the life of some pretty seriously ill patients that will probably continue their bad practices. The bail out probably saved America, and the world, from an economic calamity that would have pushed millions more into unemployment and exacerbated falling asset values. A global "Great Depression II" would have plunged millions of working poor into horrible circumstances, and dramatically damaged the ability of many blue and white collar workers in developed countries to maintain their homes. It would have been a calamity.
But this all happened because of bad practices on the part of most of these financial institutions. They pushed their Success Formulas beyond their capabilities, causing failure. Only because of the bailout were these organizations, and their unhealthy Success Formulas saved. And that sows the seeds of the next problem. In evolution, when your Success Formula fails due to an environomental shift you are wiped out. To be replaced by a stronger, more adaptable and better suited competitor. Thus, evolution allows those who are best suited to thrive while weeding out the less well suited. But, the bailout just kept a set of very weak competitors alive – disallowing a change to stronger and better competitors.
These bailed out banks will continue forward mostly as they behaved in the past. And thus we can expect them to continue to do poorly at servicing "main street" while trying to create risk pass through products that largely create fees rather than economic growth. These banks that led the economic plunge are now repositioned to be ongoing leaders. Which almost assures a continuing weak economy. Newly "saved" from failure, they will Defend & Extend their old Success Formula in the name of "conservative management" when in fact they will perpetuate the behavior that put money into the wrong places and kept money from where it would be most productive.
Free market economists have long discussed how markets have no "brakes". They move to excess before violently reacting. Like a swing that goes all one direction until violently turning the opposite direction. Leaving those at the top and bottom with very upset stomachs and dramatic vertigo. The only way to avert the excessive tops is market intervention – which is what the government bail-out was. It intervened in a process that would have wiped out most of the largest U.S. banks. But, in the wake of that intervention we're left with, well, those same U.S. banks. And mostly the same leaders.
What's needed now are Disruptions inside these banks which will force a change in their Success Formula. This includes leadership changes, like the ousting of Bank of America's Chairman/CEO. But it takes more than changing one man, and more than one bank. It takes Disruption across the industry which will force it to change. Force it to open White Space in which it redefines the Success Formula to meet the needs of a shifted market – which almost pushed them over the edge – before those same shifts do crush the banks and the economy.
And that is now going to be up to the regulators. The poor Secretary of Treasury is already eyeball deep in complaints about his policies and practices. I'm sure he'd love to stand back and avoid more controversy. But, unless the regulatory apparatus now pushes those leading these banks to behave differently, to Disrupt and implement White Space to redefine their value for a changed marketplace, we can expect a protracted period of bickering and very weak returns for these banks. We can expect them to walk a line of ups and downs, but with returns that overall are neutral to declining. And that they will stand in the way of newer competitors who have a better approach to global banking from taking the lead.
So, if you didn't like government intervention to save the banks – you're really going to hate the government intervention intended to change how they operate. If you are glad the government intervened, then you'll find yourself arguing about why the regulators are just doing what they must do in order to get the banks, and the economy, operating the way it needs to in a shifted, information age.
by Adam Hartung | May 6, 2009 | Uncategorized
"In the land of the blind the one-eyed man is king." I've heard this phrase many times, and never has it been truer than today. With so many companies fairing so poorly – revenues down, profits down, layoffs – doing better than most doesn't mean you have to do all that well.
An example is News Corp. The Tribune Company is bankrupt, casting doubts on the future of The Chicago Tribune, Los Angeles Times and its other newspapers. The New York Times company threatened to close The Boston Globe unless it received major employee concessions. But even these won't save either the Globe or the Times as the headline "Boston Globe's obituary already written" comes from commentator Chuck Jaffe. Newspapers are discontinuing daily circulation, slimming down, and closing.
So when Marketwatch.com reports "News Corp. posts flat third-quarter profit" it sounds like a monumental success compared to its competitors. But it does beg the question, why is News Corp. doing so much better than its brethren? The answer lies in the multi-faceted approach News Corp. took to connecting with those who want information – and then connecting to their advertisers. While the web sites for most newspaper companies are weak products that attract few readers (or advertisers), and the writers feed only one outlet (papers) rather than multiple outlets, News Corp. stands in stark contrast with major outlets across all media internationally.
In addition to multiple newpapers News Corp. owns multiple television stations and entire networks. It is a major player in cable programming – including the #1 ranked cable news channel in the U.S. as well as networks across the globe. It is a leader in direct broadcast satellite with SKY, owns multiple weekly magazines (that all have web sites), is a major player in billboards, and owns several internet properties including MySpace.com
Across News Corp. the leadership is able to share acquisition costs for programming – including news – and the distribution – including all forms of programming outlets. News Corp.'s leadership did an excellent job of paying attention to market shifts. After starting as an Australian newspaper company it moved into all these different businesses in order to be part of the evolving market landscape. It obsessed about competitors, never fearing to enter markets others avoided – such as launching a national broadcast network in the 1980s, and taking on CNN when nobody agreed there was need for more than one 24 hour news channel. And early in the internet era it paid up to acquire MySpace in order to be a participant in the internet's growth, not just a spectator.
The leadership at News Corp. has never been shy about Disruptions – often making itself the target of many groups. But these Disruptions allowed News Corp. to open many White Space projects, teaching the company how to compete in rapidly changing markets.
And now, as several competitors are disappearing, News Corp. is doing the best in its class. While competitors are hopelessly mired in Whirlpools from which escape is likely impossible, News Corp. is merely "flat". And there's a lot to be said for "flat" results when competitors from GE (owner of NBC and several other channels) to New York Times Company are seeing their poorest results in decades – or even filing bankruptcy (like Tribune).
by Adam Hartung | May 4, 2009 | Current Affairs, Defend & Extend, General, In the Swamp, Innovation, Leadership, Openness
Today Yahoo.com picked up on Mr. Buffett's recent comments, with the home page lead saying "Buffett's Gloomy Advice." The article quotes Buffett as saying newspapers are one business he wouldn't buy at any price. Even though he's a reader, and he owns a big chunk of the Washington Post Company (in addition to the Buffalo, NY daily), he now agrees there are plenty of other places to acquire news – and for advertisers to promote.
I guess the topic is very timely given the Marketwatch.com headline "N.Y. Times hold off on threat to close Boston Globe". Once again, in what might remind us of an airline negotiation, the owner felt it was up to concessions by the workers, via their union, if the newspaper was to remain in business. After squeezing $20million out of the workers, the owners agreed not to proceed with a shutdown – today. But they still have not addressed how a newspaper that is losing $85million/year intends to survive. With ad revenue plunging over 30% in the first quarter, and readership down another 7% in newspapers nationally, union concessions won't save The Boston Globe. It takes something that will generate growth.
And perhaps that innovation was also prominent in today's news. "Amazon expected to lift wraps on large-screen Kindle" was another Marketwatch headline. Figuring some people will only read a magazine or newspaper in a large format, the new Kindle will allow for easier full page browsing. According to the article, the New York Times company has said it will be a partner in providing content for the new Kindle.
Let's hope the New York Times does become a full partner in this project. People want news. And the only way The Boston Globe and New York Times will survive is if they find an alternative go-to-market approach. Printing newspapers, with its obvious costs in paper and distribution, is simply no longer viable. Trying to defend & extend an old business model dedicated to that approach will only bankrupt the company, as it already has bankrupted Tribune Company and several other "media companies." The market has shifted, and D&E practices like cost cutting will not make the organizations viable.
It's pretty obvious that the future is about on-line media distribution. We've already crossed the threshold, and competitors (like Marketwatch.com and HuffingtonPost.com) that live in the on-line world are growing fast plus making profits. What NYT now needs to do is Disrupt its Lock-ins to that old model, and plunge itself into White Space. I'm not sure that an oversized Kindle is the answer; there are a lot of other products that can deliver news digitally. But if that's what it takes to get a major journalistic organization to consider switching from analog, physical product to digital on-line distribution as its primary business I'm all for the advancement. Those who compete in White Space are the ones who learn, adapt, and grow. Being late can be a major disadvantage, because the laggard doesn't have the market knowledge about what works, and why.
This late in the market evolution, the major print media players are all at risk of survival. While no one expects The Chicago Tribune or Los Angeles Times to disappear, the odds are much higher than expected. These businesses are losing a tenuous hold on viability as debt costs eat up cash. Declining readership and ad dollars makes failure an equally plausible outcome for The Washington Post, New York Times and Boston Globe. Instead of Disrupting and using White Space, as News Corp started doing a decade ago (News Corp owns The Wall Street Journal and Marketwatch.com, as well as MySpace.com for example), they have remained stuck in the past. Now if they don't move rapidly to learn how to make digital, on-line profitable they will disappear to competitors already blazing the new market.
by Adam Hartung | May 3, 2009 | Current Affairs, In the Swamp, Leadership, Web/Tech
Warren Buffet held the annual meeting for Berkshire Hathaway this weekend, and upwards of 40,000 people came to hear his opinions. For hours he waxed eloquently, offering opinions on a wide range of topics sure to cover websites, blogs and tweets for a few days. But I was interested in the comment "Buffett, Munger praise Google's 'moat" according to Marketwatch.com's headline. It's pure 1980s industrial thinking, and why you have to be careful about forecasting and investing following Mr. Buffett.
The concept is that a business can be like an old castle, with a moat around it protecting it from competitors. The company can prosper because no competitor can jump the moat, and thus the profits of the business are protected. And today, Buffett and his partner think Google has such a moat. Now, remember, Buffett bought only 100 shares in Microsoft and long eschewed other high tech companies like Apple, Oracle, SAP and Cisco systems. His favorite phrase was to say he didn't understand these businesses. Now, suddenly, the elder Buffett is becoming tech-savvy, he'd have us think, and he loves Google. Or perhaps he's late to the game, and trying to apply outdated concepts.
I too like Google. But not for the reasons Buffett does. There is no doubt Google is far in front in the search business, and coupling that with ad placement gives them a huge market share today producing double digit revenue and profit growth. Big growth and profits is a good thing. But moats have a way of being jumped, or drained, or filled incredibly rapidly these days. And as good as Google is, what makes Google a good company is how it does not rest on its business success. The company keeps branching into other businesses which have the ability to extend company growth even if search runs into some unforeseen problem.
"Moats" are the industrial classicists way of thinking about strategy. Moats were powerful tools a few hundred years ago, but competitors changed tactics and moats lost their value. Even America's moats – the Pacific and Atlantic oceans - have been breeched by attackers from Japan and the middle east. And the same is true for business moats. They were an industrialists tool, based on big investments and high share, but they no longer have the ability to defend a business's profits. Just look at the Buffalo newspaper Buffett owns. "Newspapers face 'unending losses,' Buffett says" as he now admits newspapers (including his) are not going to make profits any more. Their "local market moat" was made obsolete by internet news competitors and ad sites like Craig's list and Vehix.com.
And now even Berkshire Hathaway is facing a growth stall. Nobody would dare predict bad things for the "oracle of Omaha." But reality is that Berkshire stock is at the same value it was 6 years ago as "Berkshire quarterly operating profit falls." Even the amazing financial machinations and sophisticated tools (like derivatives and credit default swaps) almost nobody understands and Berkshire has been famous for have been unable to overcome losses in the 60+ operating units. And even some of these financial tools are losing money – something Buffett historically avoided completely. But he's learning that competitors are making even these products less profitable.
Times have changed. It's no longer the era for the industrialist, and the financial whiz that can extend an industrialists profits. We live in a fast-paced world where adjusting to market shifts is at the core of maintaining ongoing profits. Google's willingness to Disrupt and use White Space to expand makes it a company worth watching. But stay away from those "moat' protected businesses. Not even one of the world's richest men can make money in that game any longer.
by Adam Hartung | May 1, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
My book talks about Growth Stalls. Whenever a company sees two consecutive quarters of flat or declining sales or profits, or 2 consecutive quarters where year over year sales or profits were flat or declining, it is in a growth stall. Unfortunately, only 7% of companies that hit a growth stall will ever again consistently grow at a mere 2%. Yes, that's damning and almost unbelievable. And very worrisome given how many companies are now entering growth stalls.
Take a look at Motorola. They stumbled badly in mobile phones because they didn't keep pushing out new products into the market. They tried to Defend & Extend their popular Razr product, and eventually profits disappeared as they cut price. Then sales fell off a cliff as people shifted to newer products. The stall was created by the company insufficiently pushing innovation into the market, and the market shifted to new solutions.
Now "Motorola to cut more jobs as non-cell business weakens" according to ChicagoBusiness.com by Crain's. When the mobile business weakened, management took action to "shore up" the business. It went hunting for a buyer (none found), and it started cutting resources. Including monster layoffs. But it still had to keep investing or the business would collapse entirely. This had a cascading, spiraling negative effect on the rest of Motorola. With resources pushed into the failing cell phone business, there was less management attention and money spent on other businesses. Those also stopped pushing new innovations to the market. Now sales of network gear, set-top boxes, and 2-way radios are all down double digits.
So Motorola plans to cut another 7,500 jobs. More resource cuts, which will cause more cuts in innovation, fewer new products, less White Space. The process of Defending & Extending the past becomes more entrenched, because there are fewer resources around. What gets cut most is anything new. The stuff that could generate growth. Cuts lead to people hoping for an economic recovery that will somehow improve their competitive position. But it won't.
Motorola is now pinning its future on successful smart phone sales. But reality is that every quarter Motorola becomes a far more distant provider in mobile phones. While the best performer had flat volume last quarter, Motorola saw unit sales drop 46%. Motorola moves farther from the market, and into role of niche player. And even though cell phones is supposed to be for sale as a business, as we can see the company is diverting resources from the best part of Motorola (non-cell phones) to mobile handsets because they won't quit trying to Defend & Extend that business.
It's now clear that Motorola is in a vicious circle of cutting resources, losing sales, losing market share, discontinuing innovation, delaying new products, cutting more resources, losing more sales, losing more profits, doing even less innovation, offering up even fewer new products, …… Almost no one ever recovers from this spiral. By trying to Defend & Extend the old business, the actions – including layoffs – significantly harm the business. With less and less innovation, and fewer resources, the company slips into decline and failure.
And that's why growth stalls are deadly. They exacerbate Defend & Extend's weakness as a management approach. The lack of innovation, remaining Locked-in, was what caused the stall. Blaming a recession is just looking for a bogeyman so the business doesn't have to take responsibility for its own mistake. But after a couple of quarters of bad performance, the next wave of actions – the "best practices" to "shore up a problem company" – kill it. The layoffs and resource cuts – especially the delaying or killing of White Space projects and new products – cause customers to accelerate their move to competitors. And the company simply fails.
Today employees in those companies in growth stalls have a lot to worry about – as do their investors. If you hear leadership talking about job cuts and other D&E actions – while deflecting blame elsewhere besides the lack of meeting new market needs – then you're best off to find a new job and sell the stock. These companies will only continue to get weaker, and competitors will displace them as market leaders. An improving economy will be created by their growing competitors, not them, and their boat will not rise with the tide.
The solution is obviously not to practice D&E management. When you identify a growth stall is when all attention needs to be focused on rolling out new solutions to return to growth. Instead of cutting costs while trying to save the past, the business needs to move as rapidly as possible to the solutions needed in the future. Old businesses that caused the stall need to see dramatic resource constraints, while the new opportunities take front and center attention.
It wasn't "the economy" that got Motorola into desperate straits. It was Apple's iPhone and Nokia's relentless new product introductions. Without commensurate innovation, Motorola will never return to its former leadership position. And without resources, that cannot happen.
By the way, thanks Carl Icahn. You were the first to really push Motorola down this track of resource cutting. You're efforts to push Motorola this direction worked, even if you didn't get to lead the cuts. But the results are the same. And if Motorola isn't careful, the whole company may disappear as both halves of what now remain continue declining.
