You have to change to grow – including Starbucks

by | Apr 29, 2009 | Books, Current Affairs, Defend & Extend, General, In the Swamp, Leadership, Lock-in, Openness

Today the U.S. Federal Reserve indicated that the worst of America's economic downturn may be over, according to "Fed stands pat, and says worst may be over" at Marketwatch.com.  Fed officials seem to think that the rate of decline has slowed.  Note, they didn't say the economy is growing.  The rate of decline is slowing.  They hope this points to a bottoming, and eventually a return to growth.

With interest rates between banks at 0%, and short-term rates for strong companies near that level, there really isn't much more the Fed can do to create growth.  It will keep buying Treasury securities and keep pushing banks to loan.  But growth requires the private sector.  That means businesses – or what reporters call "Main Street."

The government doesn't create growth.  It can stimulate growth with low interest rates and money that will stimulate business investment.  Growth requires people make products or services, and sell them.  Those who are waiting on the government to create a growing economy will never gain anything from their wait, because it's up to them.  Only by making and selling things do you get economic growth.

Recent events, closing banks and massive write-offs, are a big Challenge to old ways of doing business.  Those who keep applying old practices are struggling to generate profits.  The tried-and-true practices of American industrialism just aren't turning out gains like the once did.  And they won't.  The world has shifted.  Entrepreneurs in India, Malaysia and China – places we like to think of as poor and "third world" – are building fortunes in the information economy.  American businesses have to shift.  If you make posts to install on highway sides, well lots of people can do that and competition is intense.  To make money you need to make products that help move more people on the highway faster and safer – some kind of post that perhaps can provide traffic information to web sites and aid people to look for alternate routes.  Posts aren't what people want, they want better traffic flow and today that ties to more information about the highway, who's using it, and what's happening on it. 

Growth will return when businesspeople move toward supplying the shifted market with what it wants.  Like Apple with a solution for digital music that involved players and distribution.  Or Amazon with a solution for digitally obtaining books, magazines and newspapers, storing them, presenting them and even reading them to you.  These companies, and products, appeal to the changed market – the market that values the music or the words and not the vinyl/tape/CD or the ink-on-paper.  The customers that want the information, not necessarily the tangible item we used to use to get the information.

For the economy to grow requires a lot more businesses realize this market shift is permanent, and adjust.  During the Great Depression those who refused to shift from agriculture to industrial production found the next 40 years pretty miserable – as rural land prices dropped, commodity prices dropped and the number of people working in agriculture dropped.  Agrarianism wasn't bad, it just wasn't profitable.  And going forward, industrialism isn't bad – but to grow revenues and profits we have to start thinking about how to deliver what people want – not what we know how to make.  You have to deliver what the market wants to grow sales – even if it's different from what you used to make.

Starbucks offered people a lot of different things.  And the old CEO tried to capitalize upon that by expanding his brand into liquor, music recording, agency for entertainers, movie production, and a widespread set of products in his stores – including food.  But then an even older CEO returned, and he said Starbucks was all about coffee.  He launched some new flavors, and he pushed out an instant coffee product.  But a year later "Starbucks profit falls 77% on store closure charges" reports Marketwatch.com.  His "focus" efforts have cut revenues, and cut profits enormously.  He's cut out growth in his effort to "save" the company.

By trying to go backward, Chairman Schultz has seriously damaged the brand and the company.  He has closed 570 stores – which were a big part of the brand and perhaps the thing of greatest value.  Stores attracted people for a lot more than just coffee.  People met at the stores, and buying coffee was just one activity they undertook.  So as the stores were shuttered, the brand began to look in serious trouble and people started staying away.  The vicious cycle fed on itself, and same store sales are down 8%.  No new flavor or packaged frozen coffee bits for take home use is going to turn around this troubled business.  It will take a change to giving people what they need – not what Mr. Schultz wants to sell.

With more and more people working from home the "virtual office" for many small businesspeople can still be a local Starbucks.  When you can't afford take a client out for a snazzy lunch you can afford to take them for a coffee.  When your wasteline can't take ice cream, you can afford a no-cal hot coffee in a great environment.  Starbucks never was about the coffee, it was about meeting customer needs in a shifted market.  And when the CEO realizes this he has the chance to save the company by taking into the new markets where customers want to go.  Not by bringing out new instant coffee granules.

Starbucks is sort of a model of the recession.  When you try to do what you always did, and you blame the lousy economy for your troubles, you'll see results worsen.  As businesspeople we must realize that the recession was due to a market shift.  We went off the proverbial cliff trying to extend the old business – just like Apple almost did by trying to be the Mac and only the Mac.  To get the economy growing we have to look to see what people really want, and supply that.  And what they want may be somewhat, or a whole lot, different from what we used to give them.  But when we start supplying this changed market what it wants then the economy will quit contracting and start growing.

So be more like Steve Jobs, and less like Charles Schultz.  Quit trying to go backward and regain some past glory.  Instead, look into the future to figure out what people want and that competitiors aren't giving them.  Be willing to Disrupt your business in order to take Disruptive solutons to the market.  And get your ideas into White Space where you can develop them into profitable businesses.  Don't wait for someone else to turn the economy around – just to find out then it's too late for you to compete.

Why GM won’t survive very long

by | Apr 28, 2009 | Defend & Extend, In the Whirlpool, Innovation, Leadership

"Chrysler Avoids Bankruptcy as GM steps toward it" is the Marketwatch.com headline.  According to the article, Chrysler has a deal to manage its debt while Ford has never been as close to the edge as its two brethren.  But GM is trying to get bondholders to take a 60% value reduction AND exchange the bond value for equity value – which of course has no assurance and could easily go to zero.  The bondholders are squawking, and it's unclear they will agree.  Which would plunge GM into bankruptcy.  Are the bondholders just greedy?  Or do they see the chance of getting some of their money back better via liquidation?

Ford has some of the most popular and fuel efficient vehicles in the world.  They just aren't sold in the USA.  But they've long had high share in Europe, where Ford has built smaller cars with both diesel and gasoline engines that have met market needs.  Now Ford is preparing to build and sell those cars in the USA, which would move them a lot closer to recent market shifts than the worn out Lincoln line and the renamed 500 (rebadged as Taurus under the guise of the name making all the difference.)  These European cars offer an opportunity for Ford to Disrupt the U.S. market and regain a positive footing.

Meanwhile, Chrysler has some of the most innovative cars on the market.  Its 300, Charger and Challenger cars use technology that allows V8 engines to shut off 4 when not needed – allowing them to achieve over 30 MPG in a "large" and "performance" format.  Further, for those seeking safety and control, the 300 and selected other models are available in all wheel drive, which has been proven to be the #1 safety enhancer possible.  And of great value in northern climates where foul weather (rain and especially snow or ice) makes driving treacherous.  All included in dramatic styling that appeals to American consumer tastes.

But GM?  "GM to focus on four keeper brands" is the MediaPost.com headline.  Most GM innovation is concentrated in Pontiac, Hummer, Saturn and Saab.  The first of these is to be closed down for sure, and the latter 3 either sold or closed.  As the CEO says "the company will focus on four brands it defines as core: Chevrolet, Buick, Cadillac and GMC." Anytime the CEO of a failing company says he plans to save the place by "focusing on the core" and thereby cutting back to some aged part of the company RUN, RUN, RUN.  The past is the past, and you NEVER regain it.  Making these brands exciting is about as likely as making Holiday Inn a high-end hotel chain.

Think about it.  Remember Izod with those alligators on the breast plate?  Would you consider buying those shirts in Macy's?  Or how about resurrecting Howard Johnson's as the place to stay and eat while traveling?  Or shopping at KMart?  Or taking instant photos on a Polaroid?  When the market moves on, it's moved on.  No business can recapture past profit levels by "focusing" on old brands and products that were once great.  The clock never runs backward. T he market has shifted, and companies have to shift with it – not try to pretend "focusing on the core" will create profits simply because they are dedicated and focused.

It's Ford's offshore innovation that may save the company.  It's Chrysler's engine, drive train and styling innovations that may save it.  But GM is getting rid of anything that looks like innovation – and anything that might look like a Disruption or White Space.  It has no hope of ever regaining market strength.  It's plan is faulty, and won't work.  Even if bondholders accept the swap of debt for equity, in short order GM sales will continue declining (as will profits), and there's no way bondholders can sell all that equity in order to recover their invested value in the bonds.

Business Lifeblood – Innovation – Amazon Kindle and Management’s role

by | Apr 26, 2009 | Books, Current Affairs, Food and Drink, Games, General, In the Rapids, Innovation, Leadership, Openness, Sports, Television

I recently listened to a great presentation on innovation by Bill Burnett, partner at Launchpad Partners.  I recommend you download the slides to his presentation, "The CEO's Role in Innovation," in order to understand just how important innovation is to profitability as well as the CEOs role in creating the right culture.  I also hand it to Bill that he not only lays out the CEO's role, but discusses what it takes organizationally to implement innovation – including getting the right people involved to go beyond just coming up with good ideas.

Markets shift.  Sometimes there are long periods in which the market is reasonably the same (like newspapers).  And sometimes it seems like new changes are happening rapidly (like computers).  How long between shifts is impossible to predict.  But it is certain that all markets shift.  Some new technology, or a new form of solution, or a new way of pricing, or a new competitor will enter the market and change things such that the profitability of previous solutions declines.  And it is the role of CEOs to create an open culture in which the management team feels it must keep its eyes peeled for market shifts, bring them to the company for discussion, and propose innovations which can increase the longevity of company sales and profits by addressing the market shifts.

Take for example the current shift in the sports market.  This is important, because a throng of businesses advertise in the sports market.  Everything from TV or radio ads during games, to ads inside event brochures, to putting logos on equipment and uniforms, to paying athletes as endorsers.  Being aligned with the right sports, the right teams and the right athletes is worth a lot of money.  You can legitimately ask, would Nike be Nike if they hadn't been the first company to sign up Michael Jordan – and later Tiger Woods?  So the money is very large (billions of dollars) making mistakes very expensive.  But getting it right can be worth billions in returns.

So catching a recent MediaPost.com blog "The Allure of Action Sports" is important.  While most of us think of basketball, baseball, American football and possibly NASCAR – for GEN Y (young folks) sports is taking on an entirely new meaning.  These are sports with almost no rules – just technique.  They pack the stands at events such as the Dew Tour and X Games. Active participants include almost 12 million skateboarders, 7 million snowboarders and 3 million BMX riders.  Not only do people watch these sports, but the most popular performers have their own cable TV shows – like "Viva La Bam."  Just like football and basketball overtook our fathers' love of baseball as America's pastime – young competitors are shifting to watch and practice action sports.  For people in consumer goods and many retailers, it becomes critical that the CEO provide an environment where the company can Disrupt its old marketing practices and create White Space to explore how to link with these new markets.  The winners will rake in millions of higher profits.  The laggards will see the value of their sports market spending decline.

Have you recognized this shift in the sports market?  Are you prepared to take advantage of this shift?  Are you considering sponsoring a local skateboard competition – for example – to promote a restaurant, quick stop, or T-Shirt store?  You can react faster than Wal-Mart, Coke or GM – are you considering the options to grab loyal customers when they are still "McDonald's targets"?

A great example of the right kind of CEO has been Jeff Bezos of Amazon.  As I reported in this blog back in January, book sales declined about 10% in 2008.  You would think this would spell a huge problem for the world's largest bookseller.  But SeattlePI.com recently reported "Amazon Profits Jump Despite Recession."  CEO Bezos recognized long ago that book readership was jeapardized by changing lifestyles.  Fewer people have the willingness to buy printed books, carry them around and take time to read them.  So he Disrupted his retail Success Formula and implemented White Space to develop something new.  This led to Kindle, a product which is small, light, can hold hundreds of books, can be read "on the go", accepts downloads of journals (magazines and newspapers) and can even read the book to you (Kindle has an audio feature.)  And that's just product rev 2 – who knows where this will be in 3 years.  By focusing on the future he could see the market for reading shifting – and he created an environment in which new innovation could be developed to keep Amazon growing even when the traditional products (and business) started declining.  Kindle is now outselling everyone's expectations. 

Innovation is the lifeblood of businesses.  Without innovation Defend & Extend management leads to declining returns as competitors create market shifts.  So it is crucial leaders, from managers to the CEO, keep their eyes on the future to spot market challenges and obsess about competitor actions that are changing market requirements.  Then be willing to Disrupt the old Success Formula by attacking Lock-ins, and use White Space to test and implement new innovations which can lead to a new Success Formula keeping the business evergreen.

White Space is to make money – GE Homeland Protection

by | Apr 24, 2009 | Disruptions, In the Rapids, Innovation, Leadership, Lifecycle, Openness

Everybody should have White Space projects.  More than one.  Because you never know if which project will work out, and which might not.  Nobody has a crystal ball.  To create growth you have to not only open White Space, but you have to know when to get out — by closing or selling.

Today GE announced "Safran to buy 81% stake in GE Homeland Protection" according to Marketwatch, effectively taking GE out of the airport security business.  According to Securityinfowatch.com the sale will give the French company complimentary technology for its markets around the globe, as well as GE's U.S. sales force and market access.  Thus it was willing to pay-up for the business unit.  For GE, the sale gets the company out of a business heading in a different direction than originally planned. 

Many people thought that airport security technology would be rampant in U.S. airports following the changes after September, 2001.  And GE was one of several companies that developed scenarios justifying investment in new products to innovate new solutions and take them to market.  Scenarios for big spending on airport security seemed sensible.  But, a few years later, reality is that nobody wants to pay for the new techology.  The airlines are broke and have no money to pay for better customer satisfaction during check-in, where they can blame the TSA for unhappiness.  The cities that own the airports have no money to pay for more equipment to upgrade the systems.  Most have their hands out for federal dollars due to tax shortfalls.  And customers refuse to pay higher ticket taxes to cover the security investments.  What looked like a great market turned out to be a slow-grower with extensive downward pricing pressure.  So far the market has concluded it will just let people wait in line. 

So, hand it to GE.  They sold the business.  By GE standards the $580million received for the sale isn't a lot of money.  But it shows that when you have White Space projects, you have to manage them for results, not just let them run. To now make this business worthwhile in the massive corporation, GE would need to make big acquisitions.  But the growth wasn't really there to make the market all that interesting.  Because GE was participating in the market, they learned what was happening and could see that the desired scenario wasn't the actual scenario.  So GE needed to dial-back its investments. When the airport security business failed to take off, it made more sense to sell it than keep investing in product development for a market growing slower than expected.   Rather than simply let the business string along and see declining returns, GE sold the business to someone who has a different scenario for the future – willing to pay for GE's R&D investments.  Before the business looked bad to everyone, GE sold its interest at a good price so it had the money to invest in something else.  When the shift went a different direction than GE planned, GE got out.  That's smart.

You can't expect to read all market shifts completely accurately.  Rarely does everything quickly work out all right, or all wrong.  So you have to develop your scenarios, and invest based upon what's most likely to happen.  You need several options.  Then, track the market versus your scenarios.  If things don't go the way you thought they might, you have to be willing to stop.  If you're smart, you can get out without losing your investment – possibly even make some money – especially if you're first to escape. 

Back in the early days of mainframe computers the 3 big players were IBM, GE and RCA.  Behomoths that used the products as well as saw the market growing.  But GE quickly realized that in mainframes, IBM's share allowed them to manipulate pricing so that GE and RCA would never make much money – and never gain much share.  So the head of GE's computer business called up RCA and offered to sell RCA the business.  He offered to let RCA "synergize" the combination so it could "compete stronger" against IBM.  RCA took him up on the deal.  GE made a big profit on the sale.  The head of the computer business got tagged for his savvy move, and soon was made Chairman and CEO.  And RCA ended up losing a fortune before learning IBM had the market sewn up and RCA couldn't make any money – eventually getting out via a shut down.  That write-off spelled the beginning of the end for RCA. 

White Space is really important.  But it's not a playground for madcap innovators to do whatever they want.  White Space should be based on scenarios.  And the business should report results based upon the scenario expectations.  If the White Space project can't meet expected results, you have to be just as willing to get out as you were to get in.  You have to compete ferociously, to win, but don't be ego-involved and foolish like RCA was in mainframes.  Be committed, but be smart.  If you don't get the results you planned on, understand why.  Keep your eyes on the market.  Get in, work hard, and be prepared to possibly get out.

Like Sun Micro, the NYT inflicted fatal wounds in the 1990s

by | Apr 22, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Lock-in

Yesterday I discussed how Sun Microsystems nailed its coffin shut in the mid-1990s when it committed itself to hardware instead of following the market into software.  Even though Sun was the then leader in Unix operating systems (Solaris) and internet application development (Java), the company chose to only offer its software on its own hardware (Solaris) – or give it away (Java).  Had Sun recognized the market shift to valuing software rather than "systems" the company could have transitioned itself and avoided being gobbled up by Oracle – which is sure to close Sun's R&D facility and discontinue hardware sales.

Now we hear that the New York Times company behaved very similarly at almost the same time, putting itself at unnecessary risk that has destroyed huge value for shareholders and cost thousands of jobs.  In 1995 NYT was worth between $1.5B and $2B.  The Boston Globe recently reported in "What Went Wrong?" that same year the founder of Monster offered to sell a chunk of his new company to the Globe (which is owned by NYT) for $1million.  And Monster would start cooperating with the Globe to offer help-wanted ads on-line as well as in the newspaper.  At the time, help wanted ads alone was a $100million business at the Globe.  For 1% of just one segment of the Globe's revenue – and a far lesser fraction of NYT sales and equity value – the company could have been part of the great migration to the web. 

Globe and NYT management said no. And for the rest of the decade advertising growth remained on a tear, driving the value of NYT up to about $6.5 to $7billion by 2000.  And even though the recession came in 2001, NYT's value remained in that range until 2004.  But then, in 2004, early market shifts started to become pronounced.  Like the proverbial snowball rolling downhill, internet usage had become a big market and advertisers were looking for lower cost and more capable options.  Advertisers from auto companies to movie studies started moving ad dollars to the web – as did companies advertising for help.  The value of NYT started to drop, and hasn't stopped yet.  In 5 years more than $6billion of that value has evaporated – leaving the whole of NYT – including not only the Globe but the venerable New York Times worth a mere $700million (see 5year chart here).  Value is dropping precipitously as losses mount ("New York Times loss widens; shares fall 16%" was headline on Marketwatch yesterday), and the company leverages its Manhattan real estate to try preserving its now unprofitable Success Formula.

When business was good NYT had the opportunity to Disrupt itself and invest in some White Space to help understand the direction of future markets.  Instead, management clung to the old Success Formula and ignored impending market shifts.  While the company racked up profits it eschewed investing in new projects, because there were no Disruptions causing it to consider White Space.  And now that the market has shifted it very likely is too late to save the company (investor Rupert Murdoch with investments across all media, including the web, is licking his chops for the opportunity to take over these influential journals with which he has long tangled politically.  Even if only to watch them decline and remove a thorn in his side.)  Because of decisions made in 1995, when business was good, the nails were being driven into the coffin.  Management failed to recognize how deadly those decisions were, because they were focused on Defending & Extending the past rather than exploring how markets might change.

The Sun and NYT story emphasize how easy it is to remain Locked-in.  Profits during good times – often right at the peak of the business – become an excuse to do more of the same.  But what we see over and over is that long-term success requires Disruptions during these best times.  Companies that make the transitions don't wait for the crisis.  When times are good they invest in new market opportunities, so they can learn what works and how to compete.  They Disrupt their old model so they pay attention to market shifts, and invest in White Space where they learn and inform the entire organization about what's coming.  Lock-in is very dangerous because it is so easy to ignore.  But if you want to survive market shifts you must create an organization that can evolve with new markets.  That requires you manage Lock-in by constantly Disrupting and keeping White Space alive.

PS – a note of thanks to reader Tejune Kang for pointing me to the Globe article about Monster.  I encourage all readers to forward me your insights to companies Locked-in and at risk, as well as those practicing The Phoenix Principle.

Why Sun Failed – unwillingness to adapt

by | Apr 21, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in, Web/Tech

"With Oracle, Sun avoids becoming another Yahoo," headlines Marketwatch.com today.  As talks broke down because IBM was unwilling to up its price for Sun Microsystems, Oracle Systems swept in and made a counter-offer that looks sure to acquire the company.  Unlike Yahoo – Sun will now disappear.  The shareholders will get about 5% of the value Sun was worth a decade ago at its peak.  That's a pretty serious value destruction, in any book.  And if you don't think this is bad news for the employees and vendors just wait a year and see how many remain part of Oracle.  A sale to IBM would have fared no better for investors, employees or vendors.

It was clear Sun wasn't able to survive several years ago.  That's why I wrote about the company in my book Create Marketplace Disruption.  Because the company was unwilling to allow any internal Disruptions to its Success Formula and any White Space to exist which might transform the company.  In the fast paced world of information products, no company can survive if it isn't willing to build an organization that can identify market shifts and change with them. 

I was at a Sun analyst conference in 1995 where Chairman McNealy told the analysts "have you seen the explosive growth over at Cisco System?  I ask myself, how did we miss that?"  And that's when it was clear Sun was in for big, big trouble.  He was admitting then that Sun was so focused on its business, so focused on its core, that there was very little effort being expended on evaluating market shifts – which meant opportunities were being missed and Sun would be in big trouble when its "core" business slowed – as happens to all IT product companies.  Sun had built its Success Formula selling hardware.  Even though the real value Sun created shifted more and more to the software that drove its hardware, which became more and more generic (and less competitive) every year, Sun wouldn't change its strategy or tactics – which supported its identity as a hardware company – its Success Formula.  Even though Sun became a leader in Unix operating systems, extensions for networking and accessing lots of data, as well as the creator and developer of Java for network applications because software was incompatible with the Success Formula, the company could not maintain independent software sales and the company failed. 

Sort of like Xerox inventing the GUI (graphical user interface), mouse, local area network to connect a PC to a printer, and the laser printer but never capturing any of the PC, printer or desktop publishing market.  Just because Xerox (and Sun) invented a lot of what became future growth markets did not insure success, because the slavish dedication to the old Success Formula (in Xerox's case big copiers) kept the company from moving forward with the marketplace. 

Instead, Sun Microsystems kept trying to Defend & Extend its old, original Success Formula to the end.  Even after several years struggling to sell hardware, Sun refused to change into the software company it needed to become. To unleash this value, Sun had to be acquired by another software company, Oracle, willing to let the hardware go and keep the software – according to the MercuryNews.com "With Oracle's acquisition of Sun, Larry Ellison's empire grows."  Scott McNealy wouldn't Disrupt Sun and use White Space to change Sun, so its value deteriorated until it was a cheap buy for someone who could use the software pieces to greater value in another company.

Compare this with Steve Jobs.  When Jobs left Apple in disrepute he founded NeXt to be another hardware company – something like a cross between Apple and Sun.  But he found the Unix box business tough sledding.  So he changed focus to a top application for high powered workstations – graphics – intending to compete with Silicon Graphics (SGI).  But as he learned about the market, he realized he was better off developing application software, and he took over leadership of Pixar.  He let NeXt die as he focused on high end graphics software at Pixar, only to learn that people weren't as interesed in buying his software as he thought they would be.  So he transitioned Pixar into a movie production company making animated full-length features as well as commercials and short subjects.  Mr. Jobs went through 3 Success Formulas getting the business right – using Disruptions and White Space to move from a box company to a software company to a movie studio (that also supplied software to box companies).  By focusing on future scenarios, obsessing about competitors and Disrupting his approach he kept pushing into White Space.  Instead of letting Lock-in keep him pushing a bad idea until it failed, he let White Space evolve the business into something of high value for the marketplace.  As a result, Pixar is a viable competitor today – while SGI and Sun Microsystems have failed within a few months of each other.

It's incredibly easy to Defend & Extend your Success Formula, even after the business starts failing.  It's easy to remain Locked-in to the original Success Formula and keep working harder and faster to make it a little better or cheaper.  But when markets shift, you will fail if you don't realize that longevity requires you change the Success Formula.  Where Unix boxes were once what the market wanted (in high volume), shifts in competitive hardware (PC) and software (Linux) products kept sucking the value out of that original Success Formula. 

Sun needed to Disrupt its Lock-ins – attack them – in order to open White Space where it could build value for its software products.  Where it could learn to sell them instead of force-bundling them with hardware, or giving them away (like Java.)  And this is a lesson all companies need to take to heart.  If Sun had made these moves it could have preserved much more of its value – even if acquired by someone else.  Or it might have been able to survive as a different kind of company.  Instead, Sun has failed costing its investors, employees and vendors billions.

Spend on what pays off – not what your used to spending on – movie studios

by | Apr 20, 2009 | Current Affairs, Defend & Extend, Film, General, In the Swamp, Leadership, Lock-in, Television

How do you pick a movie to see – whether at the theatre or at home?  The movie studios think you pick movies by what you see on TV ads, according to the Los Angeles Times "Studios struggle to rein in marketing costs." 

I remember the old days when my friends and I grabbed a newspaper and shopped the ads looking for a flick to go see.  And we were influenced by television ads as well.  But, as time went by, we started asking each other, "Is that movie any good, or are all the best parts in the ad?"  (Admit it, you've asked that question too.)  Then we found out we could get sneak peaks from shows like "Siskel & Ebert at the movies," so one of us would try to watch that and see if we liked the longer scenes.  And we didn't ever agree with the critics, but we could listen to hear if they described a movie we would like.  Now, not only myself but my sons follow the same routine.  Only we go to the internet looking for a YouTube! clip, and for reviews from all kinds of people – not just critics.  Mostly when we see a TV ad we hit the mute button.

Everywhere, businesses are still wasting money on old business notions.  For movie studios, they keep trying to get people to watch a big budget by advertising the thing.  (To death.  Until nobody watches the ad any more because they have it memorized.  And get angry that the ad keeps showing.)  But even the above article admits that studios know this isn't the best way any more.  With the internet around, we all listen less to advertisements, and gain access to more real input.  From web sites, or Twitter, or friends on Facebook, or colleagues on Linked-in.  We watch a lot less TV, and what we watch is more targeted to our interest and available on cable.  Or we download our TV from the web using Hulu.com.  Yet, the studios are so Locked-in to their outdated Success Formula that they keep spending money on TV ads – even though they know the value isn't there any more.

So why do the studios spend so much on advertising?  Because they always have.  That's Lock-in.  Lacking a better idea, a better plan, a better approach that would really reach out to potential viewers they keep doing what they know how to do, even as they question whether or not they should do it!  The industrial era concept was "I spent a fortune making this movie, and distributing it into theatres, so I better not stop now.  Keep spending money to advertise it, create awareness, and get people into the theatres."  The studios see movie making as an industrial enterprise, where those who spend the most have the greatest chance of winning.  Spend a lot to make, spend to distribute, spend to advertise.  To industrial era thinkers, all this spending creates entry barriers that defends their business.

And that's why movie studios struggle.  It's unclear how well those ideas ever worked for filmmaking – because we all saw our share of blockbuster bombs and remember the "American Graffiti" or "Blair Witch Project" that was cheap and good.  But for sure we all know the world has now permanently shifted.  Today, small budget movies like "Slum Dog Millionaire" can be made (offshore in that case – but not necessarily) quite well.  The pool of new actors, writers, directors, cinematographers and editors keeps growing – driving production quality up and cost down.  And distribution can be via DVD – or web download – between low cost and free.  A movie doesn't even have to be shown in a theatre for it to be commercially successful any more.  And any filmmaker can promote her product on the internet, building a word of mouth driving popularity and sales.

From filmmaking to recordings to short programs to books, the market has shifted.  Things don't have to be big budget to be good.  The old status quo police, like Mr. Goldwyn or Mr. Meyer, simply have far less role.  Digitization and globalization means that you don't need film for movies – or paper for books.  Thus, democratizing the production, as well as sales, of "media" products.  Thus the old media companies are struggling (publishers, filmmakers, magazines, newspapers and recording studios) because they no longer have the "entry barriers" they can Defend to allow their old Success Formulas to produce above average returns.  And they never will again.  The world has changed, and the market has permanently shifted.

Is your business still spending money on things that don't matter?  Does your approach to the market, your Success Formula dictate spending on advertising, salespeople, PR, external analysts, paid reviewers or others that really don't make nearly as much difference any more?  When will you change your approach?  The movie studios are preparing to spend hundreds of millions of dollars on summer ad promotions for new movies.  Is this necessary, given that the downturn has increased the demand for escapist entertainment?  Is your business doing the same? 

If you want to cut your cost, you shouldn't cut 5% or 10% across the board.  That won't help your Success Formula meet market needs better.  Instead, you need to understand market shifts and cut 90% from things that no longer matter – or that have diminishing value.  Quit doing the things you do because you always did them, and make sure you do the things you need to do.  You want to be the next "Slumdog Millionaire" not the next "Ishtar."  You want to be Apple, not Motorola.  You want to be Google, not Tribune Corporation.  Spend money on what pays off, not what you've always spent it on.

Downloads

by | Apr 20, 2009 | Uncategorized

IcondownloadDownload slides from Adam’s presentations.

PepsiCo update – doing more of the right stuff

by | Apr 20, 2009 | Current Affairs, Food and Drink, General, In the Rapids, Leadership, Openness

"PepsiCo bids to buy its bottlers for $6billion," is the Marketwatch headline today.  Another big Disruption, this time at the industry level, orchestrated by PepsiCo's Chairperson/CEO Indra Nooyi.  Now that changes are being made with the product line, packaging and brands this latest move will allow Pepsi's beverage division to much more quickly implement changes to align with market needs.  While Coke is doing little, Pepsi is disrupting the industry organization changing the marketplace and placing serious challenges onto all competitors.  And without waiting for the recession to end.

Many leadership teams should pay close attention to what's going on at PepsiCo.  By moving fast to align with future market needs they are catching competitors unwilling to take action due to recessionary concerns.  Their Disruptions are creating changes that will help Pepsi return to the "muscle building" organization created in the days of former Chairman Andrall Pearson.  And the changes coming out of White Space are helping Pepsi to develop a stronger Success Formula for competing in the post-industrial age. 

Investors, employees and vendors should be encouraged by Pepsi.  Competitors had better be worried.  And all leadership teams can learn from the action being taken to gain share during this period of uncertainty.  As companies hit growth stalls the tendency is to "wait and see".  But winners react quickly to Disrupt and use White Space where they overtake delaying competitors – returning to the Rapids of growth and gaining share.

Rewarding performance, or luck? McDonald’s and Pepsico

by | Apr 19, 2009 | Uncategorized

"McDonald's CEO's compensation rose 44%" was the Crain's Chicago Business headline.  In this era of focus on CEO pay, the question should be whether this is pay for performance?  Yes, McDonald's has seen its business do relatively well the last year – but was that really due to the CEO?  Or did an incoming tide simply raise the McDonald's boat? 

The last year has generally been tough on restaurants.  But McDonald's competes in a narrow part of the market focused on cheap.  Like Wal-Mart, McDonald's is a huge corporation but its sales are closely tied to the performance of markets driven by low price.  It wasn't long ago (less than 8 years) that McDonald's was shutting stores around the globe because performance was so poor.  The company felt it had too many McDonald's.  So it sold Chipotle and other assets to raise the money for closings and buying back equity shares to hold off a corporate attack.  And it spent money to improve the marketing in stores, including refocusing on quality.  As a result, when the economy fell apart (globally) McDonald's was in the right place at the right time. 

There was nothing prescient about the decision-making at McDonald's.  Quite to the contrary, the decisions taken were all about Defending the old Success Formula regardless of where the marketplace was headed.  In fact, the toughest decision made during the last 18 months was whether to keep 2 pieces of cheese on the double cheeseburger or not.  And its decision to raise the price on the 2-slice burger while launching another 1-slice burger to remain priced at $1 was considered a big innovation by home town newspaper Chicago Tribune ("Launch time at McDonald's").  Fortunately, the biggest recession in 70 years has encouraged people to go down-market, to McDonald's, and thus helped the company maintain sales and profits.  Whether McDonald's will hold onto these gains or see them go back out with the receding tide when the economy improves is entirely unclear.

On the other hand, PepsiCo has taken a much more aggressive approach to growth in its soft drink business.  Chairman and CEO Indra Nooyi has never been the kind of executive to back off from pushing for change.  As a Boston Consulting Group Manager she ruffled many feathers amongst the conservative leadership in her efforts to make partner – to the point they recommended she find a career elsewhere.  And, never looking back, she went on to greatly exceed the expectations of her former bosses by rocketing through Motorola and later PepsiCo all the way to the top position.  Her willingness to Disrupt and implement White Space has created significant growth for the companies where she worked.

Now she's brought in Massimo D'Amori as the new head for Pepsi's soft drink business, and he's shown no hesitancy to follow her lead in Disrupting the moribund brands as detailed in the BusinessWeek article "Blowing up Pepsi."  Rather than waiting for the recession to recover, he's dived into the brands changing everything from packaging to logos.  He's personally been involved in the Disruptions, making sure people know that he sees now, while Coke is moving slowly and sales should be soft, to reposition Pepsi's beverage products in order to attract new customers and grow!  As the new head of brands said, it's time to "rejuvenate, reengineer, rethink, reparticipate."  When the economy caused weak performance quarters the anwer became "retool and reteam;" including changing more people on the senior team.

Will all this Disruption work? We know that White Space has flourished, so Disruption has taken hold.  Will the White space provide a faster growing and more profitable Pepsi beverage division?  We know that everything from logo design to bottles have been tested, tried and are being improved upon.  The early results look good, but it's still too early to tell if Pepsi has caught Coke flat footed.  But what we can be sure about is that Pepsi is doing everything it can to take advantage of the changing environment in order to be #1 in beverages – including vitamin water, sports drinks and juices  as well as traditional soft drinks. 

When talking about McDonald's and Pepsi it might all seem like much 'ado about nothing.  What's the big deal?  But reality is that size alone does not make either company immune to failure.  All businesses, no matter size or age, have to adapt to changing markets or risk becoming obsolete.  Polaroid invented instant photography, but has become nothing more than an historical name.  Last week the Wall Street Journal reported how "Vultures vie in auction for remains of Polaroid."  From 21,000 workers at its peak in 1978, the company has fallen to a mere 70 – and to a brand value of only $80million.  This sort of failure can happen to any company.

When we look into 2035, which, if either, McDonald's or PepsiCo is likely to be the next Polaroid?  We'd like to think neither.  Yet, history indicates that McDonald's constant unwillingness to move from Defending & Extending its hamburger business puts it at risk.  Of what?  Maybe the next Mad Cow disease.  Or the next diet craze.  Or the next economic shift that leads customers out of their stores and somewhere else to eat.  Or perhaps a "perfect storm" of all 3. McDonald's D&E management depends upon the future looking much like the recent past for the company to succeed.  It is not really preparing for a different future.  And that cannot be said for PepsiCo – where under Ms. Nooyi's leadership we see a company obsessing about competition while working passionately to position itself for future markets and future customers needs.  Pepsi's willingness to Disrupt and use White Space bodes very well for the likelihood of turning around the recent growth stall, and creating longevity for the company, its investors, employees and vendors.