by Adam Hartung | Apr 17, 2009 | Uncategorized
Thanks to one of this blog's readers who emailed me about high speed rail lines and the proposed project to improve and expand them in the USA. According to today's St. Louis Business Journal "Fed to invest $13B in U.S. high speed rail." The Associated Press says states are lining up for funding in "8 states seek stimulus money for high speed rail." And many people support the plan, as noted in an August, 2008 USAToday column "The case for high speed rail in America." Is this a good investment?
There is no doubt that the least-energy, lowest carbon footprint, and thereby lowest cost way to transport anything is via rail. Prior to the Reagan administration's deregulation of truck rates in the early 1980s shipping prices between all interstante points had to be registered with the U.S. Department of Transportation (DOT), and in-state with the state departments. These departments regulated pricing, and tended to price all shipping based on cost. As a result, there was a clear and major difference in the price of rail vs. truck vs. air. But deregulation changed that. Truck capacity exploded when truckers were allowed to lower prices to razor thin margins. Most businesses preferred trucks to rail because it was easier to schedule, scheduled in smaller lot sizes, was usually faster, and you could queu up the trucks down to a specific hour which was impossible with rail (a lot more flexible and suddenly not that much more expensive.) The flexibility, along with lower pricing brought about by hyper-competition, meant rail growth went nowhere while truck traffic skyrocketed (as did use of air shipping). The same reason passenger trains of old were replaced with car and plane travel.
So, there is no doubt that from a public policy standpoint rail traffic is a great move. It will be more energy efficient and less costly to the economy if people move by rail than car or air. But just because it's good public policy doesn't mean it will work. Remember the Susan B. Anthony dollar coin? How many readers have one in your pocket today? This coin was good public policy because it meant there would be far lower cost of printing the easily worn out paper dollar. Every major country from Canada (the Loonie) to the Euro have eliminated low value paper currency for the much more durable coin. So the Treasury department spent quite a bit on advertising to relaunch the dollar coin (which was dropped in the 1950s) and promote its use. Yet, within just a few months the product faltered and has found limited interest as currency (although still valid legal tender and held by numismatists). Just because the economics are favorable (for both users and the government) and the public policy is good does not mean the effort will succeed.
In open markets, it takes more than low cost and good idea to succeed. People are Locked-in to current solutions. In the case of the dollar, it couldn't be used in vending machines. Cash drawers had no slot for it. Many men had women had stopped carrying coins in the USA, and had no inclination to start. People were plenty pleased with things they way they were. To get people to change means you have to overcome that Lock-in to the current solution. And getting people to return to personal rail rather than cars or planes will have to overcome at least as much Lock-in as relaunching the dollar coin. Let's not forget that in the 1970s the feds started pouring money into a northeast corridor passenger train system connecting Boston, New York, Philadelphia, Baltimore and Washington – one of the most compact and populated areas of America. But in it's 30 year history Amtrak (as its called) has never been able to turn a profit, remaining subsidized to keep running.
So, to succeed high speed rail will need to apply The Phoenix Principle:
- The product must meet future customer needs. What scenarios of the future make high speed rail valuable? Increased urban density, high fuel costs, increased auto congestion, and higher airport inconvenience would all support the use. But some of these are incompatible (such as fuel cost and congestion). So we need to be very careful about the scenario planning to identify the individual user/market needs that high speed rail fulfills. Exactly which scenarios make this option a big winner with users? And what would cause those scenarios to develop? Markets are fickle, hard to guess, and impossible to "manage" as customers wander between options and trade-offs. Given that people are getting along pretty well with today's cars, busses, planes and standard trains a Phoenix Principle supporter would demand identifying the scenarios that make high-speed rail successful.
- The developers have to obsess about competition. As mentioned, people have a lot of options. How convenient will be these trains? Will they operate hourly, or once per day? How do I get from office or home to the departure terminal, and to my final destination on the other end? Will there be ample and affordable parking? Will there be rental cars? Easy drop-off and pick-up? Food? What are the economics of the whole transit from door-to-door? What is the comparison with each of the other travel options on not only cost but convenience, security, reliability, flexibility, user experience, seasonality, and any other factor that determines how people travel. And don't forget to compare the very need with other high-tech options, like webinars and fast developing enhancements to videoconferencing – competitors on the fringe.
- Why would somebody stop their old behavior and suddenly change? What Disruption is planned that will cause people to say "hey, this new high-speed rail is the think I need to try"? (As opposed to saying "that's nice – have you tried that yet? Maybe you should use that new train.") Will the government support this launch with a new tax of say 50% on short-hop air travel? Or a $1.50/gallon increase in gasoline taxes? Or a nationwide toll system to tax driving on interstate highways? Or even more inconvenient restrictions boarding airplanes? People don't change behavior for no reason – and encouraging a big change like shifting travel patterns requires some kind of Disruption that really gets their attention.
- You can't expect to change everyone – or even large numbers quickly. High speed rail needs to be implemented in White Space areas where it is most likely to succeed, and then watched and tested. Like mentioned, travel is more than just the train. Everything from schedules to prices to seats to feeder systems — there are a lot of variables here that need to be checked and tested. And regardless of early plans (assuming done by the very best planners and marketers) things will have to be adjusted. To succeed the owner/operator of these lines will have to convert an early group of users that become disciples for the product – like Howard Hughes created in the early days of air travel, or Apple does for its iPod and iPhone. These early adopters who have the earliest and greatest need will be the ones who can convince others about the efficacy of these new train lines and thereby reduce their risk, encouraging the others to migrate into this new solution.
Like I said, high speed rail is great public policy. But so is mass transit for Los Angeles or Houston. For it to be a success – meaning return a profit that covers the cost of capital and earns an above market rate of return – requires the introduction be managed like all Phoenix Projects. It must meet future user/market needs, it must be better than competitive options, there must be a Disruption to get people to consider using it, and it must be launched in White Space where the bugs can be worked out and a loyal following of users created. It takes a lot more than just laying down a bunch of new track and building new locomotives.
by Adam Hartung | Apr 17, 2009 | Uncategorized
Adam Hartung helps companies innovate to achieve real growth. He began his career as an entrepreneur, selling the first general-purpose computing platform to use the 8080 microprocessor when he was an undergraduate. Today, he has 20 years of practical experience in developing and implementing strategies to take advantage of emerging technologies and new business models. He writes, consults and speaks worldwide.
His recently published book, Create Marketplace Disruption: How to Stay Ahead of the Competition (Financial Times Press, 2008), helps leaders and managers create evergreen organizations that produce above-average returns.
Adam is currently Managing Partner of Spark Partners, a strategy and transformation consultancy. Previously, he spent eight years as a Partner in the consulting arm of Computer Sciences Corporation (CSC) where he led their efforts in Intellectual Capital Development and e-business. Adam has also been a strategist with The Boston Consulting Group, and an executive with PepsiCo and DuPont in the areas of strategic planning and business development.
At DuPont Adam built a new division from nothing to over $600 million revenue in less than 3 years, opening subsidiaries on every populated continent and implementing new product development across both Europe and Asia.
At Pepsi, Adam led the initiative to start Pizza Hut Home Delivery. He opened over 200 stores in under 2 years and also led the global expansion M&A initiative acquiring several hundred additional sites. He also played a lead role in the Kentucky Fried Chicken acquisition.
Adam has helped redefine the strategy of companies such as General Dynamics, Deutsche Telecom, Air Canada, Honeywell, BancOne, Subaru of America, Safeway, Kraft, 3M, and P&G. He received his MBA from Harvard Business School with Distinction.
by Adam Hartung | Apr 16, 2009 | Current Affairs, Defend & Extend, Food and Drink, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
All of America may have learned the jingle "America spells cheese K*R*A*F*T", but that doesn't mean Kraft is a good investment. When the recession first began, investors were excited about buying companies that had well known brands – especially in food. The idea was that everyone has to eat, so food companies won't get hammered like an industrial company (think Caterpillar or General Electric) when the economy shrinks. Second, people will eat out less and in more so food might actually see an uptick in growth. Third, people will want well known brands because it well help them feel good during the depressing downturn. So, Kraft was to be a good, safe investment. After all, even though it's only been spun out of cigarrette company Altria a few months, this thinking was powerful enough for the Dow editors to replace failed AIG with Kraft on the (in)famous Dow Jones Industrial Average.
Too bad things didn't work out that way (see chart here). Although the stock held up through the summer near it's spin-out high at 35, Kraft's value fell out of the proverbial bed since then. Down about 40%. What's worse, as several companies have "bounced back" during the recent stock market rebound Kraft shares have gone nowhere. And now Crain's Chicago Business reports "Analyst downgrades Kraft on volume risk." This UBS analyst has noted that instead of going up, or sideways, sales (and volume) at Kraft have declined. While he might have expected a potential 1% decline, instead he's seeing drops of more like 2.5%. In light of this poor performance, he thinks the best Kraft can do for the next 12 months is a meager improvement – or more likely sideways performance.
Kraft has been in a growth stall for a long time. Since well before spinning out of Altria. The company stopped launching new products years ago. Instead, it has been trying to increase sales with line extensions of its existing products – things like 100 calorie packs of Oreos. There hasn't been a real new product at Kraft since DiGiorno pizza and Boboli crust some 10 years ago. Simultaneously, the company sold some of its high growth businesses, like Altoids, in order to "focus on core brands". All of which meant that while cash flow has been stable, there's been no growth. Turns out folks may be eating at home more, but they aren't paying up for worn-out brands like Velveeta, instead turning to store brands and generics. Shoppers are looking for new things to improve their meals during this recession – but Kraft simply doesn't have any.
Without innovation, Kraft has gone nowhere. For a decade the company has merely Defended & Extended its 1940s business model. It keeps trying to do more of the same, perhaps faster and better. It couldn't do cheaper because of rising commodity prices last year, so it actually raised prices. As a result, customers are quite happy to buy comparable, but cheaper, products setting Kraft up for price wars in almost all its product lines. And there's nothing Kraft can point to as a new product which will actually grow the top line. Just a hope in more advertising of its old products, doing more of the same.
When Kraft spun out the CEO was replaced in order for Kraft to revitalize its moribund organization. Good move. The previous CEO was so in love with D&E management that he bragged about his "strategy" of spending more on Velveeta and older brands – in other words he was wedded to the outdated Success Formula and had no plans to change it.
So he was replaced by a competent executive named Irene Rosenfeld. This was touted as a big move, by bringing in the Chairman of PepsiCo's Frito-Lay Division. PepsiCo is noted for its fairly Disruptive environment, instituted during the reign of Chairman Andrall Pearson who aggressively moved people around (and out) in his effort to "muscle build" the organization. But reality was that Dr. Rosenfeld had worked at Kraft for many years before going to PepsiCo, and was returning (according to her bio on the Kraft web site). And her leadership has been, well, more of the same. There have been no Disruptions at Kraft – no White Space – and no new products. So the growth stall that began during the Altria ownership has continued unabated.
Despite Kraft's lack of performance – and you could say poor performance given that sales and volume are down, as well as profits since she took the top job – Dr. Rosenfeld's salary was increased at the end of March (according to Marketwatch.com "Compensation rose for Kraft Foods' CEO in 2008"). It seems the Board of Directors was concerned that the stock options she was awarded in early February had fallen in value (because the share price dropped dramatically – hurting all investors) so they felt they had to raise her base pay. Since the "at risk" pay didn't pan out, well they felt compelled to make her compensation less risky. Then they invented some excuses to make themselves feel better, like they want the CEO to be paid comparably with other CEOs.
(I guess they don't care about the 20 other senior execs who have seen their base pay frozen. Say, do you suppose I could appeal to my publisher that I want pay like other authors? Like Barack Obama who got almost $3million in royalties last year? Or do you suppose the publisher might tell me if I want that much money I should sell more books – looking at my results to determine how much I should get? I rather like this "comparable pay" idea – sounds sort of like union language for CEO contracts.)
Kraft is going nowhere, and Dr. Rosenfeld is the wrong person in the Chairman/CEO job. Kraft is stalled, and investors as well as employees are suffering. Kraft desperately needs leaders that will Disrupt the organization, refocus it externally on market needs, become obsessive about improving versus competitors in base businesses while identifying fringe competitors changing the market landscape. And above all introduce some White Space where Kraft can innovate new products and services that will get the company growing again! Kraft has enormous resources, but the company is frittering them away Defending & Extending a 60+ year old Success Formula that has no growth left in it. More than ever in Kraft's long history, the company needs to overcome it's Lock-in to innovate – and the Board needs to realize that requires a change in leadership.
by Adam Hartung | Apr 15, 2009 | Books, Current Affairs, Disruptions, General, Leadership, Web/Tech
I was delighted recently to find a weekly blog named www.IsSurvivor.com. Bob Lewis writes in a clear and frank tone about what he often sees as not working correctly – especially in the world of information management. I would recommend this blog to everyone because his advice applies to all aspects of business – not just IT.
And I was delighted to recently read his book "Keep the Joint Running: A Manifesto for 21Century Information Technology." Despite the book's tagline, this is a book for everyone in business – not just IT people. As the author reminds readers over and again, IT is a really important, and integrated, part of the modern business. You can't consider it a stand-alone silo or you'll have really big problems. And I find myself thinking the same is true for all functions. The book is a great read as well. Not pompous (although the author has a mountain of experience to draw upon), very matter-of-fact, and incisive when cutting into multiple myths that detract from performance of functional groups as well as the corporation overall.
One thing all readers should love is the book's focus on getting work out the door. Mr. Lewis points out, with great examples, that if you aren't competent you can't be strategic. I was reminded of so many people I've worked with over the years who lacked prodigiously in competence yet seemed to maintain their positions by taking "the strategic view." Far too often we see in consulting firms the partner that's good at relationships, but couldn't actually do the work if his life depended upon it. In the end, when those without competency are in charge, problems happen. A simple rule – like the many Mr. Lewis gives us – that we so often ignore.
Business, and IT even moreso, are very new fields of academia. Unlike math, English, botany or geology, we've been studying business only a short time. Yet, the die-hard followers of early theories are surprising. Given the lack of any labs to test these theories, and the very visible number of failures these theories incur, the willingness to turn an idea into dogma (in incredibly short time) and then remain tied to that dogma should intrigue all investors and business leaders. Mr. Lewis shows himself a great Disruptor as he wastes no time taking an axe to many dogmas, exposing them as myths, as he works his way through the sea of bad approaches he finds functional heads utilizing. Best practices, process optimization, workforce optimization, applying metrics regardless of experience or ties to goals, development methodologies and documentation practices are just a few of the dogma he successfully analyzes, finds wanting, and discards in favor of better approaches that don't find enough use. (Read the book to get the magic answers.)
I spent my own time in IT working for vendor companies, as a CIO, and for several years as a partner in the giant IT services firm Computer Sciences Corporation. Item by item I found Mr. Lewis spot-on with his assessment of most IT firms, and IT practitioners. Not that folks can't get it right – but that for the most part their assumptions about what would work are so misguided that they have no hope of success. Only by rethinking the approach can the business do better. Which, after all, is the goal of all functional groups – to improve the sales and profits of the company.
But like I said earlier, I recommend Mr. Lewis's blog, and his book, for every CEO, executive, manager or front-line employee who works with IT – so that means everyone. His ideas will help improve the performance of any organization and its functions – not just IT. And for IT folks it offers a world of insight to why things in the past were often so hard, and how they can be much better going forward. You'll gain good insight for doing better planning, using Disruptions effectively instead of following outdated practices that simply don't work, and finding White Space where you can rapidly improve the success of your organization. His recommendations make sense, and you'll find them incredibly practical for improving performance today
by Adam Hartung | Apr 14, 2009 | Books, Current Affairs, Disruptions, General, In the Rapids, Innovation, Leadership, Lifecycle
Last week I blogged about how Segway and GM were taking all the wrong steps in launching the PUMA. Today let me explain why Amazon is the mirror image – doing the launch of Kindle correctly. Kindle is the new "electronic book" from Amazon which allows people to download whole books, or parts of books, onto a very small, light and thin device where they can read the material, notate it and even convert it to audio. Even Marketwatch.com is bullish in its overview of the product "Amazon's Kindle, e-books are future of reading."
Firstly, Amazon recognized it had a Disruptive innovation and didn't pretend this was a small variation on printed material. Perhaps "over the top" a bit with the PR, Mr. Bezos called Kindle the biggest revolution in reading since Gutenberg invented the printing press. This bold claim causes people to realize that Kindle is something very different than anything prior. Which it is. Kindle is not like reading on a PC, nor is it like reading a book, nor is it like reading a magazine or newspaper (should you download those). It's different, and it requires buyers change their habits. By highlighting the uniqueness of the product Amazon doesn't undersell the fact that users really do have to change to enjoy the product.
Secondly, the product isn't being run through some high volume distribution that will struggle with the uniqueness and potentially low initial volumes. Amazon isn't trying to sell the product today at Best Buy or Wal-Mart, which would demand instant volume in the millions supported by huge ad spending. Something which would not only be expensive, but probably would not meet those retail expectations. Instead, Amazon is selling the product itself and closely monitoring volumes.
Thirdly, Amazon isn't pushing Kindle as a product for everybody. At least not yet. Amazon isn't offering Kindle for $20, losing a huge amount of money, and saying everyone needs one – which would likely lead to many people buying a Kindle, deciding its not for them, and then throwing it away to wait a very long time before a repurchase – with lots of negative comments. Instead, Amazon prices Kindle at $359 and targets the product at early users who will really benefit. Like the heavy volume book reader. This allows Amazon to build a base of initial users who will use the product and provide feedback to Amazon about how to modify the product to make it even more valuable. Amazon can cycle through the learning experience with users to adapt and develop the product for a future mass market.
Fourthly, the Kindle doesn't come with 30 options to test. It has just a few. This allows Amazon to learn what works. And add functionality in a way that tests the product. Amazon can add features, but it can also drop them.
Will Kindle be the next MP3 device. Probably. How long will it take? Probably not as long as people think. Because Amazon is introducing this innovation correctly. Publishers, authors, book readers and other application users are all learning together. And while traditional paper publishers (from books to newspapers) are waiting to see, Amazon is preparing its new products to "jump the curve" on these old publishers. It's not hard to imagine in 3 or 4 years how authors might go straight to Amazon with their writing, for publication as a Kindle-only product. This would be incredibly cheap, and open the market for many more authors (books or periodicals) than have access today. Since the cost of reading drops precipitiously (due to no paper) the pricing of these new books and periodicals may well be a few dollars, or even less than a dollar. Thus exploding the market for books the way the internet has exploded the market for short-form blog writers.
Even in a recession, people look for new solutions. But capturing those new customers takes careful understanding of how to reach them. You can't act like Segway and dump a strange new product onto users with mass distribution and a PR highlight reel. You have to recognize that Disruptive innovations take better planning. You have to find early customers who will enter White Space with you to test new products, and provide feedback so you both can learn. You have to be honest about your Disruptive approach, and use it to figure out what the big value is – not guess. And you have to be willing to take a few months (or years) to get it right before declaring your readiness for mass market techniques.
Amazon did this when it launched on-line book selling. It didn't sell all books initially, it mostly sold things not on retailers shelves. It didn't sell to everyone, just those looking for certain books. And it learned what people wanted, as well as how to supply, on its journey to Disrupt book retailling – later about all retailing – and build itself in to the model for on-line mass retail. Following that same approach is serving Amazon well, and portends very good things for Kindle's success.
by Adam Hartung | Apr 12, 2009 | Uncategorized
At Buckley Brinkman's Blog he asks the question "Can the auto industry be saved?" His posting gives a great overview of the complexities. I like his overview that "there are no safe, and few reasonable investments in this space."
Today a lot of people are asking, "how GM could be leading an industry that fell so far? How could all those managers, over all those years, end up doing so poorly? How could the collective wisdom of the last 30 years brought to the industry, including not only management but the union leadership and all the vendors seemingly let an entire industry, with companies the world's largest, end up in such a soup?"
A key to understanding the answer is offered by the recent Newsweek article "Saturn was supposed to save GM. Instead GM Crushed Saturn." This article underscores the dramatic actions taken by GM Chairman Roger Smith in the early 1980s to transform a floundering General Motors – including buying EDS and Hughes aircraft. And the unprecendented creation of a new auto division with a new union agreement to change the direction of American auto manufacturing.
Over the next few years, Saturn came onto the market as a successful division. It had unprecedented employee satisfaction, unprecedented loyalty for an American car brand, and unprecedented support by its new dealers. But what Saturn did NOT have was the support of GM. Nor even the union that helped create it. As the Newsweek article further details, inside GM there was no support for Saturn outside the Chairman's office. Management continually pushed the corporation to rob Saturn of resources, and even shut down the new division. Meanwhile, a new union leader took over the UAW, and he pushed for changing work rules back to the previous, contentious and frustrating relationship. To which GM quickly agreed preferring consistency over something that worked better.
Although Chairman Smith was dramatic in creating Saturn, he did not Disrupt GM. He never challenged the other division heads to recognize that they could not succeed with old practices. Chairman Smith never moved to place an EDS leader in a top position. In fact, to the contrary, he went along with special action to repurchase the GM shares traded to Ross Perot and remove him from the Board, on the basis that Mr. Perot was too Disruptive to GM. The very benefits Mr. Smith desired was epitomized in Mr. Perot, who pushed hard for big changes in GM management practices. But Mr. Smith was unwilling to actually Disrupt the history and hierarchy of GM. And the same was true for Hughes leadership. Instead of taking action to put a Hughes executive in charge of GM, to lead the way for change, GM leaders were backwatered and ignored in the halls of Detroit.
When you are unwilling to Disrupt, desired changes never "stick." Even with all the resources of the GM Chairman's office, without Disruption the Locked-In GM organization was more powerful and even better resourced. What was supposed to be White Space which would change GM made no difference, because GM was not Disrupted. So the organization kept Defending & Extending its Success Formula created in the 1940s. It didn't take long for the un-disrupted GM leaders to sell of both EDS and Hughes, using the profits to subsize the car business. And they converted Saturn into nothing more than another faceplate on just another GM car – nothing special at all – and widely despised by leaders who always felt Saturn had operated outside the Success Formula so needed to be closed.
Now the Chairman of GM that asked for billions of taxpayer money to save the company, Mr. Wagoner, has been fired. His approach continued to be pushing the same old Success Formula that is so obviously out of step with current market needs. So the banker of last resort asked for him to leave. Which is not so out of the ordinary. Any executive that would ask for investment in the dire straights of GM would expect the investors to make changes in the executive suite. It happens all the time. But the problem seems to be that after pushing Mr. Wagoner out, the U.S. government representatives as bankers haven't proposed a new slate.
The only way to "save" GM will require a wholesale restructuring of the company. Never have so many forces worked so hard to preserve an out of date Success Formula – from management to unions to vendors. It will take somebody of great will, and uncommon acumen, to kill off Chevrolet and the out-of-date parts of GM that simply have no future value. Because now, even more than in the 1980s, what GM needs is an enormous Disruption. Something that will cause the company, from the executive suite to the factory floor, to stop and say "wow, things really are going to be different around here." Only after that sort of Disruption will White Space be able to develop a new future for GM. As we've already seen, trying to do "more of the same" without an enormous Disruption will not save GM - in fact will not even substantially change it.
by Adam Hartung | Apr 9, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in, Web/Tech
$193billion dollars. An amount that seems only viable for governments to discuss. But that is how much the value of Sun Microsystems declined in less than one decade (see chart here). At the height of its dominance as a supplier to telecom companies in the 1990s Sun was worth over $200billion. Recently IBM made an offer at just under $8billion. But Sun has rejected the IBM bid, which was more than double its recent market value, and Sun is now worth only about 60% of the bid. An amazing loss of value for a company that never paid a dividend. And the failure can be tied to a single problem.
Forbes magazine is having a field day with the leadership at Sun these days. "Sun May Be Pulling a Yahoo!" the magazine exclamed on Monday when Sun said it was turning down the IBM offer. The similarity is that both companies turned down values at above market price, but both probably won't receive offers from anyone else. The difference, however, is that Yahoo! has a chance to compete with Google, and Microsoft would have suffocated those chances. Sun, on the other hand, won't survive and the only way investors will get any value is if Sun agrees to the buyout.
Reinforcing the thinking that Sun won't make it on its own, Forbes today led with "Sun's Six Biggest Mistakes" which decries recent (last 4 years) tactical failings of the company. But in truth, Sun was destined to fail 8 years ago – as I argued clearly in my book Create Marketplace Disruption (buy a copy from my blog or at Amazon.com.) The company never overcame Lock-in to its initial Success Formula, and when its market shifted in 2000 the company went into a nosedive from which no tactical changes could save it.
Scott McNealy was the patriarch of Sun Microsystems. Son of an auto executive, he had a love for "big iron" as he called the large, robust American cars of the 50s, 60s and 70s. And when he started Sun Microsystems he imbued it with an identity for "big iron." Mr. McNealy wasn't interested in creating a software company, he wanted to sell hardware – like the days when computing was all about big mainframe machines. His might be smaller and cheaper than mainframes, but the identity of Sun was clearly tied to selling boxes that were powerful, and expensive.
Everything about the company's development linked to this identity (see the book for details). The company strategy was tied to being a leader in selling hardware systems. First powerful desktop systems but increasingly powerful network servers. Iron that would replace mainframes and extend computing power to challenge supercomputers. All tactics, from R&D to manufacturing and sales tied to this Identity. And because the products were good, and met a market need in the 80s and 90s, this Success Formula flourished and reinforced the Identity.
A lot of new products came out of Sun Microsystems. They were an early leader in RISC chips to drive faster processing. And faster memory schemes and disk array technology. These reinforced the sale of hardware systems. The company also extended the capabilities of Unix software, but of course you could only buy this enhanced system if you bought one of their computers. Sun even invented Java, a major advancement for internet applications. But then they gave away this software because it didn't reinforce the sale of their hardware. Sun felt that if everyone used Java it would generally grow internet ue, which would grow server demand, which would help them sell more server hardware – so don't even bother trying to build a software sales capability. That did not reinforce the Identity, so it wasn't part of the Success Formula. Everything leadership and the company did was focused on its core – Defending and Extending the sales of Unix Workstations and Servers. It's hedgehog concept was to be the world's best at this, and it was. Sun intended to Defend & Extend that Identity and its Success Formula at all costs.
But then the market shifted. The telecom companies over-invested in infrastructure, and their demand for Sun hardware fell dramatically. Workstations based on PC technology caught up with Sun hardware for many applications, rendering the Sun workstations overpriced. Makers of PC servers developed advancements making their servers faster, and considerably cheaper, meaning Sun servers weren't required or were overpriced for company applications. Within 2 years, the market had shifted away from needing all those Sun boxes, causing Sun sales and market value to collapse.
Sun made one mistake. It never addressed the potential for a market shift that could obsolete its Success Formula. Sun never challenged its Identity. Sun leaders never developed scenarios that envisioned solutions other than an extended Sun leadership position. They only looked at competitors they met originally (such as DEC and SGI) and when they beat those competitors leadership quit obsessing about new comers, causing them to miss the shift to lower price platforms. Although Scott McNealy was an outrageous sort of character, he created lots of disturbance in Sun without creating any Disruption. People felt the heat of his presence, but there was no tolerance for anyone who would shed light on market changes (especially after Ed Zander was installed as COO). Nobody challenged the Success Formula. Nobody in leadership was allowed to consider Sun doing something different – like selling software profitably. And thus, there was no White Space in Sun. No place to with permission to do new things, and no resources to do anything but promote "big iron."
When any company remains tied to its Identity and its Lock-in failure will eventually happen. Markets shift. Then, all the tactical efforts in the world are insufficient. It takes a new Success Formula – maybe even an entirely new identity. Like Virgin becoming an airline rather than a record company. Or Singer a defense contractor rather than a sewing machine company. Or maybe something as simple as GE becoming something besides a light bulb and electric generation company – getting into locomotives and jet engines. The one big mistake made by Sun can be made by anyone. To remain Locked-in too long and let market shifts destroy your value.
by Adam Hartung | Apr 7, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Innovation, Leadership, Lock-in, Science
"GM, Segway unveil Puma urban vehicle" headlines Marketwatch.com. The Puma is an enlarged Segway that can hold 2 people in a sitting position. Both companies are hoping this promotion will create excitement for the not-yet-released product, thus generating a more positive opinion of both companies and establish early demand. Unfortunately, the product isn't anything at all like the iPod and the comparison is way off the mark.
The iPod when released with the iTunes was a disruptive innovation which allowed customers to completely change how they acquired, maintained and managed their access to music. Instead of purchasing entire CDs, people could acquire one song at a time. You no longer needed special media readers, because the tunes could be heard on any MP3 device. And your access was immediate, from the download, without going to a store or waiting for physical delivery. People that had not been music collectors could become collectors far cheaper, and acquire only exactly what they wanted, and listen to the music in their own designed order, or choose random delivery. The source of music changed, the acquisition process changed, the collection management changed, the storage of a collection changed – it changed just about everything about how you acquired and interacted with music. It was not a sustaining innovation, it was disruptive, and it commercialized a movement which had already achieved high interest via Napster. The iPod/iTunes business put Apple into the lead in an industry long dominated by other companies (such as Sony) by bringing in new users and building a loyal following.
Unfortunately, increasing the size of a product that has not yet demonstrated customer efficacy, economic viability or developed a strong following and trying to sell it through an existing distribution system that has long been decried as uneconomic and displeasing to customers is not an iPod experience. And that is what this GM/Segway announcement is trying to do.
Despite all the publicity when it was first announced, the Segway has not developed a strong following. After 7 years of intense marketing, and lots of looks, Segway has sold only 60,000 units globally – a fraction of competitive product such as bicycles, motorized scooters, motorcycles and mass transit. Segway has not "jumped into the lead" in any segment of transportation. It has yet to develop a single dominant application, or a loyal group of followers. The product achieves a smattering of sales, but the vast majority of observers simply say "why?" and comment on the high price. Segway has never come close to achieving the goals of its inventor or its investors.
This product announcement gives us more of the same from Segway. It's the same product, just bigger. We are given precious little information about why someone would own one, other than it supposedly travels 35 miles on $.35 of electricity. But how fast it goes, how long to recharge, how comfortable the ride, whether it can carry anything with you, how it behaves in foul weather, why you should choose it over a Nano from Tata or another small car, or a motorscooter or motorcycle — these are all open items not addressed.
And worse, the product isn't being launched in White Space to answer these questions and build a market. Instead, the announcement says it will be sold through GM dealers. This simply ignores answering why any GM dealer would ever want to sell the thing – given its likely price point, margin, use – why would a dealer want to sell Puma/Segways instead of more expensive, capable and higher margin cars?
Great White Space projects are created by looking into the future and identifying scenarios where this project – its use – can be a BIG winner that will attract large volumes of customers. Second, it addresses competitive lock-ins and creates advantages that don't currently exist and otherwise would not exist. Thirdly, it Disrupts the marketplace as a game changer by bringing in new users that otherwise are out of the market. And fourth it has permission to try anything and everything in the market to create a new Success Formula to which the company can migrate for rapid growth.
This project does none of that. It's use is as unclear as the original Segway, and the scenario in which this would ever be anything other than a novelty for perfect weather inner-city upscale locations is totally unclear. This product captures all the current Lock-ins of the companies involved – trying to Defend & Extend one's technology base and the other's distribution system – rather than build anything new. The product appears simply to be inferior in almost all regards to competitive products, with no description of why it is a game changer to other forms of transportation. And the project is starting with most important decisions pre-announced – rather than permission to try new things. And there is absolutely no statement of how this project will be resourced or funded – by two companies that are both in terrible financial shape.
The iPod and iTunes are brands that turned around Apple. They are role models for how to use Disruptive innovation to resurrect a troubled company. It's really unfortunate to see such wonderful brand names abused by two poorly performing companies without a clue of how to manage innovation. The biggest value of this announcement is it shows just how poorly managed Segway has been – given that it's partnering with a company that is destined to be the biggest bankruptcy ever in history, and known for its inability to understand customer needs and respond effectively.
by Adam Hartung | Apr 6, 2009 | Uncategorized
January 7, 2010
Young President’s Organization (YPO) Annual Conference, Denver
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by Adam Hartung | Apr 5, 2009 | Uncategorized
Michael Porter wrote a famous book in 1980 on strategy called, befittingly, Competitive Strategy. His doctoral work at Harvard had shown him that in an industrial market, you could map out the power a company has – and from that imply its future profitability. Famous from this book was his "5 Forces" model in which companies could compare the relative strength of customers, suppliers, substitutes and potential entrants with traditional competitor rivalry to ascertain attractiveness. An outcome of his late 1970s analysis was that if you are really strong, you can control the behavior of the other forces to dictate your profitability. This was all pre-internet, pre-information economy.
Today (Sunday) my wife was fit to be tied (an old midwestern phrase) when she opened the Chicago Tribune and couldn't find a television schedule. She's not much of a newspaper reader, primarily just the Sunday ads and the TV schedule. When she couldn't find the TV schedule, she called the newspaper to ask for another copy. But the automated response at the Trib said not to leave a message if you're calling about the TV schedule, because it was now being printed in the Saturday edition. As you might guess, we don't take Saturday because we don't have time to read newspapers any more. Her reaction was simple "I get most of these ads delivered in the mailbox now during the week. If we don't get the TV schedule, we might as well cancel the paper altogether."
This, of course, is not the reaction Sam Zell and his management team at Tribune Corporation are expecting. They think their last remaining competitor, Sun Times Corp., is most likely going to fold now that it's filed bankruptcy and seems drowned in red ink. Following Porter's nearly 30 year old approach, they think they have little competition and no threat of new newspaper entrant – so they'll simply "force" readers to buy Saturday if they want the TV schedule.
But they are wrong, of course. Just like every other action they've taken since Zell overleveraged the corporation in his buy-out, they continue to ignore that the internet exists. As I pointed out to my wife, we can easily bookmark several locations to identify our local programming – including a nice layout at USAToday.com.
In an industrial economy, many leaders came to believe that they could erect entry barriers which allowed them great power to run their business for high profits. At newspapers, many felt that by being the only (or largest) local paper they had a "moat" around their business guaranteeing profits. They felt comfortable they could raise rates on advertising, and classified ads for those looking to find new hires or sell a used car. But of course they missed the fact that advertisers could go to the web to find customers. And that it was a lot cheaper to use Monster.com, Vehix.com or Craig's List than a local classified ad. So now Zell's team is trying to use his "relative strength" to push his subscribers into behavior they have avoided – buying a Saturday paper. And, again, the team has forgotten that in an internet-connected world customers have lots of options, and given a push they'll go look for other solutions.
The folks at Tribune Corporation made a big mistake by over-leveraging their acquisition. And they worsened that mistake by trying to use 1980s strategy post-2000. I recently emailed books editor Julia Keller with a recommendation for promoting book reading more strongly in her Sunday "Lit Life" column. She responded by upbraiding me for having the temerity to offer an idea to her – and concluded by challenging not only my intelligence but my own reading ability – then telling me to subscribe to the Saturday edition so I'd stop being such a luddite. My son wrote to the Trib's Sunday auto reviewer Jim Mateja with some insights he had about hybrids as a 21 year old, and Mr. Mateja responded that since he was only 21 he wasn't old enough to have common sense, and certainly no insights a serious auto reviewer or auto executive should consider. Bullying customers seems to have become commonplace around The Chicago Tribune.
When business conditions turn poorly it's very easy to focus on Defending & Extending what worked in the past. It's natural to turn against those who complain, and seek out your most loyal customers for reinforcement that you're Success Formula need not change. It's not uncommon to "write off" customers that walk away from you, saying they are no longer in your market target or niche. It's likely you'll turn to management practices that might have worked 3 decades ago (think about GM as well as newspapers). It's comfortable to turn to your "hedgehog concept" and try to do more of what you know how to do, primarily because you know how to do it and are good at it.
But you can't bully customers. Today, more than ever, substitutes and new entrants are no further than a Google search. Markets aren't as neatly and tightly defined as they were in 1980. When you see results slip, you can't try to force them back up by bullying vendors either. You have to align with market needs – with the direction markets are headed. You have to look into the future to see what customers will value, and do the Google search yourself to identify alternative competitors you need to beat. The Chicago Tribune could do a lot more to make its business valuable to people in Chicago and beyond. A little White Space could go a long way. Unfortunately, management appears intent on being the first major market newspaper to really fail – and folks in Chicago as well as L.A. (Tribune Corp. also owns The Los Angeles Times) may find themselves first on the curve to using web media exclusively.
