by Adam Hartung | Mar 10, 2009 | Current Affairs, Disruptions, General, Innovation, Leadership, Lock-in
Those of you who follow my blog should have noticed a new look and feel today! If you receive this missive in your email box via an RSS feed, I encourage you to stop by www.ThePhoenixPrinciple.com to see the new look.
As most of you know, I'm quite serious about helping organizations realize that they all can rejuvenate. It's a mission I started in 2004, and devoted my life to in 2007 when I started writing Create Marketplace Disruption. And now, in the midst of this terrible recession, it is clearer than ever that we need to realize that different phases of the lifecycle take different management approaches. And for most companies today, old fashioned notions of "focus" and "hard work" simply won't pull them out of this recession and toward better returns.
So I've rededicated myself to this mission. And part of that rededication is hiring some professional help with this website! Thanks to Public Words for the new design – and this is just a small part of what they will be doing to help me over the next year to increase the awareness of this mission and expand the base of people who want to help their organizations recharge, reignite and regrow! I'm also spending more time public speaking to companies, leadership teams, industry events and multi-company conferences about what we need to do so we can get back to growing! (If you know of groups, please let them know how The Phoenix Principle and Adam Hartung can help them get growing again.)
So, let me know what you think of the new look and feel! Your comments can help the site be more productive for us all. If you want things added, speak up! I read all comments, whether here or emailed my way, and my new team will consider them all. In addition to the look and feel, please offer your ideas for how I can drive more links, and attract more readers to our mission. Some of you offered great ideas recently (special kudo to reader Bob Morris for his insightful recommendations) about how to better use tags, technoroti tags and trackbacks. Please keep telling me places I need to link, and other things which can help grow readership. Your help in spreading the word is greatly appreciated.
Also, if you haven't noticed I'm not twittering. So you all are invited to reach out to me on Twitter – there's even a link to twitter me on the blog now! I'll be getting my facebook page up soon as well.
I read a fascinating report published today you can dowload from Bank of America claiming that this recession actually began in 2000 – and we're somewhere between 60% and 70% of the way through. Real estate could decline another 15%, and the big equity averages may drop another 20-40%! Whether that's true, or maybe we're closer to "the bottom", for most of our organizations to be prosperous again will take a different approach to management. One that overcomes Lock-in to outdated Success Formulas (often created in a previous industrial era) by obsessing about competitors to learn about market trends, never fearing disruption – internal or in the marketplace – and utilizing White Space to test new business ideas which can create better, higher return Success Formulas that fit newly evolved markets.
"Hiring Plans or Firing Plans" is the headline on Marketwatch.com. Previously, the lowest number achieved for "net hiring plans" was in 1982 when a net 1% of firms were planning to hire. But in the entire 47 years of the Manpower hiring survey (since 1962) never was the index a negative – where more firms plan to lay off than hire!!! That was until now, with the index at -1%. Just one year ago the number was +17%! (Find the complete Manpower Employment Outlook Survey at this link to their site.) More of the same "ain't going to cut it". Instead of looking for reasons to lay off workers, we have to realize that there are a lot of reasons to hire more! If we follow the right management principles – The Phoenix Principle – we can get going again! If we encourage Disruption and keep White Space alive we can continue to grow!
A past client of mine recently discovered a way to introduce a new line of products with 80% less development cost. But the new product is being delayed because the CEO feels he must lay off workers and slow down product launches – due to what he's reading about the economy. The CEO is afraid that a new product launch, which would cement the company's #1 position ahead of competitors gnawing at their position the last 4 years, would be a tough sell to the Board of Directors. The CEO is clearly focusing on the wrong thing – because his Board would be happier with growing sales and profits, and a reinforced #1 market position, than anything else! Especially now! But this company is almost afraid to grow, locked in fear of what to do next. Instead of reallocating resources to growth projects, and jettisoning "sacred cow" products that are low-profit and declining in sales volume, management prefers to follow today's popular wisdom of cutting costs, cutting new product introductions, even cutting revenues by sticking with historical products nobody is buying - so that's what they will do!!!
So, please be a part of this journey. Participate, don't just be a spectator. Provide your feedback and comments. And share the word! Nothing is more valuable than debate. Great ideas are developed in the marketplace, not in someone's head! Pass along the message, and get others involved.
This blog can now be reached directly via:
by Adam Hartung | Mar 9, 2009 | Current Affairs, Defend & Extend, General, In the Rapids, In the Swamp, In the Whirlpool, Innovation, Science
The headlines scream for an answer to when markets will bottom (see Marketwatch.com article from headline "10 signs of a Floor" here) . But for Phoenix Principle investors, that question isn't even material. Who cares what happens to the S&P 500 – you want investments that will go up in value — and there are investments in all markets that go up in value. And not just because we expect some "greater fool" to bail us out of bad investments. Phoenix Principle investors put their money into opportunities which will meet future needs at competitive prices, thus growing, while returning above average rates of return. It really is that simple. (Of course, you have to be sure that other investors haven't bid up the growth opportunity to where it greatly exceeds its future value — like happened with internet stocks in the late 1990s. But today, overbidding that drives up values isn't exactly the problem.)
People get all tied up in "what will the market do?" As an investor, you need to care about the individual business. For years that was how people invested, by focusing on companies. But then clever economists said that as long as markets went up, investors were better off to just buy a group of stocks – an average such as the S&P 500 or Dow Jones Industrials. These same historians said don't bother to "time" your investments at all, just keep on buying some collection (some average) quarter after quarter and you'll do OK. We still hear investment apologists make this same argument. But stocks haven't been going up – and who knows when these "averages" will start going up again? Just ask investors in Japan, where they are still waiting for the averages to return to 1980s levels so they can hope to break even (after 20 years!). These historians, who use the past as their barometer, somehow forgot that consistent and common growth was a requirement to constantly investing in averages.
When the 2008 market shift happened, it changed the foundation upon which "constantly keep buying, don't time investing, it all works out in the end" was based. Those days may return – but we don't know when, if at all. Investors today have to return to the real cornerstone of investing – putting your money into investments which will give people what they want in the future.
Regardless of the "averages," businesses that are positioned to deliver on customer needs in future years will do well. If today the value of Google is down because CEO Eric Schmidt says the company won't return to old growth rates again until 2010, investors should see this as a time to purchase because short-term considerations are outweighing long-term value creation. Do you really believe internet ad-supported free search and paid search are low-growth global businesses? Do you really believe that short-term U.S. on-line advertising trends will remain at current rates, globally, for even 2 full years? Do you think Google will not make money on mobile phones and connectivity in the future? Do you think the market won't keep moving toward highly portable devices for computing answers, like the Apple iPhone, and away from big boxes like PCs?
When evaluating a business the big questions must be "is this company well positioned for most future scenarios? Are they developing robust scenarios of the future where they can compete? Are they obsessing about competitors, especially fringe competitors? Are they willing to be Disruptive? Do they show White Space to try new things?" If the answer to these questions is yes, then you should be considering these as good investments. Regardless of the number on the S&P 500. Look at companies that demonstrate these skills – Johnson & Johnson, Cisco Systems, Apple, Virgin, Nike, and G.E. – and you can start to assess whether they will in the future earn a high rate of return on their assets. These companies have demonstrated that even when people lose jobs and incomes shrink and trade barriers rise, they know how to use scenario planning, competitor obsession, disruptions and white space to grow revenue and profits.
You should not buy a company just because it "looks cheap." All companies look cheap just prior to failing. You could have been a buyer of cheap stock in Polaroid when 24 hour kiosks (not even digital photography yet) made the company's products obsolete. Just because a business met customer needs well in the past does not mean it will ever do so again. Like Sears. Or increasingly Motorola. Or G.M. These companies aren't focused on innovation for future customer needs, they prefer to ignore competitors, they hate disruptions and they refuse to implement White Space to learn. So why would you ever expect them to have a high future value?
Why did recent prices of real estate go up in California, New York, Massachusetts and Florida faster than in Detroit? People want to live and work there more than southeastern Michigan. For a whole raft of reasons. In 1920 the price of a home in Iowa or Kansas was worth more than in California. Why? Because an agrarian economy favored the earth-rich heartland over parched California. In the robust industrial age from 1940 to 1960, the value of real estate in Detroit, Chicago, Akron and Pittsburgh was far higher than San Francisco or Los Angeles. But in an information economy, the economics are different – and today (even after big price declines) California homes are worth multiples of Iowa homes. And, as we move further into the information economy, manufacturing centers (largely on big bodies of water in cool climates) have declining value. The market has shifted, and real estate values reflect the shift. Unless you know of some reason for lots (like millions) of health care or tech jobs to develop in Detroit, the region is highly over-built — even if homes are selling for fractions of former values.
We seem to have forgotten that to make high rates of return, we all have to be "market timers" and "investment pickers." Especially when markets shift. Because not everyone survives!!!!! All those platitudes about buying into market averages only works in nice, orderly markets with limited competition and growth. But when things shift – if you're in the wrong place you can get wiped out!! When the market shifted from agrarian to industrial in the 1920s and '30s my father was extremely proud that he became a teacher and stayed in Oklahoma (though the dust storms and all). But, by the 1970s it was clear that if he'd moved to California and bought a house in Palo Alto his net worth would have been many multiples higher. The same is true for stock investments. You can keep holding on to G.M., Citibank and other great companies of the past — or you can admit shift happened and invest in those companies likely to be leaders in the information-based economy of the next 30 years!
by Adam Hartung | Mar 6, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
"U.S. Unemployment Rate Jumps to 25 Year High" is Crain's headline today (see article here). "Payrolls sink 651,000; jobless rate soars to 8.1%" headlines MarketWatch (see article here). It's the fourth consecutive month job losses exceeded 600,000 we are reminded, as 4.4 million becomes the latest tally of those losing jobs in this recession. Those unemployed plus those with part-time-only work has risen to 14.8% of the population – a number that the labor department says may reach 1930s proportions. There are fewer people working full time in the USA today than in 2000 – a combination of the "jobless recovery" followed by a whopping recession.
I remember 25 years ago when the unemployement numbers were this high. I was graduating business school, and there was a real fear that not all graduates would find a job (a horrible situation at a place like HBS). The economy was in terrible shape after several years of economy micro-rule under President Carter. A stickler for detail, and a workaholic, Carter had implemented complex regulations to control prices of oil and other energy products, as well as most agricultural products and commodities. The oil price shocks, combined with runaway printing of money by a highly accomodative Federal Reserve during the 1970s, had sent the American economy into "stag-flation" where growth was abysmal and inflation had skyrocketed.
In 1982, things didn't look good. And the Reagan-led republicans introduced an amazing set of recommendations to break out of the rut America's economy was in. A bold experiment was set up, to test whether "supply siders" were right and if we put our resources into creating supply (capacity) would demand follow and drive up the economy. The big test was a combination of historical tax cuts combined with increased federal spending on defense projects run by industry (in other words, changing from giving money directly to people through welfare or government jobs and instead giving money to businesses to build things – infrastructure and military.)
No one knew if it would work. Smaller government and lower taxes had been a political mantra for various political parties since the days of Benjamin Franklin. But what most Americans believed when they elected Ronald Reagan was that what had recently been tried was not working – it was time to try some new things.
Today is 2009, and while unemployment rates may look similar – not much else is like 1982. Then, marginal federal income tax rates were 80%, and most states relied heavily on "revenue sharing" money from the feds back into states to pay for many progroms – like roads and schools. Today, top rates are in the low 30s, and states have jacked up (from 2x to 10x) sales taxes, property taxes and even state income taxes to cover the loss of federal dollars. Interest rates on home mortgages were 14% to 18% in 1982 – and that was on a variable rate loan with 20% down – because you couldn't get a bank to offer a 30 year mortgage (for fear of inflaction wiping out the loan's value) and no one offered low-downpayment loans. There was a housing shortage, but people struggled to afford a home with interest rates that high! And materials cost (due to inflation) was driving up construction costs more than 12-15%/year. Today mortgages are available at 5% fixed for 30 years, and the prices of homes are dropping more than 10% annually while empty properties seem to be everywhere begging for buyers at discounted prices.
The signs of an impending collapse have been pretty clear for the last few years. First, there was the "jobless recovery." While the economists kept saying the economy was doing well, the fact that there were no new jobs was quite obvious to a lot of people. There was even considerable surprise at how robust the economy was, given that it had no job creation. But it didn't take long for several economists to recognize that the source of growth was largely a considerably more indebted consumer. From the government (federal, state or municipality) to the individual. Those who did have jobs were taking advantage of low interest rates to purchase. On metrics debt/person, debt/GDP, debt/earnings dollars, debt/payroll dollars were all hitting record high numbers as lower quality debt (lower quality because there was increasingly less earnings behind each loan) provided the economic fuel. The economic research team at no less a conservative stalwart than Merrill Lynch was predicting as early as 2006 big problems – and a revisting of 650 on the S&P 500.
Although the economy in 2005-2007 looked nothing like that of the late 1970s, it was pretty clear that a declining economy and high unemployment were soon to come. The 1980s solution, which unleashed the longest running bull market in history, dealt with the problems of the 1970s. But, as the decades passed increasingly the 1980 tools had less and less impact on sustaining growth. Cutting marginal tax rates on dividends when marginal rates on income is already at 30% has far less impact than halving tax rates on everyone! Lowering SEC regulations on capital market access for new hedge funds has less impact than deregulating pricing and labor costs for whole industries like airlines and trucking! What worked well in the past, and became Locked-in to the American economy, simply had lower marginal impact. Year after year of Lock-in produced weaker and weaker results. And opened the doors for aggressive competitors to copy those practices unleashing prodiguous competition for American companies – in places like Asia, India and South America.
All Locked-in systems become victim to these declining results. It's not that the ideas are bad, they just get copied and executed by aggressive competitors who catch up. Markets shift and needs change. People that once focused on buying a new car start focusing on how to retire. People that once wanted great schools want better parking. People that wanted cheaper and better restaurants want cheaper and better health care. The old approaches aren't bad, but trying to do more, better, faster, cheaper of the same thing simply has declining marginal benefit. Results slowly start declining, until eventually they fail to respond to old efforts at all.
Comparing our unemployment rate today to that in 1982 is an interesting historical exercise. We can see similar outcomes. And what's similar about the cause is that Lock-in to outdated practices led to declining performance. That the practices were about 180 degrees apart isn't the issue. Debating the merits of the practices in a vacuum – as if only one set of practices can ever work – simply ignores the pasasage of time and the fact that different times create different problems and require different solutions. The successful practices that fired a tremendously successful business community and stock market in the 1960s ran out of gas by the 1980s. Now, the practices of the 1980s have run out of gas in the competitive global economy of 2009. In both instances, those leading the economy – the companies, economists, banks, regulators – stayed too long with a set of Locked-in practices.
Today we need new ideas. To overcome rising unemployment requires we look to the future, not the past for our recommendations. We must start obsessing about competitors in China, Hong Kong, Singapore, Brazil, Argentina, Sri Lanka, Thailand and India – competitors we belittled and ignored for too long. We must be willing to Disrupt old practices to try new things – and use White Space to experiment. The Missile Defense Shield (mid-80s) turned out to be a project that wasn't appropriate for its time – but that we tried it gave a shot in the arm to all kinds of imaging and computing technologies which helped improve business. Those kinds of experiments are critical to figuring out how we will create jobs and economic growth in a fiercely competitive global economy where value is increasingly based on information (and neither land nor fixed assets - which dominated the last 2 long waves of growth for America).
by Adam Hartung | Mar 5, 2009 | Investing, Trends, Uncategorized
I've never met anyone who says they speculate in the stock market. My colleagues always say they are investors; people who know what they were doing and savvy about the market. But, reality is that most people speculate. Because they don't invest on underlying business value. Instead, they rely on words from "gurus" and follow trends. That, unfortunately, is speculating.
Back on 12/21/08 (just a couple of months ago) the DJIA was at 8960, the S&P 918. Looking at The Chicago Tribune for that day, the primary recommendation by analysts for 2009 was "Keep an eye on long-term horizons" and "weather out the storm". The markets were down, but don't panic. Famed investment maven Elaine Garzarelli recommended if you had $10k in cash to invest $2k in tech stocks, $2k in Citigroup Preferred, $2k in GE and $2k in an income-oriented fund. Then put $2k into a short fund to hedge your risks! She couldn't have been more dead wrong on the only two named companies – GE and C. Both are at modern, or all time, lows. Don Phillip, managing director at Morningstar, recommended investing all $10K in equities because "they've taken an unprecedented hit and are very cheap."
When you hear investment gurus, on TV or elsewhere, tell you to "stay the course, the market always recovers" they are basing their opinions on history – not the future. This isn't last year, or the last recession, or the last economy. Will all economies eventually recover? Maybe not. Will the U.S. economy recover in your lifetime? Not assured – Japan has been in a recession for over a decade! Does that mean American companies will be the ones to lead the world in the next upmarket? Not assured. These "gurus" have been dead wrong for almost a year – and at the most important time in your investment history. If they were so wrong for the last year, why are they still on TV? Why are you listening?
In the short term, stock markets are driven by momentum. When most people are buying, the markets keep going up. Even for individual stocks. Sears had no reason to go up in value after being acquired by Ed Lampert's KMart corporation. Sears and Kmart were overleveraged, earning below-market rates of return, and with assets that had long lost their luster. But because Jim Cramer of CNBC Mad Money fame knew and liked Mr. Lampert he kept talking up the stock. Other hedge fund operators thought Mr. Lampert had been clever in the past, so they guessed he knew something they didn't and they speculated in his investment. The value went up 10x – and then came down 90%. Wild ride – but in the history of markets unless you are a speculator, you should never have invested in Sears. When you hear "don't be a market timer" remember that the only way to make money in Sears was to be a market timer – you had to buy and sell at the right time because the company wasn't able to increase its value. Sears' Success Formula was out of date, and there was no sign of a plan for the future, nor obsession about market changes and competitors, nor willingness to Disrupt old behaviors nor White Space. From the beginning this was a bad investment, and it has remained that way.
Today the market remains driven by momentum. Who wants to say they are buying stocks when the major averages keep falling? What CEO wants to say he's optimistic when it's popular to present "caution"? Who wants to discuss opportunities for markets in 2015 being 3x bigger when right now demand for industrial products like cars is down 20-40%? When momentum is up, you can't find a pessimistic CEO. Nor a pessimistic investor. So the likewise is equally true.
Reality is that there are good investments today, and bad. If a business is firmly locked into the industrial economy, such as GM and Ford, making the same products in much the same way to sell to pretty much the same customers, but with new competitors entering from all around - those companies are not good investments. Regardless of the rate of economic growth or debt availability. Their Lock-in to outdated Success Formulas means that their rates of return will not improve, even if overall economic growth does. Markets have shifted, and keep shifting. Businesses that were not profitable in the old market aren't going to suddenly be better competitors in a future market. Just the opposite is more likely. Even if they survive in a foxhole for a year or two, when they come out the market will be filled with new competitors just as vicious as the old ones.
But there are businesses positioning themselves for the markets of tomorrow. Apple with its iPod, iTunes, iPhone is an example. Google with its near monopoly on internet ad placement and management as well as search. And companies that are moving toward new markets rather than remaining frozen in the old model and exacerbating weaknesses with cost cutting. Like Domino's pizza.
GM will never again be a great car company. So what's new? That was clear in 1980 when Chairman Roger Smith said the company had a limited future in autos operating as it always had. That doesn't mean GM couldn't again be a growing, healthy company if new management sent the company in search of new markets with growth opportunities. Like Singer getting out of sewing machines to be a defense contractor in the 1980s. By purchasing an old-fashioned mortgage bank, and an old fashioned investment bank/retail brokerage, Bank of America is not strengthening its position for future markets. Instead, it is fighting the last war. But any company can change its competitive position if it chooses to focus on, and invest in, new markets. And those who do it NOW will be first into the new markets and able to change competitive position. When markets shift, those who move to the new competitiveness first gain the advantage. And their position is reinforced by competitors who dive for cover through cost cuts not tied to business repositioning.
Why is GM still on the DJIA? They should have been removed years ago. That's how the Dow intelligentsia keeps the average always going up – by taking off companies like Sears and replacing them with companies that are more closely linked to where markets are going (at the time, Home Depot). If we swapped out GM for Google, and Kraft for Apple, the numbers on the DJIA would be considerably better than we see today. And if you want to make money as an investor, you have to do the same thing. You have to dump companies that are unwilling to break out of Lock-in to outdated business models and invest in companies who are heading full force into future markets. In all markets there are good investments. But you have to find the companies that plan for the future, not the past – obsess about competitors – are not afraid to Disrupt themselves and markets – and utilize White Space to test new products and services that can create growth no matter what the economy.
by Adam Hartung | Mar 4, 2009 | Current Affairs, In the Rapids, Innovation, Openness, Web/Tech
I teach college classes on innovation, as well as speak regularly on the topic. And I am frequenty asked how to determine whether new products are sustaining innovations, or disruptive ones. In 2008, the most common product I was asked about was the iPhone. To me the answer was obvious. As a phone, the iPhone was sustaining. But, as a new platform from which to do a multitude of things that went way, way beyond phone use it had the potential to be very Disruptive. For those reasons, it's initial (if expensive) ability to be sustaining, coupled with it's long-term potential to be Disruptive (and therefore wildly inexpensive), made iPhone look like an easy product to introduce yet really important as time and applications progressed. It was easy to predict the iPhone as a product that would make a big difference in the marketplace.
So far, I've not been disappointed. Today, Apple announced an iPhone application allowing it to behave like a Kindle (read article here). The Amazon.com launched Kindle was the most successful new product of 2007 and 2008 Christmas seasons, selling out production and selling in greater volumes than the initial launch of the iPod. Kindle offers the opportunity to read anything digitally – from the morning newspaper (why have a paper if you can get the info digitally), to magazines to books. Literally thousands of publications and hundreds of thousands of books. When I had to buy a Kindle device to gain this access, I had to deliberate. Yet another device to carry? But now that I can get this "library" access on a device which can also deliver internet access, text messaging, mass messaging on twitter, my PDA services and telephone connectivity — well this is pretty amazing. It keeps demonstrating the iPhone as a device not like any other device in the market — a game changer – that can bring in new users to each of the individual markets it serves by offering such strong cross-market delivery.
Just 3 months ago tech reviewers felt that "netbooks" were the next "hot" item. These downsized, book-sized laptops gave basic computer performance at a very low price. And analysts chided Apple for not participating. Forbes seemed to chide Apple recently with a headline that the company was living in denial (see article here). But a closer read shows that the headline was tongue-in-cheek. Forbes too recognized that Apple has a product in the netbook class – but it does a whole lot more – and its called the iPhone. Meanwhile, Apple doesn't intend to lose value on Macs by chasing downmarket with the larger platform.
I've told many audiences that sustaining innovations – those that do the same thing but a little better – create 67% of incremental revenue. They feel comfortable, and are easy to launch. And because they give revenue a shot, we justify doing more and more of these product variations and simple derivatives. But, disruptive products produce 85% of incremental profits. Variations and derivatives are easy for competitors to knock-off, and their value is short-lived (if they produce any value at all). Disruptive products are hard to imitate, and produce long-term profits. The iPod disrupted the music business, and now years later it still has the #1 market share as an MP3 device (despite a market attack from behemoth Microsoft with Zune) and iTunes remains #1 in music downloads even though Apple produces no music. iPod and Mac make money because they cannot be easily imitated. And the same is proving true for iPhone. It is more than it looks, and it has lots of opportunity to keep growing.
Apple demonstrates every day that even in very tough economic circumstances, if you go to where the market is headed YOU CAN GROW. You don't have to sit back and bemoan the lack of credit or the change in markets. You do need to have a clear view of where markets are headed, with vivid scenarios allowing you to track behavior and target. You also have to be obsessive about competition, and realize you must relentlessly take action to remain in front. And you can't fear Disruption as you use White Space to enter new markets and test new products. That's why Apple stock is flat in 2009, while almost everyone else has gone down in value (see chart here).
by Adam Hartung | Mar 3, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
Sears has been heading for the end of its game for several years. It's in the Whirlpool now, and we can be sure it won't come out. We can go back to when Sears dropped its catalog to see the first sign of putting costs before customers, and completely missing how competitors were changing and leaving Sears without an advantage. But the next big hurt happened when customers found out they could get credit for purchases from banks – via credit cards like MasterCard and Sears – that made it unnecessary to get a line of credit from Sears, or a Sears credit card (which eventually became Discover.) Increasingly, what made Sears stand out became difficult to find. And Sears lost market share year after year to the discounters (KMart, Target and Wal-Mart) as well as lower-priced soft goods retailers (J.C. Penney and Kohl's) and then DIY retailers that offered mowers and tools (Lowe's, Home Depot and Menards).
Why anyone would shop at Sears became a lot less clear – yet Sears kept trying to do more of what it had always done in its effort to stay alive. So hedge-fund jockey Ed Lampert swooped in and bought Sears with lots of hoopla about turning it around. But his approach was to do less of the same, not more, and he had no ideas for how to be more competitive. As he cut inventory, and cut costs, and closed stores it became easier and easier for customers to shop somewhere else. Sears was shrinking, not growing, and all the focus on the bottom line, in an effort to manage earnings rather than the business, just kept making Sears less relevant to customers, investors, vendors and employees.
Sales keep declining – down some 13% in the recent quarter (see article here). Increasingly, Sears is looking for distinction by going further down the credit quality spectrum. It's most promising "bright spot" was an increase in lay-away. Lay-away, for those not accustomed to the concept, is when people who can't get credit at all offer to put down 30-50% of the value of an item (say $100 on a $300 washer) and ask the retailer to hold it (literally, hold it in the back room) until the customer can come up with the rest of the money. Sometimes buyers will come in multiple times dropping off $10 or $20 until they come up with all the money for the washer, or a new suit, or a dress, or some tools. Only people that can't get credit at all buy on lay-away. For retailers it has the downside of increasing inventory as they wait for payment. It's the bottom-of-the-barrel for retailers that can't keep up with merchandise trends, and often requires they raise prices to cover the cost of increased inventory holding.
Increasingly there is little else Sears can do. The company has closed another 28 stores, and sales in stores remaining open the last year have declined on average more than 8% for each store (see article here). Net income has plunged 93%. Five years ago, about when Mr. Lampert took over the company, it was worth just about what it is worth today (see chart here). At that time, investors were thinking Sears (which had recently been de-listed as a Dow Jones Industrial Average component) might not survive. But those investors had a lot of dreams about Mr. Lampert turning around the company. They saw the shares increase 6-fold as analysts talked-up Mr. Lampert and his supposedly "magic touch." But all that value has disappeared. Mr. Lampert would like to blame the economy for his lack of success, but reality is that the economy only made more visible the Lock-in Sears has maintained to its outdated business model and the complete lack of Disruption and White Space Mr. Lampert has allowed during his personal direction of the company. Sears has had no chance of success as long as it remained Locked-in to a retail business model tied to the 1960s. And as retail crashed in 2008/2009 it's made obvious the complete lack of need for Sears to even exist.
Note: I was delighted with responses I received from many readers about their views on newspapers. Mostly folks told me they found the value gone, or dissipating quickly, from newspapers. Although there is still ample concern about where we'll find high-quality journalism once they disappear. Folks seem less confident in broadcast and network television – and wholly uncertain about the quality control of on-line news sources. I think we're all wondering how we'll get good news, and aware that there is bound to be a period of market disruption as the newspapers keep declining. But please keep your eyes open, and let myself and all readers know what quality news sources you find on the web. Keep the comments coming. During these periods is when new competitors lay the groundwork for new fortunes. I'd watch HuffingtonPost.com, and don't lose track of the big on-line investments News Corp. has made.
Likewise, please give me some comments (here on on the blog or via email) about where you are shopping today! Have readers all become Wal-Mart single-stop shoppers? With retail sales numbers down almost everywhere, where do you concentrate your shopping? Are you doing more on-line? Are you finding alternatives you favor during this recession. Let's share some info about what we see as the future of retailing. There are a lot of execs out there that seem in the dark. Maybe we can enlighten them!
by Adam Hartung | Feb 28, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Weblogs
In my last blog I commented about the failure of the newspaper in Denver, and discussed how we'll all have to start relying increasingly on news from additional sources – such as blogs. Then I went on to comment about how easy it is for a business to miss a market shift – just as the newspapers have. They could have invested more in .com sites and bloggers for the last decade – but didn't because they kept thinking their market would return to the old ways of behaving.
I would like YOUR COMMENTS. This blog tends to be my rants about all the things I see wrong in industries and companies – with the occasional catch of someone doing something right. But I would really enjoy hearing more about what all of you think. So, building on the newspaper blog, I would really enjoy having people comment along a couple of tracks:
- How do you get your news? Are you still using newspapers a lot, or not? Do you think newspapers will remain important, or not? If you're starting to use the web more for news – where do you find information that is valuable? Where do you get important news?
- Do you think your business is soft – or do you think perhaps your market is shifting and therefore will require
changes in your Success Formula to be successful in the future? How much of your business issues are due to the market, and how much are do to market shifts? Could you be in the position newspapers were in 2000 without admitting it?
I look forward to hearing from you. Please comment here on the blog, you don't have to register. Or send me your comments via email.
by Adam Hartung | Feb 27, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
The Rocky Mountain News has folded up shop. After 150 years, no more newspaper in Denver, CO. (read article here). This is newsworthy because of the size of Denver, but the trend has been obvious. The newspaper's owner (Scripps) closed the Albuquerque Tribune and Cincinnati Post last year. And this is just the beginning. Hearst has already said it may well have to close the San Francisco Chronicle within weeks. Tribune Company, parent of The Chicago Tribune and Los Angeles Times has filed for bankruptcy, as has Philadelphia Newspapers which publishes the Philadelphia Inquirer and Philadelphia Daily Journal. The American Society of Newspaper Editors has cancelled its annual convention for 2009 (read article here.)
Just as I predicted in this blog months ago, when Sam Zell leveraged up Tribune in his buyout, the odds of any particular newspaper surviving is not very good. It was 3 years ago when I was talking to the CFO at the LATimes about the future of newspapers. He felt sure that cost cutting would get the company through "a tough stretch" and then things would get better. When I asked him if he was planning to increase spending in LATimes.com or other on-line media to make sure his projection was true – he asked me what the .com had to do with the paper. He felt the paper would soon recover. Even though there were no indicators that subscriptions would reverse trend and start growing, and even though advertisers were literally saying they never intended to return on-line ad spending back to newspapers, he felt sure the paper would succeed. When I asked why, he said "if we don't report the news, who will? Bloggers??????" and with that exasperation he reinforced in his own mind that there was no option to a successful city newspaper so no need for further discussion. He could not imagine a "democratized" newsworld without editors and publishers that controlled content and writers that were limited by that control.
February 6 I gave a speech in Chicago about growth strategies in this economy. One attendee asked me "what newspapers do you read?" As I formulated my answer, my discussion with the old LATimes CFO came to mind. "I don't read newspapers any more" I had to admit. Good thing I wasn't running for vice-president! But I realized that I'd quit reading newspapers and now picked up most of my alerts from bloggers! I am signed up to various web sites, including blogs, which send me ticklers all day long and aid my web searching for news. I get more information, faster today than ever before – and reading a newspaper seems like such a waste of time! And if that's my behavior, at age 50, I'm a joke compared to people under 30 who can use the web 10x faster than me with their better tool use.
The newspapers are going the way of magazines. That is clear. When we all started watching TV, LOOK, LIFE and The Saturday Evening Post lost meaning. Not all magazines disappeared, but the general purpose ones did. Now, even those have little value. In a connected, 24×7 world newspapers simply quit making sense a decade ago. It just took longer for everyone to realize it. While the newspapers would like to blame the recession for their failure, that's simply not true. The world shifted and they became obsolete – an anachronism. People today consume more news than at any time in history – including pre-recession years like 2007. The recession has not diminished the demand for news or journalism. And advertisers are reaching out for customers just like before. But neither readers nor advertisers are going to newspapers. The action is now all on the web – which continues growing pages at double digit rates every quarter!
So where will you get your news? If you read this blog, you likely already get most news from the web. And others will also do so. Increasingly, editors that have strong opinions (be they conservative or liberal) will have less influence on what is reported. Those who can find and report the news will themselves determine what's out there to be found – and they will capture that value themselves. To use 1990s language, Bloggers are "disintermediating" publishers. And with Google able to push ads to their sites (be they on computers or handhelds), these journalists will be able to capture the ad value themselves. If you want to see the new aggregator of the future, go to www.HuffingtonPost.com. Or www.Marketwatch.com for business info. By ignoring traditional printing and distribution, they can produce multiples of the news content of old aggregators, invest in technology to keep it updated in real time 24×7.
While people are bemoaning the decline of newspapers, take heart in the benefits. How much less newsprint will be created, reducing the demand for pulp from trees? How much less recycling of old newsprint will be required? What benefits to the ecology will come? How much more access will you have to find out all sides of various issues – rather than the point of view taken by the local newspaper publisher who mostly dictated what you used to hear about an issue? How much better educated will you be? Why, given the benefits of on-line news, would anyone want to go back to newspapers?
Bemoaning the loss of newspapers is like bemoaning the decline in rail travel – it may have romantic remembrances of a previous time, but who would ever want to give up their car and wait on trains again? As you look at YOUR business – do you blame the recession for troubles when in fact there's been a market shift? Have things "softened in the short-term," or have customers moved on to seeking new solutions that better fit their needs? It's easy to act like the LATimes CFO and project a return to old market conditions. But will that really happen? Or has the market you're in shifted, leaving you with a weak future? Will you act like Sam Zell and "double down" on a business that the market is shifting away from?
In today's economy, we can all too easily let hope for a return to the good old days keep us from using more realistic explanations. If so, we can end up like those who made kerosene for lamps (expecting electricity to be too hard to install), coal for heating, and passenger cars for trains. Be careful how easily you may think that tomorrow will look like yesterday – because most of the time it won't.
by Adam Hartung | Feb 24, 2009 | Defend & Extend, Food and Drink, Innovation
Hats off to anybody launching growth projects in this economy. With all the layoffs and other cost cutting, there are far too few companies looking for the opportunities these market shifts are creating. So it's exciting to hear that Panera Bread is testing catering at its 80 Chicago locations (read article here). But we have to wonder, will this generate incremental growth and profits?
The market view is that businesses are doing less dining out for breakfast and lunch meetings. To keep costs down, they would prefer catering food into the office. On the face of this, it's not a bad idea. But of course, lots of people are having this idea today. So Panera is not unique to begin thinking this way. Perhaps we can use The Phoenix Principle to improve our odds of predicting the outcome accurately.
Firstly, Panera is a restaurant. Caterers are not restaurants. If you look at successful caterers you will see they are experts at preparing food in special ways so it is finished, freshly, at the destination. In addition to unique cooking approaches, to make sure food is not prepared too early and becomes unpalatable, they have unique equipment to transport the food in various stages of preparation. And unique equipment to finish the dishes at the location. And their employees are uniquely trained to make sure the on-site meal is the quality desired.
The catering business is not an underserved market, simply waiting for Panera to enter. So, when Panera says it is going to use its 80 area stores to test a higher focus on catering – the odds are it won't work. Becoming a caterer would be a serious disruption to any restaurant business, and to pull it off would require implementing an entirely new operation from which to launch tests – not something run out of the back of the restaurant. We can safely predict that Panera will not become a strong force in catering.
What Panera is much more likely to rapidly evolve to is not something as disruptive as catering. Instead, they will quickly start trying to extend the existing restaurant Success Formula into delivery. Here they will try to make small changes to the products, enhance packaging somewhat, and perhaps add some sort of delivery service. They may well put in place special pricing for delivered orders, and even set up special operations for ordering and scheduling delivery. Thus the activity will be an effort to Defend & Extend the existing Panera restaurant by implementing a sustaining innovation without really disrupting their Lock-ins.
So, will this work? Look again to The Phoenix Principle. The company has seen a new opportunity in the market. That is good. But have they obsessed about competition? Many other restaurants deliver food – from pizza makers to Jimmy John's sandwich shoppes – including dozens of small chanis and thousands of independents restaurants/diners. Even the article quotes the Panera operations V.P. as saying that others such as Chipotle and Boston Market serve the target he's aiming toward. What will make Panera unique? Why will people want to buy Panera? The market is pretty well served. For Panera to succeed they will have to do something MORE than the competition. As a D&E action, they have to somehow be BETTER, FASTER, or CHEAPER.
The Crain's article referenced earlier is precious short on any discussion of competition or value proposition. And the interview didn't give any indication that the company had developed a really powerful competitive message – as much as they had merely identified an opportunity. Without obsessing about competitors, the odds are very small that the project will make much difference.
The Phoenix Principle would predict that this project by Panera will hit the market with a lot of advertising and promotion. But the company will probably under-excite customers, because they aren't really catering as much as delivering (like the named competitors.) When delivering, without a powerful competitive position (MORE, BETTER, FASTER, CHEAPER) we can expect there will be early price offers to incent trial – but then Panera will find this is a very tough business to succeed in. Panera's leaders will likely obsess about execution – but they are facing some competitors that already are pretty good at execution, and have a lot of experience to back up their practices. The odds are high that the cost to then experiment, in order to become competitive, after already spending money on the launch, will seem pretty high – and the whole thing will go into a slow, delayed analysis. Odds of succeeding in a year – about 20%.
I applaud the company for seeking out new markets. But if you're an investor, wait until you see whether they truly intend to Disrupt opeations to enter catering – or if they go into this as a Defend & Extend action. When it becomes the latter, you should expect the cost will not be well repaid, because their ability to beat the competition – which will remain fierce, and reactive to the Panera launch – will not be strong. Thus, not likely to drive much incremental revenue and probably less incremental profit.
Anyone can have a great idea. But to be a successful innovation requires implementation. And Panera doesn't look like they've figured out how critical it is to obsess about competitors BEFORE entering tough markets. Chicago has all the earmarks of an expensive test – where the company may declare victory but which isn't likely to do much for investors, employees or vendors.
by Adam Hartung | Feb 22, 2009 | Uncategorized
The business news in 2009 is about as expected in 2008. The recession is deep, and shows no sign of abating (see news here.) Meanwhile many are disappointed in the extremely expensive stimulus bill passed by Congress, including both democrats and republicans. Television press of all sorts took time to show Rick Santelli, a commodity reporter on CNBC, who "went off" on what he felt were unfairness issues in the administration's mortgage bailout plan (see video clip and read comments on CNBC here.) Amidst a lot of popular hope for a fast set of improvements based on the change in administration, it appears there is little bipartisan behavior and the same old wrangling may jeapardize improvements in other important issues like energy and health care (read article here on political capital and poor bipartisan behavior.)
Unfortunately, all of this has gone pretty much as readers of this blog should have expected. What we know is that to execute a change, you first need a Disruption. Without a Disruption, something that causes people to stop and reassess their position, people will not put much consideration into change and will instead remain Locked-in to past behaviors. So far, there's been no Disruption in Washington D.C.
"What about the dramatic increase in the number of democrat party Congresspeople and Senators, as well as a democrat in the presidency?" you might ask. "Doesn't that constitute a Disruption?" And the answer is no. It represents a Challenge – primarily to republicans. That the market has shifted is clear. But most organizations remain Locked-in despite obvious market shifts. These shifts pose Challenges, and it is up to us to deal with them. But what we know is that most people, and organizations, deal with Challenges by doing more of what they did in the past!! The view is that the Challenge is best dealt with by refocusing on the Success Formula (and the republicans have a strong one that includes tax cuts, lower spending, and social conservatism.) When Challenged, most leaders will behave as if they just need to do more, better, faster (and in business cheaper) Success Formula execution to get back to old results. And that is exactly how republicans are behaving.
Democrats are also reacting from historical Lock-in. The behavior of republicans, to re-exert their Success Formula, has posed a Challenge to democrats. But their response has been to largely continue pushing their party's Success Formula which includes populism, redistributing the tax base, and public spending. The democratic party also keeps doing more of the same, hoping that execution will "convert" some republicans to their behavior by increasing the Challenge republicans face.
This behavior was entirely predictable. Unlike previous Presidents, Barack Obama has entered the office with an effort to move very, very fast. His first major budget proposal went to the Congress in under 1 month from taking office! Compare that to Reagan who did not propose his big tax cuts (although he had talked about the idea in the election) until June! And Kennedy's proposal to dramatically increase NASA and defense spending didn't come until 6 months in office as well.
Both Reagn and Kennedy had time to Disrupt the Congress, and many important government employees, before recommending a bipartisan change. Reagan fired the striking PATCO air traffic controllers. He showed that there was an alternative approach to governing, and even if Congress didn't support him (which the democratic congress did not) he was intent on running the government differently. Firing all the PATCO workers sent a signal no one could ignore, and opened the door for considering 50% tax cuts the likes of which no one had ever tried! Likewise, by blockading Cuba and entering a "stare down" with the Russians over missile bases Kennedy sent a shock through Washington. Even those adamantly opposed to increased spending had to stop and re-think their next steps after the President's actions – and the lack of successful results implementing the old approach in the Bay of Pigs. Both of these Presidents took action that Disrupted Washington enough that it created the opportunity for doing new things.
President Obama has a powerful agenda. He takes office at a very troubling time. No one thinks doing nothing will work. But getting bipartisan agreement on any plan will not happen without a Disruption. President Clinton in his early Presidency fired the travel office and implemented a "don't ask, don't tell" policy regarding gays in the military. These actions did not Disrupt Washington. People did not think these constituted a need to change their approach to governing. And he struggled to get bipartisan backing. His best success happened after the bombing of the federal building in Oklahoma City, but as that never led to Disruption in the policy apparatus, quickly he was embroiled in political attacks that haunted his presidency. One outcome of this inability to Disrupt was complete failure on any kind of health care or energy policy change (despite enormous efforts by his administration.)
I recommended the President work hard to find the right Disruption early in his presidency. I reiterate that recommendation. America has serious problems that need addressing – and it will require White Space to try new things. But we won't get to try new things as arguments dissolve into party bickering if something does not Disrupt the situation. Right now both parties are focused on their Challenges. Someone will have to Disrupt if they are to focus on new solutions.
