by Adam Hartung | Feb 20, 2009 | Uncategorized
General Motors per share value plunged to $1.56 today – reaching a company value of less than $1billion (read article here). The company hasn't been worth this little since before paved highways were common. Investors obviously don't give the company much chance of surviving.
General Motors simply has not made cars that people want at the price they try selling them for to cover their costs. You can't blame suppliers for the cost problem. Costs are the responsibility of the buyer, not the seller. When costs go up business leaders have to find a way to provide more value – so the business can grow! Things change, market shifts happen, and all businesses – repeat: ALL BUSINESSES – have to adjust to market shifts. In the case of GM, their adjustments have not met the shifting market need and thus their revenue growth has not been able to meet the business needs. The value of the output has not been great enough to cover the cost of the inputs.
So how would should the business leaders react to this problem? You should want to increase the value of your product – tie it closer to customer needs – so you can entice customers to buy more, or possibly pay more per unit. Customers are always looking for products that fit their needs. ALWAYS. When a business's products don't fit customer needs they quit buying – or they buy something else.
What did GM do? Announced it intended to sell or close (possibly bankrupt) what should be its most interesting and exciting business units – Saab, Saturn, Hummer and Pontiac. Why? So it can try to "save" Chevrolet, Buick, Cadillac and GMC. That's because we all know how much we want to own a Chevy. That's what every American from age 16 to 34 wants – a Chevy. And because all those people from 30 to 55 strive at work to put a Buick in their garage. And people from 45 to 75 dream about owning a Cadillac. And GMC – primarily a truck brand – is the market leader. I am, of course, being sarcastic. Young people mostly find Chevrolet an anachronism. People building families are buying Japanese and Korean cars. Upscale has become Mercedes and BMW – or Lexus and Acura. And everyone knows that Ford (the only American car company not asking for bailout money) leads in trucks with its famous F series. Anyone with half an eye on the marketplace knows the brands GM is keeping are the ones with the least valuable future!
When want GM most needs innovation, but it is selling the places where innovation is supposed to breed. Pontiac once meant "muscle car" – the place where GM ceated the GTO. All performance was the Pontiac – with a big engine and barely enough metal to cover it. Americans still want performance – and Pontiac is a division that could give America the kind of 4-cylinder turbo-charged all wheel drive performance that has young people flocking to Japanese dealerships. Saturn was a brand with loyal customers who would buy no other American car except a Saturn. Customers that wanted efficient cars with no fuss dealer made Saturn an overnight success 20 years ago. Saturn was launched less than 30 years ago by a Chairman intent upon creating a car company that could compete toe-to-toe with the Asian companies and win! Saturn re-designed everything from manufacturing to parts use, distribution and even fixed pricing. Hummer may seem out of step today, but it brought to customers a unique vehicle line that smacked of "look at me buddy" – no matter the sex of the driver. And while 12mpg military-looking vehicles may not be today's fit, when you look at the industrial-designed boxy Scion (a stereo on wheels college kids call them) you can see there is a market for the right kind of car in that segment. And Saab appealed to buyers who wanted technology ("started by pilots" don't forget) and European styling. There has always been a market for the technology leader and European design in America. These are the brands that GM most needs to unleash with creativity and independence to regain growth and market success!
But, alas, GM has systematically tried to breed innovation out of these divisions – and their sales results have shown the outcome. Cumulatively, they account for only 17% of GM revenues. So GM says "shut them down." When what GM should do is kill the most boring brand in all the industry – Chevy – and put its money squarely behind driving new products out of the divisions that are best positioned to give Americans what they want! GM is still trying to Defend its past – the once proud brands that are now aged and worn out – when it needs to reinvigorate itself.
The leaders at GM "just don't get it" – to use a popular phrase. They keep trying to keep GM the company it was in 1955, when sales and profits were going up, up, up. The world has dramatically changed, and they are unable to recognize the type of change needed if the company is to survive. Investors are right to lose faith in GM, because there is no reason to have faith in these leaders. With the country's unemployment at very high levels, and the economy very weak, now is when we need leaders able to move their companies toward new solutions that meet future needs, can compete effectvely against global competitors, are able to Disrupt markets in order to adapt, and maintain White Space that will evolve their Success Formula year after year in order to remain competitive. Just the opposite of what we see proposed by the leaders at GM.
Ironically, the big losers from GM's failure will not be these leaders. The Board members at GM, and the top executives, will not lose their homes or cars if GM fails. The employees – from low-level vice-presidents to directors, managers, plant managers, supervisors, accountants, assembly-line workers and salespeople – will be ones losing their homes, health insurance, pension and cars. And the vendor companies will have their managers and employees on the unemployment line. Taxpayers will have to pay for that unemployment – possibly in welfare payments if the economy around Michigan, Ohio, Indiana and Pennsylvania collapses. Taxpayers will end up paying for the care given to pensioners who lose their only means of support (the 80 year old pensioners will not be rejoining the work force, so who will pay for their groceries, housing and care?). Taxpayers will end up paying for health care for those thousands of workers who lose coverage due to company failure.
The cost of failure is high, but will largely be born by investors who bought bonds 10, 20 or 30 years ago, suppliers and employees of GM that find themselves with mortgaged houses no one wants because there is no work within 100 miles of any kind, and American taxpayers that will have to rescue the pensioners and families that have no hope of recovery or finding another job. So why is the Board of GM still in place? Why is Mr. Waggoner still CEO? With the stock at $1.56/share, and all plans for innovation being jettisoned, why are the same people being asked to develop a rescue plan for one of the world's largest employers?
by Adam Hartung | Feb 18, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lifecycle
Yesterday Crain's Chicago Business reported that Kraft expects its sales volume to fall 5% this quarter (read article here). Kraft lost market share to competitors in 75% of its businesses! Do you suppose the demand for food is declining? How about the demand for groceries? To the contrary, reports have been that people are eating less at restaurants – leading to the failure of a few chains, and the closing of several units by others – and eating more at home. We've been led to believe that sales of frozen foods and basics are up due to the poor economy and movement toward thrift. If so, why would the purveyor of many basics and frozen food say volume is expected to decline more than the economy is contracting? Why would it be losing share?
The Chicago-area Kraft executives would like to blame this good management decisions to close unprofitable lines. But do you believe that? Why would any business voluntarily cut revenues in this kind of economy? This rings more as an excuse than a real explanation of the problems within Kraft.
What we know is that Kraft has been woefully short on new products for a decade. What was the last new product you remember from Kraft? In fact, it was only a couple of years ago Kraft was selling growth businesses to "consolidate" its business behind its largest brands – like Velveeta and Mac & Cheese. Then the company raised prices last year, blaming rising commodity costs, opening the door for branded and private label competitors. Kraft is a company with very old products, and higher prices, and no indication of any innovation.
You would think with the economy moving its way, Kraft could capitalize. But when companies hit a growth stall, they lose the ability to capitalize. As they focus on optimizing old products, brands and business practices they increasingly become out-of-step with the marketplace. As markets shift, they miss shifts as they maintain internal focus on the old processes which once produced good returns, but deteriorated. The more they focus, the bigger the gap between what they do, and what the market wants. As returns keep struggling, they continue doing more of what they always did – and explain away poor results.
Kraft is a huge corporation, a recent addition to the Dow Jones Industrial Average. But the company focus is all from the past, not about the future. The company insufficiently studies competitors, and clearly eschews Disruptions. And you can look all over company documents and not find a whiff of White Space to try new things. Without innovation, and no sign of a process to lead them toward innovation, it would be a mistake to expect better performance. Even if Kraft is one of the largest consumer goods companies in America.
by Adam Hartung | Feb 16, 2009 | Uncategorized
About 30 years ago I was in business school studying Japanese business practices. As the country transitioned from the 1970s to the 1980s, Americans were scared to death that Japan was going to take over America economically. The Japanese auto invasion was in full swing, and American auto company leaders were begging for government help to stem the tide of the onslaught from Japan. It wasn't just car companies begging for help, the steel companies were in line as well. It seemed all American manufacturers were claiming the needed support from predatory offshore pricing by Japanese manufactureres. Many Americans, still remembering WWII, were sure this was Japan's second attack on the USA way of life.
As I studied Japanese practices, I asked my father about the country. He was a WWII Navy vet, serving on a battleship in the Pacific, and his opinion was that Japanese would do anything to win. He spoke with reverance about how Japanese would sacrifice their lives as Kamikaze in an effort to win the war. And as I learned about Japanese business leaders, I learned that they felt so compelled to succeed that when things went wrong they felt compelled to commit suicide – often using a form called hari kari. I learned that cultural pressure to do the right thing for Japan was so strong that Japanese leaders would kill themselves to "do the right thing" by societal standard.
It was crystal clear then, as it is now, that America and Japan had very different standards for its leaders. Today, America's auto companies are of no economic value. To survive they are demanding help from the American government (read article here.) But none of the leaders are committing suicide, or even appear close to considering it, for the demise of their companies and the difficulties on their employees, suppliers, investors or the American citizens they ask for help. In fact, none have even recommended they may have erred and need to be replaced. They keep their past bonuses, and continue working. What's surprising, is that they even seem to be negotiating for themselves – as now the discussion involves what will happen to them as well as the bondholders and employees —- as if the payroll and bonuses of management is equal to the repayment of bond holders that invested their money 30 years ago in the company!!!
Yet, the American administration seems content to allow this sort of negotiation. There are no cries for the leadership in these companies to resign. In fact, the promised "car czar" that would make sure the industry is really restructured to be competitive has been dropped (read article here). And the car company management keeps negotiating – putting bondholders, equity holders, vendors, the American pension fund guarantee organization (ERISA), the unemployment compensation system and the healthcare systems of Michigan and Ohio at risk. Why management even has a voice in this negotiation is unclear – given they created this crisis. Why they are leading this negotiation is doubly questionable. While some people seemed paranoid about "socialism", is it better to have the fox negotiatiing access to the hen house? As mentioned earlier, in other societies it would be questioned why they are still alive. (I am not recommending that the auto leaders should commit suicide nor that their lives be threatened – but isn't it surprising that these leaders which led these companeis to the brink of failure are still employed in these positions? Shouldn't forced resignation for failure be part of this discussion?)
Few Americans would disagree with the desire to maintain a viable and strong American auto industry. The costs of failure – to health care, to unemployment compensation and to pension costs – would be economically devastating in the midst of a return to the Great Depression. But why are these leaders being asked to create the solution? If they could not create viable and strong companies when times were relatively good, why would we expect them to save the industry now?????
America's auto leaders have Locked-in to an industry model that does not work. They have allowed offshore competitors to grow and succeed despite considerable government assistance with measures to protect their pricing. Even with government help, and a lower valued dollar to help American manufacturing, these leaders could not develop a Success Formula that was viable. Meanwhile, Japanese manuracturers came to America and opened plants which made products Americans wanted, and at prices Americans would pay. Clearly the Success Formula the American auto leaders kept trying to Defend & Extend was not viable. Yet, we are asking them to develop a solution for the future – and one that puts management's compensation on the table as part of the discussion?
America once led the world in shipbuilding. Liberty Ships were a big part of winning WWII. But today there is only one shipbuildinger left on shore, and it survives only via economic protection. If we allow leaders who failed to control the negotiation, we cannot expect a viable new solution to emerge. These leaders have been blaming the old problems for 4 decades, but unwilling to Disrupt and implement White Space for just as long. If we are to build a viable industry, doesn't it make sense we will take a different leadership team to negotiate the solution as well as implement it. If you won't ask these leaders to hold your wallet – if you won't lend them more money to bail out their problems – why are we allowing them to lead the negotiation to develop a new industry? Isn't it time to find someone who can replace them with a new solutoion?
by Adam Hartung | Feb 15, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in, Web/Tech
In Create Marketplace Disruption I talk about how Sun Microsystems (see chart here) became wedded to a Success Formula which was tied to selling computers. In its early days Sun had to build its own systems, workstations and servers, to make its techology available to customers. As the company grew, it continued pushing the hardware, even though increasingly all of its value add was in the software. One of its more famous innovations was a software product called Java – now used all across the web. But because Sun could not figure out how to sell hardware with Java the company literally gave the product away – on the theory that growing internet use would increase demand for servers and workstations.
But like most Locked-in Success Formulas, Sun's fell into diminishing returns. The market shifted. First it's biggest buyers, telecom companies, fell into a depression early in the century. And corporate buyers struggled to maintain old IT budgets, increasingly transfering work offshore and demanding lots more performance at lower prices. Secondly, an emerging software standard, Linux, started competing with Sun at a much lower price point, and corporate buyers found this a viable solution. And thirdly, Linux and Microsoft both improved performance operating on somewhat "generic" PC hardware that was considerably cheaper than Sun's hardware, further augmenting corporate movement away from Sun.
But Sun continued to push forward with its old Success Formula. Now analysts are confused about Sun's direction, and largely think the company less likely to survive (read article here). With most analysts recommending investors sell Sun Microsystem shares, as one analyste (Rob Enderle) put it "They seem like a software company, but they are sort of like a hardware company." He added that after years of giving software away for free in efforts to entice hardware buyers Sun Microsystems is on the verge of being obsolete.
Sun Microsystems is just another example of a company so busy focusing on doing what it always did that it didn't evolve to what the market demanded – and rewarded. As software became the value, Sun did more but didn't figure out how to evolve its Success Formula to charge for it. The company remained Locked-in to its old practices, and refused to Disrupt and open White Space where it could find a more valuable Success Formula for the future. Too bad for employees, vendors and investors.
by Adam Hartung | Feb 11, 2009 | Uncategorized
The newscasters around Chicago have been lit up with indignity the last 2 days. Forbes magazine released its in-house study of Americ'as most miserable cities, and ranked Chicago 3rd – behind Stockton, CA and Memphis, TN (read article here). As you might expect, even though Chicago has long had the nickname "2nd City", Chicago's journalists and leaders have been none too happy with this positioning as the most miserable large city. The reaction has been pure defensiveness – pointing out the relatively low real estate values, the large opportunities for arts, major colleges (including Northwestern and University of Chicago, as well as Loyola, DePaul, University of Illinois and several others in the SMSA), beautiful summer weather, multiple historically leading professional athletes (such as Michael Jordan), on, and on, and on. There are a lot of good things to talk about in Chicago.
But, this is the kind of reaction many businesses have when they hear about various problems seen through the eyes of an outsider (like an analyst, or a consultant, or maybe a customer). Companies, and certainly Chicago, knows what works – and feels comfortable about doing more of what works, with minor tweaks where necessary. Thus, the desire to defend the Success Formula is great. But, smart companies know that this kind of input is extremely valuable, and well worth spending time looking at because it offers the opportunity for changes that can make you more competitive. Negative feedback is an opportunity to identify weaknesses in your Success Formula, and give you the chance to Disrupt previous practices and use White Space to develop new and better solutions!
The facts Forbes puts forward are unassailable as facts. That Chicagoans mostly know these facts and are willing to live with them is the issue worth discussing.
- Yes, it can be quite cold in winter – and frankly there's nothing Chicago can do about that one. Just talk about how much nicer it is in the summer than most of the U.S.
- And the Cubs haven't won a world series – but does that really make a city miserable? I'm not sure their's anything the city can do about this. (Especially with the Sox winning the series just a few years ago? And that long-term domination in basketball held by the Bulls? And the Bears were in the Super Bowl just 3 years ago – even if they didn't win.)
- That Forbes noted Chicago has the highest sales tax in the country is worth talking about. The sales tax increase was very controversial in Chicago, implemented by the county board rather than the city, and perhaps that is a debate worth re-opening. There are no easy answers to tax questions, but being #1 in any tax category is not a good thing and perhaps should be reconsidered.
- Unemployment is an issue that Chicago can do something about. The area has long loved its association with manufacturing – but that passion has hurt the city as top engineering graduates in electronics, IT, biotech and other fields leave the state for jobs in other markets. Chicago has done far less than many other cities to support high-tech business growth, and has paid a steep price as start-ups regularly find they must "move to the coast" to raise money.
- For many years Chicago bragged about its great train service and well-designed highways to move people around efficiently and cheaply. But lack of funding has caused service costs to escalate faster than inflation, while quality has deteriorated. You still can't find "reverse commute" trains most hours of the day on major suburban train lines, and service dramatically declines during non-rush hour times — and heaven help you stay late for dinner in the city as you'll find no service at all late at night to get you back home. Meanwhile, the inner city buses and trains are notorious for being off schedule. And the highways have been underfunded with cheap asphalt roading for so many years that there are no major roads which don't suffer from significant pothole damage slowing traffic. Commuting in Chicago is no better than other major cities today, and in many cases worse.
- Corruption has plagued the city (and state) since long before Al Capone had a major say in how the government worked and the behavior of local police. If you've been around Chicago a long time, you sort of get used to it – and that alone is an incredible statement. When businesses look for a headquarters location, or people look for a place to live, they don't want to wonder how much "palm-greasing" is required to get things done. That the spotlight is again shining on Chicago as a corruption center may be something that is hard to accept – but it is an image (and a reality) that must be dealt with.
Any one of these items justifies a Disruption in the government of Chicago, Cook County and Illinois. I remember when Miami and Dade County were places you feared being arrested – expecting to possibly be beaten to death. But Florida Disrupted several of its "good old boy" practices, recruited for businesses like Disney to come into the area, and transformed itself from a southern backwater for retirees into a vibrant economy with strong links to international markets. With proper Disruption, and efforts at trying new things, Illinois can improve. But it won't as long as the city, county and state (and its citizens) prefer to Defend & Extend past practices rather than Disrupt them. The former governer was a disapointment not just because his antics made national news, but because he promised to be a reformer — and turned out to be anything but!
Chicagoans should heed this report from Forbes and see how it can be used to improve what is already a pretty darn great place to live and work. Chicago can be better. By asking to host the Olympics Chicago entered the competitive world stage. To stay on that stage, and to raise in the rankings, the city will have to do more than the Olympics – it will have to listen to its competitors/distractors, and use Disruptions to implement White Space where it can improve.
Now – on to a rebuttal of Forbes: (Hey, I do live in and love Chicago – and you can't let him simply get away with cheap shots!)
- Let's not forget that Forbes magazine has long called itself "The Capitalist Tool". The publisher, Steve Forbes, is a strong conservative and two-time presidential candidate on the Republican ticket. That the magazine has an agenda is clear. That the agenda is at odds with the highly democratic Chicago area should also be clear. That Mr. Forbes is no cheerleader for Mr. Obama is well known, and attacking Obama's home is something of an unfair shot on the home of a politician Forbes does not like.
- While the Chicago sales tax is high, there are items (such as foodstuffs) that are not taxed or very lowly taxed. To the sales tax is not across the board. Additionally, the Illinois income tax is a flat tax – a favorite scheme of Mr. Forbes who has not been able to implement such a scheme in his home state of New York. When looking at taxes you have to compare them all – and the income tax in Illinois is quite favorable. Low state taxes are the biggest reason why city taxes in Chicago are higher. Look at total taxation cost – not just the sales tax.
- Property taxes are capped in Chicago. And far from the highest in the USA. A big part of the reason the sales tax was increased in 2008.
- Workers in Illinois public service jobs – from teachers to firemen – receive a great pension which is state tax free.
- Most of the corruption referred to in the Forbes article relates to state positions – not city of Chicago positions. Mayor Daly has dramatically attacked corruption as Mayor (as did his predecessors) and the city itself is far less corrupt than it used to be. Forbes mixed apples with oranges in the discussion of corruption, labeling the city with blame for what were mostly problems with state and county politicians.
- Some great reformers have been very successful in Illinois. The former governor was imprisoned for behaviors taken as Secretary of State, before he became governor. His replacement as Secretary of State (Jesse White) has reformed the office in ways that have exceeded almost all citizen expectations. The Illinois Secretary of State office is now a model for all states – and for citizens it is one of the most pleasant bureaucracies imaginable. It is extra-ordinarily efficient, and everything is above-board.
- A brief listen to the television show "Hardball" and you'll quickly be reminded that "pay for play" exists in all cities – New York is not immune. The country watched the resignation of New York's governor, for soliciting prostitutes even while a "law and order" candidate, just as it watched the recent debacle in Illinois. It would appear that the creation of this new category, and its metric, look to hamper those who attack corruption (by measuring enforcment). Since New York's governor resigned, his practices don't make it into the Forbes measuring system. Because corruption is prosecuted in Chicago/Illinois, rather than swept under the rug with back-door deals, Chicago just might be less corrupt than many other large cities – the Forbes metric is questionable. And one can't wonder if the category and the metric weren't selected specifically by Forbes to salatiously take advantage of recent news events and impune the new President in a back-handed way.
- While it is cold in January (this year was horrible – the 10th worst on record) Chicagoans love to call anybody in St. Louis, Miami, Charlotte, Washington, Dallas, Houston, Phoenix or Las Vegas between May and September. While they are inside, air conditioned and fearful of heat stroke Chicagoans enjoy day-after-day of beautiful outdoor weather. When it's cold, put on a sweater. By the way, in sweaters you don't look as fat! There are good things about cold.
- So the Cubs don't win the World Series - who cares? The team still sells out game after game. While you are a spectator in most major league ballparks, at Wrigley you are a participant. It's an experience in yesterday to watch balls lost in the outfield ivy, creating a double-by-rule – or to see people on rooftops across the street watching the game. Few teams can sport the loyalty of Cubs fans, during a losing season, even when their home team is winning. What was attendance at Marlins or Texans games the last quarter of last season?
Come to Chicago – it's a GREAT city. Full of warm and gracious people who are ready to make you welcome if you're on a visit, or looking to relocate. From Northwest Indiana to the southeast corner of Wisconsin, the people of Chicago are from every city and state in the USA, and from every country abroad. Every religion is practiced, and honored. And Chicagoans love a place where everyone can get along with their neighbor. All of us will take Chicago over New York City every day of the year – and Mr. Forbes should be careful lest someone takes the time to start pointing out the weaknesses of life in Manhattan!
by Adam Hartung | Feb 10, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
GM is in intense negotiations with bondholders, employees (via the union) and the government over its future. At stake is nothing less than the future of America's largest auto company. A company that saw revenue decline more than 40% in January after deciding in December to idle most of its manufacturing plants.
The negotiations are focusing on whether GM can be competitive. But, unfortunately, GM seems to be directing that discussion toward cost reductions (read article here). As if all GM needs to do is somehow lower costs and it will be competitive with Toyota, which displaced GM atop the global auto industry as the world's largest in January. What customers globally know is that the issue at GM isn't just about cost (which can pretty much be translated into "union contract busting.") Customers want quality products that fit their needs, produced at high quality, with low service costs, and low cost of use (interpret – higher mileage.) It's been 20 years since the yen/dollar valuation gave Japanese manufacturers lower cost of production – and yet year after year Toyota, Honda, Subaru and Suzuki keep growing share while U.S. manufacturers keep declining.
One of the more difficult to understand articles this week was the lauding of GM's vice-chairman Bob Lutz. Mr. Lutz is more than 70 years old! He might well have been a great executive 35 years ago (in 1974) when he was an up-and-coming executive. But my how the world, and the auto industry, has changed since then. I'll never forget watching him interviewed on television about the Tesla (the electric sports car) and seeing him laugh. He literally dismissed Tesla as unimportant – not up to the standards of GM and it's industry leadership. At the time my thought was "I think you'd be a lot smarter to listen to these new guys than be so smug and ignore them." Of course, in short order, Toyota's hybrid vehicles helped lead Toyota past GM, and the approach of Mr. Lutz was looking less and less viable. Good bye, and good riddance, would be a better report for an executive who not only stayed around too long and didn't "save" GM, but ignored powerful competitors while trying to defend an outdated Success Formula.
It is time for GM, and the other domestic auto competitors, to move on. The old Success Formula has failed. It's not about just doing less well, with GM stock valued at $2.70 and the negotiation about converting bondholders to equity holders in order to get more government bailout money — the game is over. What worked for GM in the 1950s, and most of the 1960s, doesn't work any more. And the success of Toyota and Honda demonstrates that. America doesn't need Bob Lutz (and his compadres) any more – may he enjoy his retirement (which is a lot more secure than the thousands of GM retirees that weren't executives). If investors, employees and vendors of the American auto industry are to avoid even more downfall it is time to develop an entirely new game – with new leaders.
GM (and its brethren) need to quit villifying unions as the "boogeymen" causing all their problems. Management signed those union agreements – and if they weren't viable management should have dealt with them. The employees of GM - and all the citizens of Detroit, southeastern Michigan and northwester Ohio as well as the extended midwest – have a vested interest in the succes of this industry. They will agree to leadership which helps them succeed. Continue the old "company vs. union" battles will do no good. Leadership needs to be focused on offering an approach to delivering products that will energize employees and ucstomers alike.
GM must define a new future. Not one based upon a series of cost cuts – which will be matched by competitors. GM needs to demonstrate it can change its view of R&D, product development, customer finance and distribution to meet current customer needs. For GM to be viable, management must demonstrate it knows that tweaking the old model is insufficient. It's time to develop an "entirely new car company" as Roger Smith said when he funded the launch of Saturn. And America's banks, investors and auto buyers all know this.
Increasingly at GM, Disrupting the old business model seems unlikely. Current management is so Locked-in it continues searching for ways to Defend the old model, in spite of deteriorating results at the nadir of failure. If America is to invest in this company, it deserves new management which is able to develop a new company that can truly compete. It is time to demand new leaders who are not the "old guard", but instead leaders who are able to bring new products to market that are competitive by implementing White Space where these new products can be launched through new distribution. For America to keep supporting GM the company needs to move beyond old arguments about labor costs, and get serious about changing its product line and distribution system as well as its legacy employment costs. It's possible to turn around GM – but only if management will abandon its Defend & Extend Management practices and instead use Disruptions to open White Space for a better company to emerge.
by Adam Hartung | Feb 9, 2009 | Current Affairs, Food and Drink, In the Swamp, Leadership
The second step in following The Phoenix Principle to achieve superior returns is to study competitors. Better, obsess about them. Why? So you can learn from them and position your products, services and skill sets in a way to be a leader. We would hope that studying competitors would not lead a company to take on battles it's almost assured of not winning. Too bad nobody told that to Mr. Schultz at Starbucks, who seems intent on killing Starbucks since his return as CEO.
Starbucks become an icon by offering coffee shops where people could meet, talk and share a coffee – while possibly reading, or checking their email. One of the most famous situation comedies of recent past was "Friends", a show in which people regularly met in a coffee shop not unlike Starbucks. People could order a wide range of different coffee drinks, and the ambience was intended to reflect a more European environment for meeting to drink and discuss. This combination of product and service found mass appeal, and rapid growth. Meanwhile, the previous CEO rapidly moved to seize the value of this appeal by stretching the brand into grocery store sales, coffee on airlines, liquor products, music sales, various retail items, some food (prepared sandwiches and high-end snacks, mostly), artist representation and even movie making. He knew there was a limit to store expansion, and he kept opening White Space to find new business opportunities.
But then Mr. Schultz, considered the "founding CEO" (even though he wasn't the founder) came roaring back – firing the previous expansion-oriented CEO. He claimed these expansion opportunities caused Starbucks to "lose focus". So he quickly set to work cutting back offerings. This led to layoffs. Which led to closing stores. Which led to more layoffs. The company fast went into a tailspin while he "refocused."
Meanwhile competitors started having a field day. Dunkin Donuts launched a campaign lampooning the drink options and the special language of Starbucks, appealing for old customers to return for a donut – and get a latte too. And McDonald's, after years of study, finally decided to roll out a company-wide "McCafe" in which McDonald's could offer specialty coffee drinks as well. While Starbuck's CEO was rolling backward, competitors were rolling forward – and in the case of McDonald's rolling like a Panzer tank.
Now, with a big recession in force, McDonald's is making hay by siezing on its long-held position as a low cost place. Like Wal-Mart, McDonald's is in the right place for people who want to seek out brands that represent "cheap." With sales up in this recession, the company is now launching a new program to highlight its McCafe concept directly aimed at trying to steal Starbucks customers (readarticle here).
So, here's Starbucks that has "repositioned" itself back as strictly a "coffee company". And the company has been spiraling downward for over a year. And the world's largest restaurant company has its sites set right on you. What should you do? Starbucks has decided to launch a "value meal" (read article here). Starbucks is going to go head-to-head with McDonald's. Uh, talk about walking in front of a truck.
Far too often company leadership thinks the right thing to do is "focus, focus, focus" then define battles with competitors and enter into a gladiator style war to the death. And that is just plain foolish. Why would anyone take on a fight with Goliath if you can avoid it? At the very least, shouldn't you study competitors so you compete with them in ways they can't? You wouldn't choose to go toe-to-toe when you can redefine competition to your benefit.
But that is exactly what Starbuck's has done. Starbucks spent its longevity building a brand that stood for being somewhat "upmarket." You may not be able to afford a Porsche, but you could afford a good coffee in a great environment. Sure, you might cut back when the purse is slim, but you still know where the place is that gave you the great, good-inside feeling you always got when buying their product or visiting their store. Now the CEO of that company has taken to comparing the product, and the stores, to the place where kids are jumping around in the play pit – and you can smell $1.00 hamburgers cooking in the background. He's decided to offer values which compare his store, where you remember the cozy stuffed chairs and the sounds of light jazz and the smell of chocolate – with the place where you sit in plastic, unmovable benches at plastic, unmovable tables while listening to canned music bouncing off the tile (or porcelain) walls where you can wipe down everything with a mop.
You study competitors so you can be fleet-of-foot. You want to avoid the bloody battles, and learn where you can use strengths to win. Instead, Starbucks' CEO is doing the opposite. He has chosen to go head-to-head in a battle that can only serve to worsen the impression of his business among virtually all customers, while tacitly acknowledging that a far more successful (at this time) and better financed competitor is coming into his market. His desire to Defend his old business is causing him to take actions that are sure to diminish its value.
Let's see, does this possibly remind you of — let's see — maybe Marc Andreeson's decision to have Netscape go head-to-head with Microsoft selling internet browsers? How'd that work out for him? His investors? His employees? His vendors?
Studying competitors is incredibly important. It can help you to avoid bone-crushing competition. It can identify new ways to compete that leads to advantage. It can help you maneuver around better funded competitors so you can win – like Domino's building a successful pizza business by focusing on delivery while Pizza Hut focused on its eat-in pizzerias. But you have to be smart enough to realize not to try going headlong into battle with competitors that can crush you.
by Adam Hartung | Feb 8, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership
General Electric's (chart here) future earnings and valuation were recently lowered by an analyst at J.P. Morgan (read article here). Reviewing the difficulties facing GE he commented, "Former [Chief Executive Jack] Welch built a culture of earnings management that was unsustainable." One of the few times I've ever heard an analyst make excuses for management. Unfortunately, he could not be more wrong. Investors have every reason to expect GE's earnings growth to continue.
There is no doubt that the real estate bust has led to lower consumer spending, as well as big troubles for banks struggling with reserve requirements as they mark down loans. There is a "wall of worry" among consumer and business spenders alike. Yet, GE's task is to find ways to grow – even in the face of market challenges. When companies fall into a growth stall they have only a 7% chance of ever again growing at a mere 2%.
At GE we're seeing first stages of a growth stall. Why? Despite the very aggressive culture at GE, when Mr. Immelt replaced Mr. Welch he did not maintain the level of Disruption and White Space that his predecessor maintained. For whatever good reasons he had, Mr. Immelt steered GE on a course that was more predictable – and far less likely to make hard turns and hold leaders accountable. GE was very strong, and the company could continue to build on past strengths. And doing so, Mr. Immelt sustained GE largely by Defending & Extending historical practices. Along the way, acquisitions and divestitures were very predictable actions – not openings into new markets that could develop a new Success Formula.
Then the markets shifted. Very hard. And a long-term GE business called GE Capital was suddenly in a lot of trouble. This was not entirely unpredictable – but GE Capital had fallen into Defending & Extending its old business rather than really assessing what might happen. They had real estate investments, and complex hedging products that made real estate losses worse. GE Capital's reserves began disappearing overnight. Simultaneously, NBC was seeing declining revenue as ad demand fell through the floor. Again, not unpredictable given the inroads Google was making in the ad market since 2002. But NBC had fallen into believeing it could Defend & Extend its traditional business, rather than use scenarios to point out the potential shift of advertisers to the web. Even though Mr. Buffet at Berkshire Hathaway jumped in with financing, the reality was that GE had not prepared for the scenario unfolding. By slowing its Disruptions and White Space, GE fell into the same problems many of its other big company brethren fell into. Something the company had avoided under "Neutron Jack" who kept the company eyes firmly on the future while avoiding complacency in existing businesses.
Part of what made GE the incredible earnings machine it was under Mr. Welch was its extensive scenario planning which led the company to get out of businesses, and get into new ones. Under Mr. Welch GE implemented Disruptive techniques like focusing on market share (#1 or #2 was one Disruptive technique) or implementing Destroy-Your-Business.com teams to prepare for internet-based competition. But under Mr. Immelt GE did far less changing of its businesses. GE remained largely in industrial businesses, it's financial business and traditional media. Although it had extensive business interests in India, GE itself was not deeply involved in new internet-based or information-based businesses. It spun out its biggest IT business (GENPAC), reaping a huge reward which the company mostly invested in additional industrial businesses - like water production.
GE is a great company. It's the only company to be on the Dow Jones Industrial Average since the index was created. But not even GE can escape market shifts. GE was one of the first to pick up on the shift to globalization and was an early investor in offshore operations. But the last few years GE's fortunes have stymied as the company spent more energy Defending & Extending its old businesses instead of doing more in new markets. No company, of any size or age, can afford to depend on its old businesses. All businesses must prepare to compete in the future, on the requirements of future customers and against future competitors willing to maximally leverage current and developing opportunities for improvement via technology, business model or any other factor.
GE has a lot of resources, and a long-term culture of Disruption and using White Space. GE has the built-in skills to attack its old Lock-ins, find competitive opportunities and rapidly gear itself in the direction of growth. And that's what GE needs to do. Some analysts are worried that GE may have to reduce its dividend – and well GE should!!! When markets shift as rapidly as has happened this last year, its more important to develop new market opportunities than Defend a dividend payout. GE needs to move quickly to re-establish itself in growth markets for products and services that can push GE into the Rapids and pull the company out of this growth stall. Right now, investors should be demanding that Mr. Immelt act more like Mr. Welch, and push hard for Disruptions that open new White Space projects. That Mr. Immelt is on Mr. Obama's new business economic team (read article here) is not important to investors, employees and suppliers. Right now, all hands and minds need to be focused on finding new markets to regain growth for GE.
by Adam Hartung | Feb 5, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Quotes, Web/Tech
Dell had a tough day Thursday when J.P.Morgan downgraded the stock to the equivalent of a sell (read article here). The stock continues its relentless slide – despite the return of Mr. Dell as CEO (chart here). Some quotes:
- "Our downgrade … focuses squarely on the potential that Dell's PC exposure..could force the company to seek revenue offsets" interpretation – revenues should go down
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"looking for revenue from other sources, Dell could face new costst and competition that could destabilize margins and cause the company to dip into its cash reserves." interpretation – entering new markets isn't free, and new competitors will make the road tough so expect Dell to go cash negative
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"Dell gets around 60% of its total revenue from PC sales, which is an example of how exposed the company is to a market that is widely expected to shrink this year…PC unit shiptmets to fall this year by 13.5% from 2008" interpretation – this is primarily a one product company and that product is not going to grow
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"the enterprise replacement cycle … could be deferred to next year … Dell will be hard-pressed to maintain its profit margins this year as the company faces more-entrenched consumer-market competitors in Acer and Hewlett-Packard" interpretation – Dell sells mostly to companies, who are not replacing PCs, and in the consumer market Dell will find tough sledding competing with Acer and HP
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"Dell is on track with its plan to cut $3billion in costs by 2011" interpretation – Dell is cutting costs, not growing revenue
To steal from an old Kentucky Fried Chicken ad "Dell did one thing, and did it right." Dell's Success Formula worked really well, and the company grew fantastically well as it improved execution while the corporate PC market was growing. But the market shifted. Dell had not developed any White Space to enter new markets, so it was unprepared to keep growing. When revenue growth slackened, the company did not Disrupt its Success Formula, but instead kept trying to do more, better, faster, cheaper. And lacking revenue growth opportunities, the company is slashing costs in its effort to Defend its bottom line and old business model. And all that has resulted in another downgrade – and a company worth a lot less than it was worth before. Just as you would expect for a company that fell out of the Rapids and into the Swamp.
by Adam Hartung | Feb 4, 2009 | Uncategorized
About a year or so ago the conventional wisdom was that we were headed for a recession (the government wasn't yet saying we were in a recession already). Building on that theme, advisors were recommending investors should buy stocks like Kraft (chart here) and Sara Lee (chart here). After all, these companies make basic foodstuffs, and even in a recession people have to eat! So investors should be thrilled to own stock in companies with brands like Velveeta, Mac-N-Cheese, Oscar Meyer, Maxwell House and Jimmy Dean.
Once again, conventional wisdom didn't quite work out. Today Kraft (the world's #2 food manufacturer) announced a 72% profit plunge (read article here). Sara Lee profits fell to a loss – so you could say they fell 100%+ (read article here).
Both companies were in trouble back when the conventional wisdom said "buy." Sara Lee has been in a freefall ever since it changed CEOs five years ago. Back then the new CEO decided to "refocus" Sara Lee by selling its apparel business (Hanes and Champion) along with other assets. That effort continues, as the company recently sold its foodservice coffee business and some international businesses. The CEO was successful selling assets, but the money is now gone and all investors have is a smaller and less profitable Sara Lee. Her effort at "focus" did a good job of "focusing" Sara Lee right down the Swamp toward the Whirlpool. What was once a great consumer products company is now a mere industry afterthought that nobody pays attention to, and has wiped out 2/3 of investor value along the way.
Kraft was formerly a division of Altria (which used to be called Phillip-Morris – you know – cigarettes). During the early- and middle-2000s management sold growth busineses (like Altoids) in order to "focus on core products" like Velveeta. The CEO said that he saw no reason to spend money on risky new products, when he could maximize value by spending more money on Velveeta ads. If there was ever an example of a process designed to yield a specific result, any analysis that gave preference to Velveeta ads over new products was one clearly designed to Defend & Extend the past.
After spinning out on its own, analysts were all aglow about how a new Kraft CEO would take this venerable company into dramatic profit growth. But that hasn't quite worked. Rather, lacking any new product launches Kraft profits have been stagnant. Last year, the blame was placed on escalating commodity prices eating into margins. Now, with profits bouncing off the floor, the claim is that because the company raised prices last year to reclaim cost increases it has driven down sales! Of course we don't know exactly how bad things are at Kraft, because the company decided to claim substantial "restructuring costs" this quarter hiding the true business margins. We just know things are pretty bad.
Conventional wisdom is based on, at worst, myth – and, at best, what worked in the past, although no one is sure why. Following conventional wisdom can be successful only so long as current conditions are like past conditions.
But, this economic downturn isn't like any previous downturn. There have been dramatic shifts in global competitiveness and the value of resources. And, the companies being discussed are dramatically different than they were in previous recessions. Both Kraft and Sara Lee are companies that systematically shed all their growth businesses to raise cash in an effort to Defend & Extend old businesses. Both company's leadership manipulated the financial statements to make the company look better in past quarters (and years) thus reducing opportunities to now hide those ongoing weaknesses. Simply, things aren't like they used to be in the marketplace, or in the competitiveness of these companies. No one should be expecting them to have improved results. As the old markets weaken and shift, these companies become even weaker.
Both could take a different course. They could revitalize their futures by stopping Defend & Extend practices designed to over-invest in outdated brands and products. They could obsess about competitors to identify new growth opportunites. They could Disrupt old practices and procedures to allow new innovations to flourish. And they could open White Space where managers are given permission to do things new and different and given the resources to develop a new Success Formula. Both companies could be successful. But first they have to stop believing in the past, in their conventional wisdom, and focus again on future growth.
