by Adam Hartung | Nov 4, 2008 | Defend & Extend, General, In the Whirlpool, Leadership
In 2004 Motorola (see chart here) was about to take off. It's radio business was continuing to grow as it launched into digital products. And its handheld cellular business was about to go nuts with the launch of a new product called Razr. A new CEO was focusing the company on the future, obsessing about competitors that were launching new products, Disrupting everything from the new product launch process to free corporate lunches and opening White Space all over to get growth going. And it worked.
But then, almost as fast as it grew, Motorola went south. Instead of continuing the new approach, Ed Zander, the CEO, became overwhelmed by a 2-pronged set of concerns. Carl Icahn started buying shares and asking to oust the CEO so he could (somehow) start cutting costs. Instead of taking on Mr. Icahn by demonstrating how his results were headed the right direction while Mr. Icahn was clueless when it comes to high-tech, Mr. Zander began cost cutting to appease Mr. Icahn. Secondly, Mr. Zander stopped pushing the scenario building, competitor obsession, Disruptions and White Space. Instead, he reacted to employee uneasiness by turning immediately to a Defend & Extend strategy, Locked-in on the Razr. New products dried up as the company just pushed harder and harder on Razr sales. The company quickly began operating as it had 8 years earlier when it slid into disarray, lousy returns and massive layoffs as the future grew murky.
Now Motorola is trying to define a new future. The plan is to split the company into 2 parts. Radio and cellular. But the problem is that the biggest, cellular, is in deeply difficult territory. Sales are down, new product launches are few and profits are gone. So the Board hired a new CEO for that business – the former Chief Operating Officer at Qualcomm. And now Crain's Chicago Business reports he's issued an internal memo with his plan (read article here). So can we expect a turnaround?
His plan involves changing his top reports. And he's cutting a line of new products being launched to save cash and "better position products for the future." He's narrowing the technology line-up toward those he believes are the most likely winners. And he's reorganizing along geographic lines. So do you think this will "fix" Moto?
There are reasons to be concerned:
- Products are being stopped from market review. In the end, White Space has demonstrated that the marketplace is much better at selecting winners than executives are. It was "getting Razr out the door" that got Moto going again – an historical problem at Motorola that loves to over-engineer everything and has been slow to new products letting competitors chew them up.
- The company is narrowing its technology use. History has shown that technology shifts can happen fast in high tech, and those companies that avoid the bets by playing the widest technology tend to make the most money the longest. Making technology bets is a quick way to turn a large fortune into a small one – and Moto doesn't have much fortune left.
- There is no Disruption in what he's doing. Changes in employees at the top, and reorganizing along traditional lines, does not attack the behavioral or structural Lock-ins. Without an attack on existing Lock-ins the organization will not do anything new. Organizations like to Defend & Extend what they've always done. Given that there's no Disruption planned, why would we believe the organization will be more productive?
- No White Space. The opposite could be implied, with the decision to stop a new product launch and to narrow the technology use. It's up to the leadership to be right, to guess the future of technologies and customer needs as well as the design of new products. Instead of White Space to develop a new Success Formula to which the company can migrate, this is an effort to have the CEO be brilliant and lead the organization into better results. Unfortunately, this approach almost always fails as Lock-in inhibits transition and the difficulties of being prescient become obvious.
I'd love to see Moto come back. But with the approach as relayed by the Chicago journalists, it appears unlikely. Perhaps a few big investors with private equity will think that a "streamlined" and "focused" Moto will be a better bet. But the fact is that only the market will decide if Moto is a good operation. And that will require having new products and services that meet changed market needs. Moto operates in a hotly competitive marketplace. It doesn't have the luxury of dictating what will work and what won't. Competitors will have more to say about its success than management will. And this approach is weak on scenario development – and absent on talking about competitors. Without Disruption and White Space, how can we expect the company to be effectively market reactive? Doesn't look good for shareholders, employees, suppliers or customers.
by Adam Hartung | Nov 3, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
Circuit City (see chart here) has announced it will close another 155 stores (see article here). Here, right before the big holiday buying season, Circuit City is contracting drastically. The company is almost out of cash, and is running into problems obtaining inventory. And with the likely demise of the company soon, it's unclear how many customers will buy from Circuit City when they can't take back items that break after the retailer is gone.
What makes this story somewhat remarkable is that Circuit City was one of the 11 companies Jim Collins profiled in "Good to Great." Not only was it one of what were considered the best 11 corporate performers in the world – it's turnaround to greatness score was the absolute highest of all the companies profiled, more than twice as high as the next best performer, and more than 3 times higher than the average "Good to Great" company. Jim is considered a management guru, who receives around $100,000 every time he gives a speech to corporate clients. "Good to Great" has been considered a corporate bible by many CEOs and other executives who have taken the stories from Mr. Collins to heart and decided his approach is the best way to great success. So to have Circuit City severely falter, and most likely fail, after only a handful of years since Mr. Collins published his book is an event worth spending some time discussing.
Despite Mr. Collins' great wealth accumulation and speaking success, he is not without detractors. Many academics have questioned the validity of his research. And in "The Halo Effect" professor Rosenzweig of Switzerland's top business school casts Mr. Collins as a fraud. Unfortunately for Mr. Collins, a review of the performance of his 11 "Great" companies demonstrates their performance since publishing the book is – at best – average. When one fails, perhaps it's worth spending some time reconsidering Mr. Collins' recommendations.
What appears true is that companies Mr. Collins likes end up in growth markets. Then, they pursue very targeted strategies which Mr. Collins recommends you not alter much nor even challenge. Mr. Collins ascribes business success in these companies, as he does in his first book about start-ups that get big ("Built to Last"), largely to dogged determination and sacrifice. He proselityzes that success is the result of hard work, dedication, and focus. And, from all appearances, once a company is into the Rapids of Growth, such actions to reinforce the Success Formula are helpful for the early leader to grow. For those who turnaround, much of their success can be ascribed to getting into a growth market and then simply doing what got them there.
But the problem with Mr. Collins' "Great" companies occurs when they lose their growth. In most cases, exactly as it happened with Circuit City, competitors figure out the Success Formula and they copy it. Additionally, lacking the significant Success Formula Lock-ins (behavioral and structural) which Mr. Collins loves and become part of the "Great" companies, new competitors more quickly implement new ways of competing which the "Great"companies ignore. In Circuit City's case, this was obvious in spades as Circuit City ignored on-line competitors which have lower cost, faster inventory turns, wider selection and lower price than traditional brick-and-mortar stores.
As a result, even Collins's "Great" companies end up falling out of the Rapids. Quickly they move into the back half of the life cycle, mired in the Swamp. Without the current of growth, which pushed them in the Rapids toward profitability, they are consumed fighting competitors. But, doing "more, better, faster, cheaper" of what they've always done simply does not make them more profitable. Competitors create market shifts which require changes in the Success Formula to continue thriving. But, with "everyone on the bus" (a favorite phrase of Mr. Collins) no one knows how to do anything new, and there's no place to try anything new. Quickly, results continue faltering and the company is sucked into the Whirlpool of failure – a prediction being made by Marketwatch.com when labeling today's Circuit City article "Circuit City Circling the Drain." Of course, it's hard to argue with Marketwatch's editors when the company value has declined from over 30 dallars per share to 30 cents per share in about 2 years!
Phoenix companies avoid this sort of fall by overcoming their Lock-ins. Something Mr. Collins never discusses. Yes, these Lock-ins help them grow during the Rapids. But all markets eventually shift. The Rapids disappear due to competitive changes. To succeed long-term companies have to Disrupt their Success Formulas by attacking Lock-in BEFORE they find themselves in the Whirlpool. And they implement White Space where they can test and develop a new Success Formula toward which the company can migrate for long-term success. Winning long-term requires more than a single turnaround into a growth market and then slavish willingness to do only one thing. Instead, it requires figuring out likely market changes with extensive scenario planning, being obsessive about competitors in order to identify new competitive changes. And then Disrupting and using White Space to constantly be reborn.
by Adam Hartung | Oct 31, 2008 | Disruptions, General, Leadership
Even in the midst of the recent financial crisis, you probably also noticed that the price of oil has dropped. In fact, it's had a record-setting drop (read article here). It was just in July that oil peaked at $147/barrel. Now it's trading around $60-70/barrel. I'm sure you've noticed the benefit if you're a U.S. driver, as the gasoline pump price has dropped from over $4/gallon to under $3/gallon.
A lot of people simply breathed a sigh of relief. "Well, that's one problem I can now forget about" an executive recently said to me. I was disappointed to hear him say that. Because how does he know oil won't go back up to $150? Or drop to $25? Regardless, doesn't it have implications on how competitors in your business behave? On who wins and who loses? Things certainly haven't "returned to normal." The signs are all around us that there have been substantial changes in how companies manufacture, procure IT services and finance their business. Just because the price of oil went from $25 to $150 to $65 dollars doesn't mean things are "back to normal."
Scenario planning is really important to developing competitive strategy. Most people spend a lot of energy to achieve high precision understanding their historical sales, customers, technology comparisons, price comparisons and share. But they put very little energy on creating potential scenarios about the future. When they do look forward, the tendency is to seek the same sort of precision. As a result, too few scenarios are developed and they end up being based on data people feel are "highly predictable." The scenarios that are important are the ones where unlikely events and outcomes occur. They create opportunities for changes in competitive position.
Scenario planning should start with "big themes." Once you explore that theme, however, the objective is not to develop your "best guess." Instead, the objective is to cast a wide net and explore, in detail, what the world will look like given that scenario. How would thing change given the expectation? How will that help, or hurt your ocmpetitiveness. Who will be the big winner? The big loser? Create a robust description of that scenario – what are the implications – not the likelihood of it happening.
Over the last year the price of energy was one such big theme which interested a lot of people. But most people only explored one scenario – what if oil prices went to $200 or $250? Interesting, but not sufficient. Yes, that scenario is well worth investigating in great detail. But, it's also important to investigate other options – like oil at $150, or $100 or $65 or $35. All of those have different implications. What's important in scenario planning is to investigate them all. To understand how each would impact competition and individual competitors. So your SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis can be done for the future – not just for today.
The other value from scenarios is identifying and understanding the triggers. By exploring the scenarios you start to understand what would make each of the outcomes more likely. Not so you can develop a probability distribution – which will lead you to the "average" or "most likely" outcome – and thus the least likely to make any difference and therefore the least interesting. You don't want to use scenarios to become a forecaster – because odds are you won't be very good at it. You want to recognize the implications of these scenarios, and then figure out how you can use that scenario to improve your competitive position. To upend competitors who did not do the scenario planning and thus aren't prepared. Then you can start tracking key variables, key metrics, in order to recognize when you need to prepare for one of the various outcomes. And if you've done a good job with your scenarios, be the competitor best prepared to take advantage of the changed circumstance to improve your position.
The only way you can be prepared is to have considered the scenarios, and developed some plans should that scenario happen. To be a long-term winner it's not enough just to be good in the current environment, you have to be prepared to succeed no matter what the environment. By developing scenarios, you can be prepared to take advantage of market shifts – and if your competitor isn't, you can gain market share and improve your returns.
We all are subject to letting current events drive our views of the future. Then we try to "stand back" and look at a long term trend and develop some sort of "average" point of view. But neither of these really help when markets shift. What's needed is a set of scenarios – such as oil at $25 or 50 or $100 or $150 or $250 or $300. Understanding how you can grow sales and profits in each makes you prepared, and greatly improves your long-term chances of growth. It's the only way to prepare for market shifts, and worth a lot more during turbulent changes, like we're seeing now, than the deepest analysis of what you've done the last year, 3 years or 5 years.
by Adam Hartung | Oct 30, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
The business press, whether print or on-line, is full of stories about lay-offs. Motorola (chart here) to cut another 3,000 jobs in its flailing handset business (article here). American Express (chart here) to cut 7,000 jobs (article here). Over the last few weeks, other announcements included 3,200 job cuts at Goldman Sachs (chart here), 5,000 at Whirlpool (chart here) and 1,000 at Yahoo! (chart here).
Given the regularity with which leaders have implemented layoffs since the 1980s, investors have come to expect these actions. Many see it as the necessary action of tough managers making sure their costs don't unnecessarily balloon. And political officials, as well as investors and employees, have started thinking that layoffs don't necessarily have much negative long-term meaning. People assume these are just short-term actions to save a quarterly P&L by a highly bonused CEO. The jobs will eventually come back.
Guess again.
Most layoffs indicate a serious problem with the company. Long gone are the days when layoffs meant people went home for a major plant retooling. Now, layoffs are a permanent end of the job. For the employer and the employee. Layoffs indicate the company is facing a market problem for which it has no fix. Without a fix, management is laying off people because the revenues are not intended to come back. Thus, the company is sliding into the Swamp – or possibly the Whirlpool – from which it is unlikely to ever again be a good place to work, a good place to supply as a vendor or a good place to invest for higher future cash flow. Layoffs are one of the clearest indicators of a company implementing Defend & Extend Management attempting to protect an outdated Success Formula. Future actions are likely to be asset sales, outsourcing functions, reduced marketing, advertising & R&D, changes in accounting to accelerate write-offs in hopes of boosting future profits — and overall weak performance.
Layoffs are closely connected with growth stalls. Growth stalls happen when year over year there are 2 successive quarters of lower revenues and/or profits, or 2 consecutive declines in revenues and/or profits. And, as I detail in my book, when this happens, 55% of companies will have future growth of -2% or worse. 38% will have no growth, bouncing between -2% and +2%. Only 7% will ever again consistently grow at 2% or more. That's right, only 7%.
When you hear about these layoffs, don't be fooled. These aren't clever managers with a keen eye for how to keep companies growing. Layoffs are the clearest indicator of a company in trouble. It's growth is stalled, and management has no plan to regain that growth. So it is retrenching. And when retrenching, it will consume its cash in poorly designed programs to Defend & Extend its outdated Success Formula leaving nothing for investors, employees or suppliers. The world becomes an ugly place for people working in companies unable to sustain growth. People try to find foxholes, and stay near them, to avoid being the next laid off as conditions continue deteriorating. Just look at what's happened to employment and cash flow at GM, Ford and Chrysler the last 40 years. Ever since Japanese competitors stalled their growth, "there's been no joy in Mudville."
Given how many companies are now pushing layoffs, and how many more are projecting them, this has to be very, very concerning for Americans. Clearly, many financial institutions, manufacturers, IT services and technology companies appear unlikely to survive. Meanwhile, we see wave after wave of new employees being brought on in companies located in China, India, South America and Eastern Europe. For every job lost in Detroit, Tata Motors is adding 2 in India. For every technologist out of work in silicon valley, Lenovo adds 2 in China. For every IT services person laid off at HP's EDS subsidiary, Infosys adds 2 in Bangalore. It's no wonder these companies don't regain growth, they are losing to competitors who are more effective at meeting customer needs. There really is no evidence these companies will start growing again – as long as they use layoffs and other D&E (Defend & Extend) actions to try propping up an old Success Formula.
Sure, times are tough. But why die a long, lingering death? Instead of layoffs, why not put these people to work in White Space projects designed to turn around the organization? Instead of trying to save their way to prosperity – an oxymoron – why not take action? In most of these companies, lack of scenario planning and competitor focus leaves them unprepared to rapidly adjust to these market changes. But worse, Lock-in and an unwillingness to Disrupt means management simply finds it easier to lay off people than even try doing new things. And that is unfortunate, because the historical record tells us that these companies will inevitably find themselves minimized in the market – and eventually gone. Just think about Polaroid, Montgomery Wards, Brach's Candy company, DEC, Wang, Lanier, Allegheny Coal, Bear Sterns and Lehman Brothers.
by Adam Hartung | Oct 29, 2008 | Uncategorized
The old story goes that once a there was a European village that was overrun by its mortal enemy. The enemy left without investigating one small area where all the blind people lived. Upon learning that their village was now gone, the remaining people found out that there had been a single survivor of the attack. He had lost one eye, and his vision was poor. Nonetheless, he was voted the new leader of the village. From this story comes the famous line, "In the land of the blind, the near-sighted one-eyed man is king." In other words, how good something looks has a lot to do with what it's being compared to.
That's about the only explanation for recent interest in Kraft (chart here), Procter & Gamble (chart here) and Kellogg's (chart here). About the only thing that makes these companies appear attractive is their equity values haven't been hammered like some other companies. But are these companies upon which we can expect growing revenues and profits that will generate more dividends for investors, more demand for suppliers and higher pay and more jobs for employees?
Investors have not shed these companies as fast as some others because the view has been that demand for their products is more recession-resistant. But one thing these companies have in common is limited growth. Kraft was recently placed on the Dow Jones Industrial average to replace AIG. Until recently, Kraft was a division of Altria (the old Phillip Morris cigarette company). As Kraft "repositioned" for spinning out it sold most of its growth businesses, including Altoids. The company refocused on its old-line businesses, like Velveeta, Oscar Meyer bologna, Ritz crackers and Kraft macaroni and cheese - none any kind of high-growth business and each with ample competition from other branded and store-branded products. Leadership planned to increase earnings by cutting costs in these old businesses. Now we hear profits are up! But that's because Kraft sold its Post cereal business, gathering another one-time asset sale gain. And the company keeps cutting heads (read article here). The company isn't bringing out new products, or developing new businesses. If the stock market wasn't crashing, who would care about Kraft's asset sales and headcount reductions as it tries to find profits without anything new.
P&G's profit is up 9%, but the company admitted sales growth will fall below forecast (read article here). Profits are up mostly because commodity prices have fallen. Its competition from store-brands is hurting sales, as competitive private label sales are up 8.4% this year. Kellogg's got on the Phoenix track with plenty of White Space under previous CEO Guitierez, but the current CEO has done nothing to maintain Disruptions and White Space. Sales are up 9%, but that's primarily due to raising prices driven by higher commodity costs. Frozen meal sales seem to benefit from people eating at home more – not any new products (read article here). That's not a long-term trend.
Are these companies poised for high growth? Well, do you see the companies doing extensive scenario planning to identify new business opportunities? Are they talking about fringe competitors that they are worried about, and need to address with new products?? Do you see them Disrupting their Lock-ins to historical products and markets? Attacking old sacred cows? Is there any discussion of White Space where they can develop new Success Formulas with more growth and higher rates of return? Or are these recent earnings announcements mostly discussions of how well they are trying to Defend & Extend the old Success Formulas in turbulent markets?
Before the bottom fell out of the stock market investors focused on growth opportunities. Now, with fear involved, they are looking for companies that appear less risky. If you want less risk, go buy bonds! Preferably government bonds! There is no such thing as a low-risk company. Doing more of the same, but at lower cost or charging higher prices, inevitably leads to competitive problems. There are no "defensive" companies because all companies are vulnerable to new competitors with new solutions that better meet customer needs. Those who like these consumer goods companies today are too narrow in their focus. They are ignoring other investment opportunities in companies outside the USA, or in other types of assets like bonds, tangible items like art, or commodities like gold. As U.S. equities have seen problems, short-term these consumer goods companies have had less equity problems. But that does not make them good investments. For high rates of return companies must be developing new Success Formulas that deal with current Challenges and allow for higher future rates of return.
You're not likely to come out a winner if you vote the one-eyed, short-sighted person (or company) king. Better to find another village.
by Adam Hartung | Oct 28, 2008 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lifecycle, Lock-in
Wal-Mart (see chart here) has not been doing badly the last couple of quarters. Of course, it hasn't done great either. And if we look back the last 8 years – well there's not been much to get excited about. Wal-Mart Locked-in on its low price Success Formula 40 years ago and hasn't swayed since. Today as incomes go down and fear is huge about jobs and investments people are looking for low prices so they are returning to Wal-Mart. But those sales aren't coming easily, because Target, Kohls and other retailers are battling to get recognized for value while simultaneously offering benefits consumers demonstrated they enjoyed before economy went kaput. It's not at all clear that the small uptick in sales at Wal-Mart is anything more than a short-term blip in a very flat environment for Wal-Mart.
It's unclear that there's much growth. This week Wal-Mart admitted it was finding fewer opportunities to open new stores as saturation of its low-price approach appears imminent in the USA (read article here). Instead of opening new stores capital expenditures are going to decline by 1/3, and dollars are being shifted to store remodeling rather than new store opening. This implies a far more defensive tactic set, reacting to inroads made by competitors, rather than an understanding of how to regain the growth Wal-Mart had in the previous decades.
So now Wal-Mart is saying it will turn investments toward emerging markets (read article here). Sure. Wal-Mart wrote off huge investments and exited failed efforts in Germany and France, It's efforts to expand in Canada and the U.K. have been marginal. In Japan it only avoided a huge write-off and failure by making an acquisition. And its China project has gone nowhere, despite much opening hoopla 5 years ago. So why should we expect them to do better with a second attack into China, possibly going into India and Mexico?
The Wal-Mart Success Formula worked in the USA and drove incredible growth, but it is unclear that shoppers in developing countries get much benefit from a strategy largely based on buying goods from low-cost underdeveloped countries and importing them to the USA for mass-market buyers in low-cost penny-pinching store environments. What's the benefit to Wal-Mart's approach in Mexico or India? In India and China customers must pay high duties on imported goods, and low-cost retail exchanges already exist across the country for domestic products. Additionally, lacking a robust infrastructure (meaning a big car and good roadway to carry home mass quantities of stuff bought in large containers) it's unclear that Wal-Mart's approach is even viable. If you have to carry goods home on a bicycle, why would you want to go to a big central store? Isn't buying regularly what you need better? Wal-Mart has made no case that it's Success Formula is at all viable outside the USA, and especially in emerging countries.
Compare the Wal-Mart approach to Google (see chart here). In the last year Google has moved beyond mere search into other high-growth businesses such as mobile telephones. And today Google announced it is going to legally offer books and other copyrighted material to customers in some ways unique – but competing with Amazon's e-book (Kindle) business (read article here). Google keeps entering new high-growth markets with new demands from new customers. And in each market Google enters with new products intended to be better than what's out there today.
Wal-Mart keeps trying to find a way to Defend & Extend its old, tired Success Formula. Wal-Mart is huge, but its growth has slowed. Competitors have entered all around it, and every year they are chipping away at Wal-Mart by offering different solutions to customers. The competitors are getting better and better at matching the old Wal-Mart advantages, while offering their own new advantages. And we can see Wal-Mart is now being defensive in its histiorical markets while naive in trying to export its old Success Formula to markets that don't show any need for it. Wal-Mart is mired in the Swamp, struggling to fight off competitors while its growth is disappearing and its returns are under attack. On the other hand, Google keeps throwing itself back into the Rapids of growth in new businesses that offer new revenues and increased profits. And it enters those markets with new solutions that have the opportunity of changing competition. Google doesn't have to have everything work right for it to find growth through its White Space projects and continue expanding its value for customers, suppliers, employees and investors.
by Adam Hartung | Oct 27, 2008 | Disruptions, General, Quotes
You never know when interviewed exactly what the writer is looking for, what the article is, or how your comments will be used. But I was delighted to be interviewed by the acclaimed weekly newspaper Investor's Business Daily a couple of weeks ago. (The article can be found on Yahoo! business here.)
"Get Through It With Grit – by Sonja Carberry
Pust the envelope. Adam Hartung, author of "Create Marketplace Disruption," points out that winning companies aren't afraid to shake things up, especially during a downcycle. He said Cisco — instead of aiming to sell more products — has the "Disruptive" goal of making its offerings obsolete by creating new solutions. "This kind of approach keeps you from riding the tail (of a trend) too long."
Tap rabble-rousers. Hartung cited Apple's CEO as a prime example. "Steve Jobs is a very dsruptive kind of guy," Hartung said. So much so, Apple and Jobs parted ways in 1985. When Jobs was coaxed back to Apple 15 years later, he championed such out-there ideas as the now-mainstream iPod."
What's great in this article is some information from the Managing Director of one of the world's top management consulting companies, Bain & Company. Steve Ellis divulged from a recent Bain study that 24% more firms rose from the bottom to the top of their industries during the 2001 receission than the following sunnier economic period.
What great support for the fact that when markets shift the opportunity is created for changing competitive position. Those companies that build detailed future scenarios, obsess about competitors, Disrupt their internal Lock-ins and implement White Space can come out big winners during market shifts. So if you're a leader, now's a good time to be more Steve Jobs like and not fear Disruption. It's time to push your company to the top by taking advantage of competitor Lock-ins!!
by Adam Hartung | Oct 26, 2008 | Defend & Extend, General, Quotes
(Read the following quote in Forbes, October 5, 1998, written by Peter Drucker) “As we advance deeper into the knowledge economy, the basic assumptions underlying much of what is taught and practiced in the name of management are hopelessly out of date… most of our assumptions about business, technology and organization are at least 50 years old. They have outlived their time… Get the assumptions wrong and everything that follows from them is wrong.”
Last week, former Reserve Board Chairman Alan Greenspan admitted to Congress that his assumptions about financial services and the products being offered, including credit default swaps (CDS), were wrong (read article here). As a result, what he thought would happen in the financial markets – from interest rates to equity prices to currency values – turned out to be wrong. Unfortunately, this helped create the opportunity for runaway leverage and the banking meltdown which has affected world trade since early September. When leaders operate with wrong assumptions, the price paid by everyone can be pretty hefty.
The reality is that pretty much all leaders work with assumptions about business that are very country specific. The impact of global knowledge transfer – of worldwide information at a moment’s notice – of labor arbitrate happening in hours – and the immediacy of financing and financial reactions – is still not well understood by leaders trained in an earlier era. Thus leaders under-recognized the speed with which manufacturing jobs could move around the world – as well as the speed with which IT services could move to lower cost markets. Even though the current Federal Reserve Chairman (Dr. Bernanke) is a student of America’s Great Depression, what he doesn’t understand is that Depression happened in an isolated way to the USA. Today, globalization means that problems with U.S. banks becomes a problem globally. For all his studies of history – things in financial services have fundamentally shifted. His assumptions are, well, often wrong.
In November there will be an economic summit. Some are referring to it as the next “Bretton Woods” – a reference to the meeting in upstate New York which determined how foreign currency exchange rates would be set and how banks would interact between countries (read about the summit here). Yet, there are others who say no changes are needed. But let’s get real. Of course we need to rethink how our country-based banking system works in a world where insurance companies and hedge funds often move faster and have more ability to affect markets than traditional banks. In the 1800s banks in the USA issued their own currency – and then states issued their own currency. Eventually this disappeared to federal currency. So, do we now need a global currency? With the change to the Euro in Eurpope the need for individual country currencies took a step toward unnecessary. Should that trend continue? You see, it’s easy to think about the world using old assumptions – like a U.S. dollar as independent of other countries – but does it make sense in a world where products and services are supplied globally and governments (such as India and China notably) now manipulate their currencies to maintain price advantages?
On Friday evening a “guru” on ABC’s Nightline was talking about the wild swings on the New York Stock Exchange and the NASDAQ. He commented “the only way to get hurt on a roller coaster is to get off. So hold onto your equities and keep buying.” Give me a break. A roller coaster is a closed system. Even though it goes up and down, you know where it will end and the result. WE DON’T KNOW THAT ABOUT EQUITIES TODAY. Many, many companies we’ve known for decades could disappear (GM, Ford, Chrysler are prime examples). Just like Lehman Brothers disappeared, and AIG practically so. If you were an investor in common or preferred equities of Freddie Mac or Fannie Mae, your “roller coaster ride” did not have a happy ending – and you would obviously have been a whole lot smarter to have jumped off. You may get bruised, but that would have been better than the disaster that loomed.
It is critically important to check assumptions. This is not easy. We don’t think about assumptions, they just are part of how we operate. That’s why now, more than ever, it is incredibly important to do scenario planning which will challenge assumptions by opening our eyes to what really might happen. Because you can never assume tomorrow will be like yesterday – not in business. To survive you have to constantly be planning for a future that can be very, very different. Doing more of what you always did will not produce the same results in a shifting world. Planning for future shifts is one of the most important things managers can do.
by Adam Hartung | Oct 23, 2008 | Uncategorized
Odds are you don't know what a DN-01 is. And that's OK.
Think about my recent post on motorcycles. Even with gasoline prices down substantially, they are still about where they were a year ago – which is way higher than they were 5 years ago. So, the desire to obtain high gas mileage is still relavent. There are still people who would like the high gas mileage a motorcyle provides. So what do you suppose holds them back? Safety is an issue. But for many, it's "I don't know how to ride."
Very few Americans know how to drive a standard shift auto any longer. If you're under 30, the odds are that you've never even sat in a car with a clutch and a stick shift. And that's a problem if you go to buy a motorcycle, because they have standard transmissions. So, while learning to ride the motorcycle you not only have to learn how to manage a front brake and back brake, but how to work a clutch and shift a manual transmission. Now, that's a big hold up for a lot of people.
And that's where the DN-01 comes in (see link to DN-01 here). This new motorcycle from Honda (see chart here) has a transmission that doesn't need shifting. Formerly only possible on a small engine scooter, now Honda has a full-size motorcycle that can be ridden without thinking about shifting. If you think about that for a few minutes, you realize that opens the market to about 10x the previous number of possible customers. I've long extolled how Honda is a leader in using Disruptions and White Space to find new opportunities. Here again we see Honda taking the lead in finding a way to greatly expand the marketplace. Another example of White Space at work.
Compare this to Harley Davidson (see chart here). Most Harley motorcycles use the same technology they've used since the 1940s (albeit with minor modifications – but not a lot). Around the turn of the century Harley tried to update its customer base by launching a new motorcycle with an engine designed by Porsche of Germany. Even though it's been out since 2002, the V-Rod has not been a big seller (read about the V-Rod here). If you go into a Harley dealer and ask about this bike you'll likely be told "oh, the chick bike," in a derogatory way that only a Harley dealer could figure somehow talks down one of his own products. While this bike represented the next breakthrough in technology to move Harley forward, the company and its dealers have chosen to largely downplay it – and sales results keep falling.
Now compare Honda to Sony. Sony was long considered at the front edge of innovation. For years Sony was known for bringing forward solid state radios, solid state televisions, the walk man and the disk man. But in the late 1990s Akio Morita, long the company head, decided to retire. Throughout his career, Morita focused on new product development, testing and finding new markets for new technologies. But the Board replaced Mr. Morita with an MBA. Sony's new leader first reacted to stop all the wasted new product development at Sony in order to immediately raise profits. Then, he cut R&D and product development budgets in favor of acquisitions. Today, Sony is no longer the technology leader it once was.
Think about how Sony (see chart here) - which owned a recording studio as well as #1 position in consumer electronics – completely missed the MP3 music market. The new management's focus on profit, and Defending & Extending its past market position without investing in new development, left the company vulnerable to Apple and its Disruptive effort to change the music business. As a result, Sony's profits are now down 38% this year, and leading a recent drop in the entire Japanese stock market (see article here). Sony is worth less today than at any time since 1996!
Sony and Harley Davidson both Locked-in on what worked in the past. They tried to maintain sales on old products, and old product technologies. They tried to say that "brand" was what was important. That let new competitors come into their markets and find new customers, using new products. And that's exactly what Honda is doing. By Disrupting old notions about motorcycles (that they have manual transmissions, most recently) they create White Space for new products (and new businesses – like jet airplanes and robotics.) As an investor or employee, you're better off with the Disruptor than the D&E competitor every day.
by Adam Hartung | Oct 21, 2008 | Disruptions, In the Rapids, Leadership, Openness
Yesterday I talked about how Lock-in to an old Success Formula kept Sun Microsystems from undertaking Disruptions in the 1990s that would have helped the company keep from floundering. One could get the point that with this weak economy, the die has been cast and there’s little we can do. "Oh Contrare little one".
Let’s look at Apple (see chart here) – the company Sun passed up to focus on its core server business in the 1990s. Today Apple announced profits are up 26% this year – despite the soft economy (read article here). We all know about the iPod, iTunes, iTouch and now iPhone. Apple has demonstrated that it is willing to bring out new products in new markets without regard for "market conditions", and as a result drive new revenues and profits. It would be easy to delay new investments and new launches in this economy to drive up profits, but the company CEO maintains commitment to internal Disruptions and ongoing White Space to drive growth – especially while competitors are retrenching.
Another recent example is Coach (see chart here) the maker of high-end luggage, leather goods and fashion accesories. Most high-end goods are seeing sales plummet. But Coach used its scenarios about the future to invest in its 103 factory outlets and many discount outlets. Instead of running to the high end and doing more of the same, while cutting costs, Coach has put new products into the market and offered new discount programs – in addition to its growth of outlets beyond the traditional Coach stores (read article about Coach here.)
Any company can take action at any time to grow. All it takes are plans based on future scenarios, rather than based on just doing "more of the same." Being obsessive about competitors allows for launching new products before anyone else, and gaining share. And using Disruptions to create White Space for successful new business development. This can happen at any time – not just when times are good. In fact, when times are bad (like now) it can be the very best time to focus on growth. When competitors are trying to retrench it creates the opportunity to change how customers view you, and grow. This might well be the best time ever to not only Disrupt your own thinking – but Disrupt competitors by changing your Success Formula and doing what’s not expected!
