by Adam Hartung | Oct 28, 2007 | In the Rapids, Leadership, Openness
I talk frequently with small businesses. Many with revenues under $1million. And for many of these owner/operators they wonder how it can make sense to maintain White Space. After all, they say, as a small business isn’t even more important to focus on the primary business? The allure of doing one thing is high, but in the end the best businesses always utilize White Space.
The era of drive-in theatres is almost gone. But many of us remember when every town had one. Did you ever wonder how Drive-ins started? I bet you thought someone in the movie business invented the concept. Or perhaps someone with a traditional theatre. But that would be wrong. In 1933 it was a parts store/gas station owner who wanted to increase his night business that opened the first drive-in theatre. He started by experimenting with a projector and a sheet between trees. He launched what became an entirely new theatre concept, and it became a lot bigger than his gas station. (For more on the history go here.)
Businesses of all ages and sizes need White Space. It’s in this part of the business where anything goes, not encumbered by Lock-in, that we are the most creative and capable of trying new ideas. None of us know what will lead to the Rapids, and fast, profitable growth. Even though lots of small businesses think they know what they should do, until they hit the Rapids and grow at double digits they are still in the Wellspring. And the Wellspring breeds the highest number of business failures – usually because enterpreneurs Lock-in before they hit the Rapids and they don’t know what will grow. Maybe you think you’re in the gas station business, only to learn your night movies are worth more than parts selling. Only the marketplace will determine if you’re in the Rapids.
Domino’s thought it was in the pizza business. For 20 years Domino’s did not grow, nor did it make any money. But when the founder realized he was in the prepared food delivery business, rather than the pizza business, he hit the Rapids and became a billionaire in just a decade. No business is too small to benefit from White Space – and avoid the traps Lock-in lays to thwart growth.
by Adam Hartung | Oct 23, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
The greatest euphemism in business is "mature." Frequently executives and analysts will describe low growth as "maturing", as if this is OK. Just today CBSMarketwatch (read article here) reported an analyst from Fifth Third Bank said WalMart (chart here) is a mature business — and then goes on to say this is a good thing! Incredibly, he thinks slower growth will lead WalMart to paying more in dividends and buy back more shares raising the stock price as it stops investing in stores.
That’s what we used to call "milking" the business. And we now know that simply doesn’t work. The thinking used to be that the cash flow was sound, due to market domination, so the cash could be paid out. But just look at WalMart. It’s having to spend plenty of money just trying to stay in place as competitors (Target, Kohl’s, JCPenney and others) keep stealing customers and revenues. Last week WalMart cut prices on 15,000 items, which will cost billions of gross margin dollars, in an effort to get customers back into stores for Christmas shopping. And because WalMart growth has slowed dramatically (sales in same stores are up only .8% compared to a year ago – less than inflation) the company is desperate to invest in things like Japanese grocery stores seeking something that will grow. So the money is still flowing out of WalMart in plenty of big ways, without going into the pockets of shareholders. Or employee pockets as they still work without benefits or overtime pay, and sometimes even over breaks – as we learned in a Pennsylvania lawsuit.
Businesses are not genetic material. They have no biological requirement to "mature." And businesses can’t afford to "mature." They have to constantly grow. Without growth, they quickly will be consumed by competitors. If we say WalMart is "mature", that is a very, very bad thing. I agree wtih the UBS analyst who said that WalMart needs a turnaround. But that won’t happen any time soon at Locked-in WalMart. For investors, employees, vendors and customers, the word "mature" is more devastating in business that it even is in life.
by Adam Hartung | Oct 22, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
So readers of this blog know I am no fan of Wal-Mart. The company has yielded no benefits to its investors, employees or major suppliers for almost a dedace (see equity chart here.) Management loves being Locked-in to the outdated Success Formula, even though it does not produce satisfactory growth.
So, given that the last 4 years Wal-Mart has failed to meet expectations for its Christmas season sales you would think it was about time they came up with a new approach, wouldn’t you? And what did they do? According to USAToday (see article here) the company decided to whack prices down on 15,000 additional items. Let’s see, last year they cut prices on 6,000 items and revenue did not meet expectation. So this year the obvious this is to do………….. more of the same, of course. What didn’t work will surely work if the company simply does more of it – right????????? Does this in any way remind you of doctors that believed in blood-letting?
Wal-Mart is so stuck in the Swamp it can’t even think of doing anything new. More of the same is not a strategy. When the tactics become too easy to predict the company becomes too easy for competitors to attack (and make my blog writing too easy.) More of the same is a death sentence when the growth slows. With lower prices Wal-Mart’s revenues and profits will suffer more, not improve. And it’s unlikely this will even benefit consumers very much, since most of them have already said they prefer to shop at Target, Kohl’s, JC Penney and other retailers with better selection and better ambiance.
by Adam Hartung | Oct 9, 2007 | Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in
When I was a kid – way too long ago – a comedic television show named Get Smart featured a mock spy who was terrible at lying. When he would get caught telling a fib he would immediately try to change his story, and his first line was always "Would you believe?". It was clear that you couldn’t believe, or trust, this guy.
General Motors (see chart here) has apparently reached a new agreement with the UAW. And the headlines screamed "Deal Gives GM Grip On Costs" (see article here.) The Chicago Tribune article goes on to quote several industry analysts/gurus making claims that GM has now resolved the issues that caused them to fear bankruptcy just 2 years ago. For example, the chairman of the Center for Automotive Research said "I think they’re competitive on cost now. There are no excuses after this." The consensus is that GM can now refocus on products, and regain lost share.
Would you believe……. ? Does anyone remember the auto company’s situation back in the 1970s and ’80s? They all cried "foul" that they could not compete effectively with Japanese competitors who had the benefit of a very favorable Yen exchange rate. Because the dollar was stronger than the Yen, the auto companies claimed they could not compete. Well, it was only a few years before the dollar fell more than 30% against the yen. And now, following a long decline, the dollar is at an all-time low versus the Yen, which is extremely cost favorable for GM. But do we hear any auto executive saying that their competitiveness versus the Japanese has improved? Rather, attention has shifted to labor contracts.
Companies in the Swamp and Whirlpool leap from disaster to disaster. Their Success Formulas are broken, and Lock-in keeps them producing poorly. They blame poor performance on factors outside their control, because they hope the world will return to conditions which will allow their Success Formula to produce better. They want the world to evolve toward their needs, rather than they evolve toward meeting market Challenges. Good luck with that approach.
GM has seen its market share steadily erode for 3 decades. And a look at the company’s stock price chart shows that long term investors would have received no value (other than dividends) over that same long period. Shifting its health care charges under a new labor contract does not change GM’s competitiveness. GM does not design, manufacture, market and sell its products as well as its competitors. And it has not developed any new businesses with higher growth and better profits. Most of GM’s competitors now make a large percentage of their cars in the U.S. just like GM, even though they are offshore headquartered, and they are growing sales, market share and making more money.
GM needs a Disruption and White Space – like the old Saturn division once was – to design a new Success Formula. GM’s new labor contract merely extended its demise a little longer. Investors, employees and suppliers need to beware of big promises, anticipate business-as-usual, and prepare for more pain.
by Adam Hartung | Oct 8, 2007 | Defend & Extend, In the Swamp, Leadership, Lock-in
Defend & Extend managers love to believe that by sticking to the Success Formula they produce the best results at lowest risk. But, Lock-in is not free. It has costs related to lost opportunities, as well as direct costs. Take for example Wal-Mart (see chart here) which has offered investors no gain for over 5 years.
As detailed in previous blogs, Wal-Mart is horribly Locked-in. It’s efforts to grow internationally have failed miserably, because the company tries to extend its Success Formula into other markets where it simply doesn’t work with clients. Now we’re seeing that Wal-Mart is struggling to extend that model even in the USA (see article here). Everyone knows how Wal-Mart started in the rural markets, then went to mid-size cities and eventually into the suburbs. Each step Wal-Mart merely did what had previously done better, faster and cheaper. Wal-Mart did not develop the capability to adapt, but merely to further optimize.
Now Wal-Mart is hoping to grow in the U.S. by entering major cities. But in each city, such as New York, they are being shut out. In 2006 they targeted Chicago. Almost shut-out, they obtained permission for 1 store via the first ever veto of Chicago’s Mayor Daly. But now, growth has stalled and there are no new stores opening any time soon. As the first page of the Chicago Tribune headlined "Wal-Mart Strategy Stumbles." So as America becomes more urban, Wal-Mart is losing the opportunity to enter its last remaining domestic marketplace.
Most people are aware that part of Wal-Mart’s Lock-in is to never allow unionized employees. And Wal-Mart is merciless when controlling employee time. In Philadelphia Wal-Mart’s Success Formula cost the company $62.3million, on top of a previous award of $78.5million, as a judge ordered the company to pay workers for its labor practices (see article here). Wal-Mart might like to brag about its ability to be low cost, but when that capability starts being judged in courtrooms, and judges order large fines, it is clear that Lock-in is standing in the way of progress rather than aiding it.
Lock-in is not free. Companies that succeed long term learn how to update their Success Formulas by overcoming Lock-in. Unless Wal-Mart Disrupts soon, its shareholders, vendors and employees can’t expect much of a return.
by Adam Hartung | Sep 22, 2007 | In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Lots of people have the idea that you can "milk" a business of cash. The notion goes that you can take a viable, but slow (or no) growth business and stop investing. Then "milk" the cash out of it. What a great idea. Too bad it doesn’t work.
Take Sears for example (see chart here). Eddie Lampert got KMart out of bankruptcy, and then bought up Sears. He quit investing in Sears, and revenues and profits dived. He told investors that was OK, because he was improving profit margins. He said he would keep flying the plane well, just at a lower altitude. But sales and profits have continued to dive even further. Just recently (see article here) Sears had to announce that profits were off yet another 40%. Margins have declined from 28.4% to 27.7T. Even though the company has been buying its own shares to prop up earnings per share, even that figure is down almost 40%. And, revenues are down (not the growth rate down, the actual revenues have again declined) by 4%. Same store sales at both Sears and KMart are down by about 4%. The President of Sears, Aylwin Lewis, said he was disappointed. Oh really?
Many investors have said not to worry about Sears slide. After all, they said Mr. Lampert would "milk" Sears of its cash to make hedge fund investments – which are supposed to be wildly profitable. Especially since that is ostensibly Mr. Lampert’s forte. But, there are now more hedge funds than you can shake a stick at. The price of deals has been bid up, and returns have fallen. So those investments haven’t paid off. Now the Sears war chest has declined by almost 50% – so much for "milking" to maintain cash.
Sears went into a growth stall, and those who ignored it have lost 27% on their equity investments. The reality is that in today’s competitive global marketplace, no one has the option to slow investing and "milk" the business. Competitors swoop in and push you down faster, and harder. Competitors find those who want to "milk" easy prey. Especially when they are as good as Target, Kohl’s and JC Penney – or as large and desperate for growth as WalMart.
When a Success Formula grows old and tired, the portfolio notion of "milk it" so you can invest in another investment is, well, hopelessy out of date. Portfolio theory is a great idea, but do you really think slow-growth, defensible cash-rich businesses exist? Let’s get real. When a Success Formula stops producing good returns management has to move fast to set up White Space and MIGRATE to a new Success Formula. That’s the only option to keep from losing everything in the Whirlpool. "Milking" is not possible. Migrating is what management has to do. By migrating to a new Success Formula companies can be reborn- like the Phoenix. But Sears has no White Space – none. Leadership keeps bleeding out cash, revenues fall, profits fall, and there’s no great saving alternative investment. With every month, that option gets farther away for Sears and its inevitable demise becomes clearer.
I posted to this blog the day Lampert announced his acquisition of Sears that the company would not resurrect. But a lot of people wanted to believe in Mr. Lampert. Better to believe in reality. Company’s have to migrate toward a new Success Formula by using Disruptions, White Space and working hard at it. Not by wishing for portfolio theory, clever transactions and efforts at "milking" to somehow miraculously create value.
by Adam Hartung | Sep 7, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Kraft, the venerable American producer of cheese and other branded foodstuffs, has performed terribly for several years (see chart here.) It’s operating margin is lowest in its peer group, its revenue growth has been nonexistent, and it has sold off valuable, and growing, brands – like Altoids – to fund its outdated Success Formula by Defending such old brands as Velveeta. This last year Kraft was fully spun away from previous owner Altria (the old Phillip Morris), and a new CEO was put in place. But so far, investors and employees have nothing beneficial to show from these changes.
On Tuesday the CEO said she intended to improve the performance at Kraft by setting higher goals, and tying compensation to those goals (read article here). Her plans include incentive compensation ties to profits, cash flow and revenue growth. And she intends to link how much is paid to Kraft’s ad agency to the growth in brand sales. All of this may sound good, but it is unlikely to make any difference.
Any reader of this blog could decide to set a goal of improving their income by 50% this year. And readers could promise that spending on hobbies would be directly linked to growing income. But, would that make any difference? If you go to your boss and tell him your plan he’s likely to say "that’s interesting", but will that help you reach your income goal? Of course not. Changing the goal is not enough. What’s critical is Disrupting the Lock-ins so that it’s possible to find a new Success Formula leading to that goal. For example, to achieve a 50% revenue increase might well require getting additional education – which would likely mean killing the Lock-in to watching weekend football or enjoying evenings out with a spouse. Or it might mean changing employers and careers, which could entail killing the Lock-in to a short commute, or to the corner office acquired over time, or even to the company 401K or pension plan. Those Lock-ins stand in the way of Disrupting yourself, and that’s what really stands in the way of achieving higher goals.
CEO Rosenfield at Kraft has not created any Disruptions. Nor has she set up any White Space. Quite to the contrary, she is proposing to cut headcount – a typical business disturbance that increases Lock-in by reducing resources. She has complained about rising costs of the grains and other raw materials going into Kraft products, but has done nothing to create White Space which would address this issue – thus leaving declining margins at the ongoing mercy of those outside Kraft. She keeps trying to incrementally improve the Kraft Success Formula, which is obviously woefully out of date and thus producing insufficient returns.
Setting new goals and linking compensation to goals is a nice thing to do. But it is meaningless unless Disruptions are implemented that create White Space where new Success Formulas can be created that will result in achieving higher goals. Tweaking the model by cutting heads, and blaming outside cost factors, only serves to keep the Success Formula Locked-in. Unfortunately for investors and employees, Kraft’s new goals will make no difference unless the CEO starts attacking the Lock-ins that are keeping Kraft results below average.
by Adam Hartung | Sep 2, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in, Openness
A few weeks ago this blog talked about the mistake Ford (see chart here) was making by selling off its most profitable group (Jaguar and Land Rover) in order to generate cash to Defend & Extend the broken Success Formula in traditional Ford business. Ford is selling it’s White Space for cash to defend in its old business. Just the opposite action Ford should take to turn itself around.
And one very savvy competitor has seen the opportunity. Tata Group of India is not well known outside its home country (see website for Tata here). It’s best known business is TCS (Tata Consultancy Services) which provides IT services globally. But inside India Tata is known for everything from electricity generation to automobile manufacturing. While Tata makes a complete line of vehicles, from large trucks to very small cars, in India (see website here) these are not known outside it’s domestic marketplace. The company has recently made a splash by developing a quality automobile that it will sell for only $2,000, and potentially taking this new vehicle global (see article here.)
While Tata Motors is not yet regarded on the world stage, the company is very serious about learning how to compete. And the commonly held view is that Tata should produce a cheap car, which is not expected to be very good, and eventually try to migrate up market. This slow approach is what the Japanese auto companies did, and more recently the Korean auto competitors. But Tata Group is very astute. And they recognized an opportunity to take a very different approach.
It has been reported that Tata is considering buying Jaguar and Land Rover (see article here.) And this sort of Phoenix Principle thinking is why Tata has become a very successful, high growth and extremely profitable company. This acquisition would give Tata a fast growing and very profitable auto company operating across the globe. Tata already knows how to make inexpensive high volume automobiles. These companies would give Tata global market access, and two very positively positioned brands. Tata could then migrate its business toward the global marketplace, learning what will work from its acquisition, while developing new skills and capabilities in its very large, domestic business. These acquisitions will provide the White Space that can help Tata Motors continue its rapid growth by developing a new Success Formula which can meet future market needs and help Tata become a world -class competitor.
Ford should have migrated its Success Formula forward with the White Space it has in its premier auto gruop. By selling these businesses it effectively hands over its White Space, probably its most valuable assets, to an emerging competitor very willing, eager and capable of learning from these businesses to accelerate its growth. In effect, Ford will create a new global competitor that may well help accelerate the demise of Ford itself.
Tata has been brillliant in its efforts to expand its information services business globally. It is one of the world’s largest suppliers. And while TCS results are not reported, it is well known in the industry that TCS’s performance is right up there with Infosys (see chart here) – the fastest growing and most profitable competitor on earth. Now, Tata is looking to move forward similarly with its auto business. And Ford is handing the knowledge keys to Tata for some money to short-term protect its badly outdated traditional business. When the fox comes home to eat the eggs, Ford will only have itself to blame.
by Adam Hartung | Aug 18, 2007 | Defend & Extend, General, In the Swamp, Leadership
Thursday of last week Dell (see chart here) announced that it would be restating four YEARS of previous accounts because the numbers had been manipulated at the request of senior executives. The company admitted that account balances were reviewed by senior exexcutives with the goal of seeking adjustments to meet quarterly objectives. The Dell CFO said that the company had found evidence of fraud in revenue transactions that would have to be completely redone. (see article here)
This shows the power of Lock-in when an organization finds itself stuck in the lifecycle Swamp. The business is Locked-in to its Success Formula, but a market shift causes the results to no longer be as good as they used to be. Although the overall market continues to grow, the company doesn’t do as well. From the prosperity of the Rapids leaders find themselves fighting to find faster water as growth, for them, slows. And in most companies, Dell being stereotypical, the answer is to try working harder, doing more, and seeking to be somehow cheaper in order to save the poorly performing Success Formula. When the results just don’t meet expectations, huge pressure is felt to Defend the Lock-ins & Extend the Success Formula. And, in too many cases, under great pressure to perform executives will resort to financial machinations. Sometimes these accounting tricks are completely legal. But, sometimes pressure causes leaders to falsify records in order to preserve the Success Formula.
As we saw during the infamous trials at WorldCom and Enron, (and more recently Tyco and Conrad Black) leaders vocally proclaim all innocence. They become so blinded by their Lock-in, and the need to protect the Success Formula which previously served them and investors so well, that they slowly inch toward taking more dangerous acts. When they start realizing they cannot meet objectives simply by operating the Success Formula, they look for more creative methods.
While some few execs will likely get blamed for this 4-year fiasco, in reality Michael Dell and the existing executives are equally to blame. They remained so Locked-in and unwilling to consider modifying the Success Formula that they created the environment which bred this problem. Dell has never maintained White Space, nor has it ever tried to migrate to new solutions for market Challenges. Dell kept pressuring management to do more, better, faster, cheaper. And with that approach he created a no-win environment for divisional presidents and vice-presidents. They didn’t have the option of using White Space to find a better solution, and with that avenue cut off they either fell on the sword of failure or they had to find some way to keep the emporer feeling he was wearing beautiful clothing.
I blogged months ago that Dell was stuck in the Swamp. Now we know it is. A 4-year (I still can’t believe it) ongoing accounting falsification goes to show just how deeply the company is stuck. It takes a significant commitment to Lock-in to overlook something being wrong for that long. And Dell’s current answer is that the errors were not really significant. Give me a break – any time someone can get away with chicanery for 4 years it’s a significant problem. And just by taking that point of view Dell reinforces its intent to remain Locked-in and stuck in the swamp. The company still shows absolutely no indication it will ever set up some White Space to evolve forward to a better competitive Success Formula.
Once stuck in the Swamp fewer than 7% of companies ever get out alive. Most fight off the aligators and mosquitos only so long before being pulled into the Whirlpool of failure. Dell looks to be far too deep in the Swamp to ever get out. And that’s too bad for a lot of suppliers, employees, customers and investors.
by Adam Hartung | Aug 14, 2007 | Defend & Extend, In the Swamp, Leadership, Lock-in
So, has the American consumer quitting its spending, or are some retailers running weak Success Formulas? That’s really an important question to answer when assessing management at Wal-Mart [see chart here].
Today Wal-Mart missed its earnings forecast (again) [see article here.] After sorting through all the financial machinations from previous year divestiture charges, this year’s tax adjustments, etc. this most recent quarter had earnings per share exactly equal to last year. Does anyone not think this number was manipulated to be sure it wasn’t worse by 1 cent? Wal-Mart blamed its problems on the fallback in consumer spending. Of course, Wal-Mart’s primary customrs have long spent 100% of their bi-weekly pay, so what is supposedly different now? Are we to presume these lower-income folks are saving more now? As their real estate prices and saving rates are falling?
Interestingly, stock market analysts built on the Wal-Mart announcement to beat up the entire Dow Jones Industrial Average [see article here.] Analysts at Wall Street firms like Jefferies & Company said that if Wal-Mart is doing badly, it must mean that consumer’s are spending, and going to spend, less. The assumption in this logic is that Wal-Mart is running a good Success Formula allowing its results to be a proxy for all consumer spending. To accept this, investors have to believe that Wal-Mart’s Success Formula is meeting customers needs so well that it would not be possible to serve customers and get a better performance than Wal-Mart.
In reality, the Wal-Mart Success Formula is seriously out of step with consumer needs. Sheer size does not make Wal-Mart a proxy, because once Wal-Mart’s Success Formula misses serving customer needs consumers keep spending – just somewhere else. Sears Holdings has been missing targets for a long time, but no market analyst says the misses at Sears and KMart are not considered market barometers because market analysts know the Success Formulas there are problematic.
The DJIA has seen higher volatility lately (see chart here). And it is off of its recent highs. Is the cause weak consumer spending? Certainly no one focused on consumer weakness as the cause the last two weeks. But Wal-Mart saw this market destabilization as an opportunity to make an excuse for its poor performance. And via size, some important people are buying that excuse. But the reality behind Wal-Mart’s poor performance has nothing to do with the U.S. economy, aggregate spending patterns by consumers or even changes in the money supply affecting interest rates. The problem at Wal-Mart is Lock-in to an outdated and poorly performing Success Formula. And everything else is just making excuses for not using White Space to solve this problem
