by Adam Hartung | Aug 12, 2007 | General, In the Swamp, Leadership, Lifecycle, Lock-in
Frequently investors look for "good markets" when seeking a place to put money to work. On the flip side, frequently management that is performing poorly will blame their weak results on a "bad market." Listening to this, it would be easy to conclude that if you want to make money you need to be in "good" markets, while avoiding "bad" ones. And that begs the question, what’s a good or bad market?
When Tom Monaghan entered the home-delivered pizza business with Domino’s restaurants were growing at less than 3 percent a year, the competition was largely cut throat small pizzerias with no entry barriers, and there was a huge, dominant, branded player in pizza restaurants named Pizza Hut which was owned by PepsiCo and had enormous resources. Was that a good or bad market? Tom Monaghan became a billionaire competing there.
When Sir Richard Branson launched Virgin Atlantic his prime competitor, British Airways, had 90% market share and was losing money. The only other competitor was Freddie Laker, and he had just gone bust. Were airlines a good or bad market? Sir Richard made more than a billion dollars from Virgin Atlantic.
Now, Virgin America is launching service (see article here.) United has just emerged from protracted bankruptcy, while Delta and Northwest are on the brink. All the major national airlines (except Southwest) are claiming that fuel and labor costs are so high they can’t re-invest to upgrade their aging fleets. Meanwhile they are laying off workers, cutting customer services and on-time performance is declining as they struggle to fly planes. So is Sir Richard crazy? Are U.S. airlines a good or bad market?
Rupert Murdoch of News Corp. fame has just paid an enormous premium to purchase Dow Jones & Company (read article here). But investors have been bailing out of newspapers for 6 years. Knight-Ridder busted itself up selling its assets. Tribune Company is going private to try and cut additional costs. Subscriptions and advertising revenues have declined for 4 years as customers have left for internet news in droves. Is Murdoch crazy? Are newspapers a good or bad market?
Success in business is not about "good" or "bad" markets. Success requires understanding how to compete in the future. When customers have a demand, but old Success Formulas produce poor results it indicates an opportunity to make money. Just not using the old Success Formula. Virgin America will not be like United or American. It has a new approach to customers, and therefore it has a plan to operate a different Success Formula and make money. Likewise, News Corp intends to radically change the Wall Street Journal, including putting a lot more emphasis toward the on-line editions. If Murdoch successfully Disrupts Dow Jones, and invests in White Space to create a new Success Formula, he has a tremendous opportunity to make money. People want to fly in North America, and people want to read business news on this continent as well. The problem is that the existing management teams are so Locked-in to their Success Formulas that they accept lousy results as they do the same things day after day. These new competitors don’t need a "good market", they just need to apply new Success Formulas to these old markets.
The myth is that growing markets offer an easier place to compete. That growth creates more resources is true, but growth also attracts a lot more competitors. When you find a gold nugget, within minutes you’ll be surrounded by hundreds of additional prospectors. While the gold may be more available in that part of the stream, those trying to grab it are far more plentiful as well. No matter what the growth rate, high or not, returns go to those businesses that develop new Success Formulas which overcome market Challenges. And that is what we’re seeing at Virgin and News Corp. The leaders of these companies are not afraid of any market. And they have shown they can make money by building new Success Formulas that reap profits while Locked-in competitors stall and fail.
by Adam Hartung | Aug 3, 2007 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
The headline in the business section of The Chicago Tribune screamed "United Doubles Up On Profit" (see article here). You would think United airlines (see chart here) was a great story of turnaround success. After all, the airline only returned out of bankruptcy about 18 months ago. And the stock has doubled from its 12 month lows. But is all well at UAL?
When we read the article we learn that profits are up largely due to United’s ongoing cost cutting programs. They keep beating up on employees to do more work for less money. And United used bankruptcy to strip down much of its pension payouts, further giving to employees (past and present) on the chin. United didn’t improve it’s performance with customers or improve its productivity and thereby improve profits. It just spent less.
Closely tied to United’s long-term profits is its charges for airplanes. And a different article (see article here), which preceded the earnings announcement by 3 days, stated that United was falling behind on its new airplane orders. United has stopped buying replacement planes, and that has helped the company lower its expenses. In other words, United is squeezing down the company to be smaller, and not reinvesting even for maintenance, much less growth. In fact, according to the article, United is so far behind on placing orders for new planes the company is at jeopardy of being able to get any replacement aircraft to keep its fleet in the air! The aircraft manufacturying industry capacity is sold out for several years into the future, and United isn’t on the list to get any new equipment.
So while United is cheering about its LAST quarter, its FUTURE prospects look bleak. UAL has literally traded its future for today. Management is de-investing in order to produce current profits, while simultaneously asking employees to sacrifice in order to keep the company alive. This is the ultimate in Defend & Extend Management, where the leadership gives up the future, and gives up its employees future, in order to defend its own decisions and actions. The United leadership team is so Locked-in to trying to present its outdated Success Formaul as capable that it is killing the company in its effort to present immediate profits.
Investors should not cheer this latest profit news. Rather, they should recognize that United has probably turned the corner from the Swamp into the Whirlpool. Without the wherewithal to purchase more airplanes, in the future there will be no airline. No matter what last quarter’s profits were.
by Adam Hartung | Jul 24, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Wal-Mart has been stumped in finding a growth path for several years (see chart here). Once one of America’s fastests growing companies, Wal-Mart now trails Target, Kohl’s and JCPenney’s growth rates – and profit margins. Dropping prices only went so far with shoppers in a highly competitive retail marketplace – as merchandise selection, store ambiance and store personnel also contribute to the selection of where to spend our money.
Nonetheless, Wal-mart keeps plugging away at doing the same old thing. Never one to recognize a Challenge to its out of date Success Formula, Wal-Mart maintains its Lock-in to "low price" as the only tool for competition. They demonstrated that they would even fire any executive with the nerve to try changing the merchandise mix when they publicly humiliated the last VP of Marketing while giving her the heave-ho. Last Christmas they tried cutting prices to drive revenue, only to be met with yawns by shoppers.
So, what is Wal-Mart doing now? According to CNNMoney.com (see article here), they are….. take a guess…… cutting prices (cymbal crash heard in the distance). Another 16,000 items are intended to see the scalpel applied, with even deeper discounting than in the previous holiday season. We know for sure that will cut further into margins. Whether it will drive same store sales growth….. well….. it hasn’t worked for the last 6 years.
A slave to its Lock-in Wal-Mart follows the adage "if at first (or second, or 65th time) you don’t succeed, try, try again." But successful businesses know that in a dynamic marketplace that strategy is death. The better phrase would be "If at first you don’t succeed, learn something from what you did and try a different tack." But that would require Wal-Mart be willing to Disrupt itself and use White Space to find new solutions. And that seems to be the one thing Wal-Mart’s leaders are completely unwilling to consider.
by Adam Hartung | Jul 21, 2007 | In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
The CEO with the hottest seat in corporate America right now is probably Ed Zander of Motorola (see article here, see chart here.) And well it should be hot, as recent negative results now verify Motorola is once again in a Growth Stall (see article here). After a great couple of years, the last two quarters have been back to back negative ones. Fewer than 7% of companies recover from a growth stall to consistently grow a mere 2%.
This isn’t the first stall for Motorola. There were several before, and just 3 – 4 years ago many investors felt that Motorola may not survive. But a new CEO (Zander) came in, implemented a slew of Disruptions, opened up a bevy of White Space projects and Motorola started to really improve. He ignored analyst calls for massive, widespread layoffs and instead rapidly moved new products to market (like RAZR) and started building new businesses in Motorola. Results were stellar, and Zander was widely applauded for the changes including being named CEO of the Year by popular journals.
But these latest earnings announcements demonstrate that a post-stall recovery is very hard to maintain. Motorola was desperately Locked-in to its failing Success Formula when Zander took over. Despite all his Disruptions and White Space projects, Motorola did not fully develop a new Success Formula, nor did it complete a migration to a new Success Formula, before slips started happening in the traditional business. Profits dipped, and then Carl Icahn started a raid on the company.
Unfortunately, leadership then hiccuped. Reacting to Icahn, and the cries of stock analysts, instead of doing more Disruptions and creating more White Space to keep its focus on growth, Motorola started trying to Defend & Extend its old strategies – announcing an 11% (7,500 person) layoff would begin. The company shut down an R&D facility at the University of Illinois in Champagne (one of the top engineering schools in the world) to save money. And it began "reorganizing" (see article here) The company even took to financial machinations as it focused on engineering the P&L instead of new products – as can be seen in the latest earnings news.
From his early actions it appears Zander knows the right thing to do. And he has continued following the original path, such as the announcement early this month that Motorola has agreed to acquire Leapstone Systems, further bolstering the network division – where growth rates and profits both exceed the mobile handset business (see article here.) What Motorola needs now is not another change in CEO, but rather more Disruptions and White Space to push Motorola further away from the old behaviors and Lock-ins which got it into so much trouble in the 1990s, then early this decade, and now more recently. It’s not Zander that is the problem, but the truncated effort to use White Space to develop a new Success Formula and then mobilizing Motorola toward that Success Formula.
Motorola was an incredible turnaround story. Disruptions and White Space were allowing this Phoenix Principle company to regain flight. But right now the Phoenix is in the crosshairs of many analysts and Icahn – who are collectively calling for the CEO’s head when they should be screaming for more Disruptions leading to more growth. Motorola will not save its way to prosperity. It must develop a new Success Formula that puts Motorola back in the Rapids – and keeps the company out of the Swamp. If investors and employees aren’t careful they’ll accomplish their goal of unseating Zander, Icahn will swoop in, and then we can expect yet more heads to roll, businesses to be sold, more product development to be shuttered and after Icahn gets his cash back he’ll leave Chicago with a shell where once a great company stood.
Better to let the Phoenix take flight. If the Motorola organization and its leadership have the guts to get out of the broken down old nest and really test its wings.
by Adam Hartung | Jul 16, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Readers of this blog know I am no fan of Sears Holdings. Bringing together Mr. Lampert’s Lock-in to private equity cost cutting behavior with Sears’ out of date Success Formula was like finding out you have cancer shortly after suffering a heart attack. One very sick situation.
For months investors played along with Mr. Lampert’s story that he would somehow save his way to prosperity for investors. But now, after 6 years of declining revenue, and a recent report that same-store-sales are down for the second consecutive quarter (see article here), the company equity value is down almost 25% from it’s April peak (see chart here). True to form, Mr. Lampert has proposed propping up the stock price by increasing the share buyback. At the end of the day, this financial machination will leave Sears with only one store and only 1 share of stock, but somehow Mr. Lampert indicates magic comes from this plan.
Mr. Lampert tapped into a long-held business myth. Even though we see businesses fail every year, most of us do not really think the companies we work for, or invest in, will fail, We adopt old-fashioned notions of business lifecycles that assert "mature" companies should accept a low growth rate, and maximize profits instead of revenues. This Myth of Perpetuity allows people investing in, selling to, or working for even failing companies to have faith – long after such faith is poorly placed.
The reality is that businesses either grow or die. Businesses exist in a competitive marketplace. If they don’t grow, they get clobbered by more successful competitors. You aren’t allowed to stand still, because that makes you food for the aggressive competitor running hard to succeed. Mr. Lampert acted as if Sears could stop growing and "milk" the business. What he ignored was the fact that the lions were watching, and while he’s trying to "milk" Sears of cash Target, Kohl’s, JC Penney, Lowe’s and even Home Depot have eyeballed this "cash cow" and decided to simply kill it. They don’t see any reason to allow Mr. Lampert the time to cut costs slowly and generate cash. Not when they want those customers, the revenue and the profits they can make from increased sales — something Sears can’t produce because it’s Success Formula is so out of date.
It was clear 2 years ago that Sears was unable to succeed. Now it has hit a growth stall, and statistically it has only a 7% chance of ever again growing even 2%. Those investors that believed in Mr. Lampert believed in myth. Not just the myth of his heroic skills, but in the Myth of Perpetuity — because they would not accept that the venerable Sears company was heading straight into the Whirlpool.
by Adam Hartung | Jul 10, 2007 | Defend & Extend, In the Swamp, Leadership, Lock-in, Quotes
Do you remember the old Smith, Barney television ad where the professorial actor said “We make money the old fashion way. We EARN it.”?
More executives appear to need reminding of this. In today’s market report from Merrill Lynch (see info here, page 2) we learn that in the first quarter of 2007 the S&P 500 spent an incredible $117BILLION on share buybacks. So much was spent buying back shares that it added from a full point to 1.5 points to EPS for the quarter! In May and June IBM, WalMart and Home Depot announced share buyback plans of $50Billion (and keep in mind, just yesterday Home Depot announced real earnings would be down 18% this year! [see page 1 of same link]). Conoco and Johnson & Johnson are announcing plans to buy back $25Billion of equity between them.
When businesses are growing they spend money on hiring employees, building plants and offices, traveling to see customers and making new products. When they want to Defend & Extend their existing business they take the money out of such productive long-term uses and spend it instead on buying back their own stock. An action which does not create a single job, nor new product, nor help the business create enhanced growth in revenue or profitability. We have to be careful not to confuse financial machinations with real growth.
by Adam Hartung | Jul 8, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
When was the last time you enjoyed an airplane flight? Flying is one time when as a customer the more you consume, the less happy you become. I don’t know anyone flying commercial U.S. airlines that enjoys the experience. It’s amazing, ever since deregulation annual customer surveys point to unhappy customers – and every year satisfaction declines further.
The Locked-in airlines will tell us that customers can’t expect service and low price. And customers keep picking price. That’s not true. Customers really don’t have much choice. Airlines have Locked-in on their Success Formulas, and they pay more attention to their money-losing direct competitors than they listen to customers. When everyone (Southwest accepted) gives lousy service, can’t be on time and loses bags– and they control 90% of the gates across America — it’s not like the customer has much choice. So they blame the customers for being unhappy. Give us a break!
The Chicago Tribune ran front page articles today on just how badly the airlines are performing – looking at plane crowding, delays, lost baggage and customer complaints (see articles here and here). So what are the airlines doing about the situation? Are they creating White Space to try new solutions? Unfortunately, no. Their answer is to do More, Better, Faster and Cheaper operation of an airline system that is cracking all over the place, and producing horrid results. How will we get better service, after 3 decades of decline, by doing more of the same?
The first action the airlines promise is MORE flights. How will that improve the situation when the system is already overcapacity, causing computer breakdowns at the airlines and in the FAA? More flights have never solved the problem.
United reacted by hiring a Walt Disney executive pledging to help the airline be BETTER at customer service. Sorry, but the airlines aren’t amusement parks, and customers are trying to get from A to B on time and with their bags. The solution isn’t about trotting out Mickey Mouse to put a smile on someone’s face when they are 6 hours late, tired of the uncomfortable airport seating, and out of money for the overpriced airport food and lodging. Trying to apply a veneer of happiness on top of a broken Success Formula producing lousy results will only make investors and customers more angry.
The airlines are asking for a change in work rules so they can try to move the airplanes FASTER. When the gates are sold out, and the system is working so close to capacity that even high wind can cause 2 hour back-ups at major airports as ripples flow the system, changing the job description for a baggage handler or gate agent isn’t going to solve the problem.
And, of course, the airlines never tire of talking about ways to cut costs so they can be CHEAPER. They never grow weary of hammering on their employees (often unionized) that they have to take pay cuts – when many no longer even earn a living wage (especially in the major cities where airlines hub.) Haven’t the airlines heard customers? Prices are already low. Lower prices don’t matter when you can’t get where you want to be on time and with your bags!
More, Better, Faster, Cheaper are the 4 words of Defend & Extend managers who have no idea how to do anything other than maintain Lock-in to a broken Success Formula. And in this case vendors (except for the airplane manufacturers), employees, investors and customers are all bearing the brunt of an industry that is more interested in Defending & Extending what doesn’t work than in creating some White Space to develop a new solution.
by Adam Hartung | Jun 30, 2007 | General, Leadership, Lifecycle
I was in a heated argument this week with a stock broker. His claim was that all anyone should care about is earnings. I told him that was not true. In fact, what is most important to investors is the business growth which can lead to future cash flow.
Take WalMart for example. The company has continued to grow it’s EPS the last few years, but the stock has been mired in a trading range over the same period (see chart here). Why doesn’t WalMart stock price go up with earnings? Why does the price/earnings multiple decline? Because investors are very unsure how the existing management team will ever grow the business as it previously did, given that efforts to expand in Europe, South America and China have fallen flat. Wal-Mart is now trying to cut costs and buy back its stock in an effort to dress up earnings per share, but investors aren’t fooled as they see all the problems WalMart has faced and how the company’s old Success Formula simply isn’t as competitive any longer.
Or take a look at Tribune Company (see chart here). Just a few months ago Tribune announced it was repurchasing all its equity via a Sam Zell led leveraged buy-out, But recently the stock has fallen below the repurchase price. Investors have been made aware of how the management team manipulated earnings and cash flow last year to "dress up the pig" for market, and there is now risk if the bonds can be sold to generate the cash to buy the remaining stock (see article here.) When there is no growth in the business, such as the no growth scenario at Tribune, even debt investors realize that they cannot expect a return on their investment.
Just a week ago I quoted in this blog a Merrill Lynch daily report by David Rosenberg to be careful and not confuse financial re-engineering with business building. Rosenberg went on to quote the New York Times this week "a raft of bond offerings for recently announced deals… have been scaled back after facing resistance from investors." And "the term ‘loan covenants’ is making its way back into the investment lexicon." (see source here page 2.) Within two days Rosenberg said "there was supposed to be a $250bln corporate bond pipeline in the next few months to fund all these deals that have been announced, but in a sign this is no longer an ‘issuers market’, many are being scaled back or postponed" (see source here, page 3).
If you don’t keep growing your business, your value cannot grow. No matter if you are public, or want to be private. You must have a Success Formula that meets competitive customer needs and keeps you in the Rapids. You can’t count on unthinking debt investors to give you money, hoping you will let them "clip coupons" as you lazily sit in the Flats. Investors are wisening up, and realizing that you have to keep your business in the Rapids of business growth to create value – or you quickly lose value. And no one wants to be stuck in a ship without a current of growth pushing it.
by Adam Hartung | Jun 26, 2007 | Uncategorized
All businesses and people Lock-in. Lock-in is beneficial at helping us to be productive. We work faster because Lock-in helps us use assumptions to move rapidly toward a goal, using a Success Formula as a guide. The goal of The Phoenix Principle is to help us be aware of and manage Lock-in, and find opportunities for new Success Formulas that can produce better results.
This was driven home to me just today. I was talking with a company in a very high transaction business. They outsource transactions for other businesses. In transitioning up a new customer the company agreed "to move 80% of volume to the offshore facility" by a certain date. When I read this I was anticipating they were in big trouble, because the company was considerably away from handling 80% of transactions in the new offshore facility.
When I asked the company President about this he looked at me and said "we transferred all the complex transactions offshore first. Once we get those set up the simple ones transfer easy and fast. We’re doing well over 80% of the work hours in our offshore facility, since complex transactions take many multiples of the work hours required by simple transactions." Bang! Was I Locked-in, or what? I jumped to volume = transactions. Volume didn’t mean transactions, but rather work hours! Imissed that not all transactions are equal.
I was reminded that we all have to be aware of how easily we Lock-in (myself included). We have to seek out input from others who don’t have our Lock-in and be open to really listen to that feedback. "Outsiders" can provide different interpretations of what we see with our own eyes – but unconsciously modify through the lenses of our Success Formula.
by Adam Hartung | Jun 24, 2007 | Defend & Extend, In the Rapids, In the Swamp, Leadership, Lock-in
You know I’m no fan of McDonald’s (see chart here.) As detailed in previous blogs, the leadership is horribly Locked-in to its old Success Formula, and is expending lots of company resources to protect that Success Formula in the face of unhappy investors and competitors. Yet, when talking about competitors what do you hear McDonald’s discuss? Wendy’s, Burger King, Carl’s Jr. – other businesses focues upon hamburgers -with an occasional mention of Kentucky Fried Chicken or another traditional fast food outlet.
We all know where the big threat is though. And that’s Starbucks (see chart here). Far from a mere coffee shop, Starbucks has used White Space to unleash itself in several markets. And last week Starbucks showed its willingness to use White Space to expand into the marketplace McDonald’s has owned for decades – fast lunch – by announcing it will be launching premier salads.
McDonald’s started selling salads totally as a defensive move. McDonald’s new customers were staying away because mom or dad simply couldn’t eat a burger and fries, or preferred not to. So McDonald’s offered a second-rate salad product at a hefty price to try and keep the parents from saying "no" when the kids asked if they could have a burger. Salads weren’t intended to bring in new customers to eat salads, they were intended to Defend & Extend the old hamburger-based Success Formula by stopping client exodus.
Starbucks is taking a positive move into salads (see article here). It is an expansion of their Success Formula definition to include a full lunch entree. It is a shot across the bow of McDonald’s, which has conveniently ignored this emerging competitor for several years. And McDonald’s didn’t see it coming, and would now most likely say they don’t think of Starbucks as a competitor. After all, Starbucks doesn’t sell a burger, or fries.
The national airlines (United and American) never dreamed that Southwest would one day be national, have much higher customer satisfaction and be more profitable. Sears never imagined that a low-cost discount chain like Wal-Mart could eclipse its powerhouse status. DEC never imagined that AutoCad could drive it out of business. Lanier and Wang never perceived that Microsoft with a simple application like Word could kill the word processing marketplace. Once businesses devote their energies to Defending and Extending their Success Formula they completely miss the new competitors, and they don’t react until they are so far down the river that they can hear the Whirlpool sucking them under.
