by Adam Hartung | Jul 16, 2008 | Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
The headline in today’s Chicago Tribune trumpeted the headquarters move of MillerCoors to Chicago. In exchange for $20million in aid, about 300-400 headquarters jobs will move to Chicago. The article goes on to wax eloquently about how Chicago is a "winner" city because of its great quality of life (read article here). Unfortunately, the article is a whitewash of the economic reality in Chicago and Illinois. Chicago’s mayor and governor are trying to focus on symbols, like acquiring a new company headquarters, rather than look at the results. Because the reality is that Chicago and Illinois have been on a long-term job decline.
The brutal reality can be found by downloading the PDF located here. What you’ll see is that from 1990 through 2007 Illinois, and Chicago as by far its largest job hub, has trailed not only the nation in job creation, but even the rest of the midwest (Indiana, Iowa, Michigan [yes, even auto-dependent Michigan], Missouri and Wisconsin). Chart after chart details how every sector of employment has been significantly trailing the national growth rate – and even far behind the region. Chicago may be a great city to live in, but it’s not a great city to be employed – or look for a job. Especially if your talents are on the leading edge of growth businesses.
What matters in business is results. And competitively, Chicago and Illinois have not met the challenge for almost 2 decades. Year after year Chicago becomes more of a "fly over" for people working on both coasts. Even though the University of Illinois is one of the top 5 engineering schools on the planet, most graduates leave to work on a coast (think Marc Andreeson and Netscape and you’ve got he message). When innovators create a new product as a result of working at Kraft or Motorola, they have to go to a coast to find funding, employees to grow the business and talented service people that can aid their growth. Large companies in Chicago are shrinking as competition steals competitors to the coast, or offshore.
In the midwest it’s common for people to relate their life to a family farm which exists today, or is a mere one generation away. But just like these midwestern urbanites migrated to the largest midwestern city, Chicago, because there were no jobs in the rural hinterlands, we now see midwesterners are forced to migrate coastal in order to maintain employment or find funding for new ventures.
By focusing on something as trivial as a headquarters win the city and state do a disservice to its citizens. This symbol overlooks the need for a much higher growth rate. Housing did not crash in Chicago like it has in LA, but it never went up nearly as much either. With few jobs, there was less demand and the boom never set in like it did elsewhere. People in Chicago cannot hope to see their city flourish if it cannot win the competition for jobs by developing more opportunities. Yes Boeing moved its HQ to Chicago, but we all know the planes are made in Seattle, and that’s where the jobs are. MillerCoors may be in Chicago, but the beer is made in Milwaukee and Denver. Neither "win" comes close to offsetting the losses from the closing of BankOne and operations move to New York, or the closing of Ameritech and operations move to Texas (just 2 recent examples of massive job losses). Or the failure of Lucent and Motorola to maintain their health thus causing tens of thousands of jobs to move to both coasts and India.
Chicago and Illinois leaders still focus too much on maintaining old Lock-ins, trying to Defend & Extend what the city was when it was the manufacturing and transportation center of America 50 years ago. For example, Chicago is no longer the city of Capone and Dillinger. By denying gambling, Chicago’s hold as the conference center of America shifted to Las Vegas while tourists flocked to Merrillville, IN or Milwaukee, WI to enjoy an evening. Yet the paranoia about its past stops Chicago from doing the obvious and legalizing casinos like cities/states have done within 75 miles. Or take for example the refusal to build a domed stadium in Chicago where weather which is less than ideal. While everyone knows a domed stadium would help bring in major events from around the globe, the city refuses to consider one as it relishes in the glory of aged facilities like Soldier and Wrigley Field. The last all-star baseball game in Chicago was delayed 8 hours due to rain, and everyone watched and wondered if the White Sox would play in the snow to win the World Series. Great is their past, and beautiful is the architecture – but Locking-in to that past is now costing citizens tax revenue and jobs! {note to readers – yes I know the Sox play in the renamed Comiskey Park and not Wrigley – but why didn’t the city dome that when it was rebuilt?}
The situation in Chicago is not dire, but neither is it good. Unless the IT jobs, healthcare jobs, biotech jobs and other occupations upon which the planet’s future is based make their way to Chicago, the city will some day be as well known as Dodge City – but possibly about as popular (Dodge City has under 50,000 people and is so far off the beaten path I challenge you to identify its location within 150 miles – hint, it’s in Kansas, not Arizona or California.) To find the future which will keep Chicago vibrant its leaders must focus on scenarios for growth, and realize they must COMPETE with cities that offer many benefits. Then the mayor and his leadership team must Disrupt Lock-ins to tradition, and use White Space to discover a new Success Formula which can regain growth leadership. If the current mayor Daily wants to have a legacy which eclipses his father, he must reset the agenda for growth by focusing on jobs – not merely symbols.
by Adam Hartung | Jun 16, 2008 | Defend & Extend, Disruptions, General, In the Swamp, Innovation, Leadership, Lock-in
Here we sit with nearly $150/barrel crude oil. In the USA gasoline is over $4/gallon, and diesel fuel is nearly $5.00/gallon. For the first time since the 1970s, adjusted for inflation we have new highs for petroleum fuels. But we can’t seem to break our reliance on petroleum. We all know that petroleum demand gives a lot of power to leaders in unsettling countries – where peace is an uncommon word and decision-making bears no relationship to U.S. or European processes. And we know that long-term the oil will run out. And we know that we all would benefit, maybe even the climate would benefit, if we used other "renewable" energy sources. But we don’t. Why not – are we all collectively "stupid."?
Quite to the contrary, we all are acting very rationally. In the 1970s oil went from $2/barrel to $30/barrel. That caused such havoc it sent the U.S. economy into a tailspin. But the major supplier of oil, OPEC, quickly got the message and began pumping more oil. It wasn’t long into the 1980s before oil restabilized at $15-$20/barrel. The U.S. businesspeople breathed a collective sigh of relief, and went on about business without much change.
How brilliant of the suppliers. When the price became so high that Americans truly started investing in alternative fuel sources they quickly lowered the price. They made petroleum competitive enough that alternative technologies, which were less effective, economically unviable. Now we hear they are looking at the world with exactly the same analysis (go to WGN TV web site here for 30 second clip.) They have kept raising price until we are at the edge of making substantial investments in alternative energy – such as reactivating our nuclear program for electicity production – and now they plan to control supply to maintain price.
We are not foolish people, we are reacting economically correctly given current market conditions. We may hate higher energy cost, but we will pay it until there is a more economic alternative. And today the alternatives, from E85 gasoline to hydryogen cars to electric cars simply aren’t as effective and are costly. These alternatives probably would have far better performance given money and time to work on them – but who wants a "less good" solution at the same or higher price?
This is the way it is for all new technologies. They are less good until they find markets where they can be developed into a more competitive solution. These new solutions are what Clayton Christensen called "Disruptive technologies" in his excellent books The Innovator’s Dilemma and The Innovator’s Solution. OPEC’s leaders are pricing to make sure that oil remains the best economic solution for as long as possible – so they raise price but not too much.
The only way to change our reliance on petroleum is to develop a replacement. But who will pay? Who will pay for the less good solution? It would be an unwise consumer to invest in an electric car when it costs more and lasts a shorter time. Or in a hydrogen car when there are no refueling stations. Or for a building developer to invest in solar panels when it drives up the total cost of rent for his tenants.
Baring intervention, we will keep using petroleum until the supply declines to the point that there is no choice but to develop an alternative. When the petroleum becomes so rare that the cost goes so high that the other solutions become relatively cheaper. That could take many more decades. And could entail more wars and other very costly societal impacts.
The only way out of this connundrum is to use either penalties for the fossil fuel (such as taxes) or to provide subsidies to the less economical solution. And these penalties/subsidies have to be implemented by the government. But in a society, like the U.S., that is Locked-in to concepts of "free markets" and "no taxes" and "no subsidies" these programs are not attractive to politicians who must stand for re-election. What politician wants to be the one who voted to raise the gasoline tax $.50/gallon? Who wants to be accused of "pork barrel politics" for providing a subsidy of $3,000 for buying an electric car (especially if made in Japan or Korea)? Or giving a real estate developer a $200million grant to install solar panels? Or paying a farmer $50million and then giving a company $1billion to build a windmill farm?
As long as we remain Locked-in to our assumptions about the benefits of free markets, low taxes and no subsidies we will continue to march down the road of continued fossil fuel dependence. Economically, it will always be cheaper to sustain petroleum than develop a new solution. The only way we can overcome this will be to Disrupt our approach to energy. Future behavior is highly predictable when we have current industry executives, who want to sustain petroleum as long as possible, setting our energy policy. They will always make the case for drilling more holes, opening new mines and building new refining facilities. That, on the margin, is currently the most economic solution. Only by Disrupting our approach to energy – then creating White Space for new solutions to develop – can we ever change. We have to create the projects to test these new solutions. To learn and make advancements in order for the new technology to become economically more effective. And that can only happen in places which are not being managed by people that benefit by sustaining the status quo.
99% of the world’s population is paying money, today, to less than 1% for petroleum. This is a vast transfer of wealth. From not only the developed markets in Japan, USA and Europe, but China and India as well. This is making those who lead the middle east and selected dictator-controlled countries in Africa and South America incredibly rich. And none of that money is being invested in an alternative to fossil fuels. If we are ever to change, it requires we address our underlying assumptions about trade and lassez faire economics – New solutions require Americans disrupt their beliefs in doing what is always most economical today – and create White Space where we can develop new solutions that will someday surpass the oil on which we are all so dependent – and tired of complaining about.
All new solutions have a cost to develop. There is an early days when they are less economical than existing solutions. They are either subsidized in the early days, or they don’t happen. At least not until the old solution becomes prohibitively expensive. We subsidize commercial ventures all the time – such as the 20 consecutive years of losses which were subsidized by investors in Federal Express. Or the consistent reinvestment made by investors in unprofitable airlines. Or the losses sustained in the early days of Amazon and eBay. But America’s current Lock-in to old-fashioned economic notions about pricing, taxes and government subsidies means that little will be done to address reliance on petroleum. We could maintain the status quo for another 50 years. And that is unfortunate. Because now is a good time to recognize the Challenge, Disrupt our thinking, and implement White Space projects that could change our energy policy dramatically in just a single decade. But only if we are willing to address our old Lock-ins to an outdated economic Success Formula.
by Adam Hartung | Jun 12, 2008 | Disruptions, General, Innovation, Lifecycle, Openness
Yesterday the news services all reported that America’s National Center for Health Statistics now has determined the average person born this year will live to over 78 years old (read article here.) White women will live to 81, and white men to 76, while black women to 77 and black men to 70. Did you haar about this on the television, radio or see in the newspaper? What are you going to do about it?
We’ve known across our liftetimes that people are living longer. Substantially longer. So, hearing this sort of information becomes like the weather – we see it but we don’t really pay any attention. Unless there is a pending calamity (such as a thunderstorm) we pretty much ignore the information. But this really has some big implications. And for businesspeople, failing to plan for those implications could be deadly.
The most obvious implication is retirement. President Franklin Roosevelt declared the retirement age would be 65 when he established Social Security. Where did 65 come from? It was the life expectancy at the time. In other words, the program wouldn’t be too costly because at least half of Americans weren’t expected to survive to ever get a check. That’s no longer true. So can we continue to expect retirement at 65? If not, what does that mean for your business? When was the last time you hired someone knew who was over 55? If she can work until 75, is a 20 year potential loyalty too short? Maybe the company that seeks out people over 55 to hire will have an advantage? Will these older workers be more dedicated, harder working, less distracted by children at home and school, quicker to complete tasks due to more experience, make fewer mistakes due to better judgement, require fewer benefits (like child care or education subsidies), be more punctual and possibly even work for less pay?
Oh yes, but there’s the cost of health care. We all know health care costs are going up. Of course, 20 years ago people with strokes, heart attacks and cancer died. Now we know not only how to save their lives, but keep them alive for a very long time with medication, rehabilitation services and assisted living. Of course there’s a cost to this. How will we pay for this? Will health care jobs become less valuable? Will we import health care workers? Will we export health care work to foreign countries – asking people to go to India on vacation and replace a hip while there (medical tourism is one of India’s fastest growing businesses)? Will we change our lews and care standards so that health care is more automated and cheaper but with an allowable error rate? Who will benefit from changes in health care?
We used to accept health insurance companies saying that once you had one of these illnesses your insurance forever after would be extremely expensive – if you could obtain coverage at all. But should employers accept this? We now know cancer, heart attack and stroke survivors live decades without recurrences – so does it make sense to charge more for insuring these folks. If we keep adding up more and more people who are survivors of illness will we end up with the government the "insurer of last resort"? If we want to employ these people but we don’t because of heath care costs can we expect governmental intervention? Will we begin charging penalties for smoking, drinking, poor exercise habits? Will we lose our civil liberties as we strive to lower health care costs (no one thinks its a bad thing that we force everyone to wear a seat belt today – a clear loss of the civil liberty to choose whether to wear one)? What insurance practices will be necessary to compete? What insurance practices should employers seek out?
How about immigration? As we live longer the average age is going up as well. Where will the younger people come from to do all the manual work the retirees don’t do? Should we expect an impact on immigration reform that might involve allowing more workers into the country to offset the aging? Will that lead to an increase in demand for education and skills training? Will it change our use of English as the only language? Will it change the foods sold in grocery stores? Demand for housing, and the type of housing desired?
What about television programming? Will it remain totally focused on younger people in the "coveted advertiser age groups" below 54? Will it make sense to run movies at 7:00pm rather than 11:30 or midnight? What about retail stores, should they make changes for an older average population? Do huge shopping malls make sense if people are less interested in spending the day roaming this indoor paladium?
Average life expectancy is just a simple projection, made by the government every year. Easy to ignore while we run our business every day. But it has significant implications on many businesses – implications that could have an impact in as little as 5 years. Add onto that other easy projections – like urgan sprawl is causing water use to increase, and growing economies in China and India means exponential growth in demand for fuel, and increasing education in foreign countries means the standard of living is going up faster outside the U.S. than inside – and what do these mean for your business in 5 years? If you’re a homebuilder, should you be in the USA or India? If you run a college should you be opening a new campus in the U.S. or China? If you’re in health care, should your next hospital be in Chicago, or Thailand? If you’re a recruiter, should you be putting your management through foreign language school? If you make TV programs, should you expand your studio in Burbank, or open one in Bollywood? You don’t need a crystal ball. It’s not about having a highly accurate forecast. It’s just, are you really planning for a future that will most likely be different than the past? If you’re not, you’re sure putting a lot of faith in luck.
by Adam Hartung | Jun 3, 2008 | Defend & Extend, General, Innovation, Leadership, Lock-in
Lately, there’s been lots of press about mergers. With the economy listing, reports are rife that retailers need to merge to survive. Airlines need to merge to survive. And now we read beer brewers need to merge to survive (read article in Chicago Tribune here). Is this true? Do these businesses have to merge to survive?
Most mergers are based on the simple idea of "economy of scale." This is a very Industrial Revolution idea that the company with the biggest manufacturing plant has the lowest cost – and thus wins! Advocates claim that you keep buying competitors so you build more volume in order to spread out marketing, advertising, administrative (accounting and legal for example) costs over more volume – because these costs don’t need to rise as fast as volume (in their estimation). Similarly, within manufacturing or operations there will be costs that don’t rise as fast as volume, and thus the biggest volume competitor should end up with the lowest per-unit cost. And this supposedly leads to victory because the low cost competitor always wins. As though product differentiation, service differentiation and other factors are irrelevant.
In the case of beer, we’re now expected to believe that unless a company has the most beer volume GLOBALLY they can’t afford to stay in business – so poor Budweiser (see chart here) with its multi-million case annual production is such a small fry it’s going to become toast. Do you really believe that? Will combining Budweiser with a Belgian and Chinese brewer suddently, somehow, make Budweiser a more profitable brand? Just because its parent has more global market share?
Well, we all know we know longer compete in an industrial economy. Today, economies of scale advantages are pretty rare. Competitors can get 99% of scale advantages at pretty low volume by sharing resources – from ad buys to distribution centers to trucks and manufacturing plants. Furthermore, there are lots of people out there wanting to invest in "hard assets" so finding money to expand facilities is very cheap – leading to the lowest capacity utilization for fixed assets in American history! Plants aren’t busting with volume as they expand. Quite the contrary plants are regularly being closed to consolidate capacity into other locations! Economies of scale are a proven concept – but having them as a competitive advantage is another point entirely. We now compete in an information economy where the rules are entirely different than before.
So why all this merger mania? Firstly, because so many people believe in economy of scale advantages (which worked really well in the 1960s and 1970s) they keep believeing in them even though they no longer exist. And because merging is something a CEO can drive from his own office. If he runs a company wtih $100 revenue, and he buys another with $100 revenue, he now controls more people, more plants, more costs, more revenues – and by gosh hasn’t he done competitively well? He’s taken over the competition, and made his company bigger and doesn’t that mean competitive success? Given how we hero-worship the CEOs of large companies, and provide more hero attributes the largest of these, we demonstrate regularly that we think of a merger buyer as the "winner" and the merged company as a "loser." But is that true when the only growing beer brands are the craft beers and they are considerably more profitable than the traditional part of the business? Isn’t it time to focus on a different way to compete if we want profitable growth?
Does merger activity produce better products, lower prices, better customer satisfaction, lower cost, more jobs, better communities and higher returns for investors? Oh my, but this are tough questions. Virtally all academic studies of mergers have shown the opposite. The merger reduces product innovation and new product launches, creates higher prices (in fact that’s the objective of airline mergers), lower customer satisfaction, create little change in per unit cost (it goes up more often than down), fewer jobs as layoffs dominate, and investors of the "winning" company receive nothing for the effort.
We have to move beyond out-of-date ideas like "economy of scale advantages" if we’re going to break out of the no-growth, no-jobs economy dominating the U.S. since 2000. We need to use Disruptions to drive new ideas, and implement White Space to test them.
Illinois Tool Works (see chart here) has demonstrated that companies can be very successful with mergers. Acquisitions aren’t inherently bad. But they are if they are done for the wrong reason – like economy of scale advantages. Instead, ITW uses mergers need to make better products, improve customer satisfaction, develop more new products and launch them leading to better revenue growth and better cost/price performance leading to higher profits for investors. Mergers can be very valuable to successful strategy – but they have to be well designed, thought through and managed for those results – not merely assumed to produce lower cost because volume is being consolidated.
by Adam Hartung | Jun 3, 2008 | Defend & Extend, General, Innovation, Leadership, Lock-in
Lately, there’s been lots of press about mergers. With the economy listing, reports are rife that retailers need to merge to survive. Airlines need to merge to survive. And now we read beer brewers need to merge to survive (read article in Chicago Tribune here). Is this true? Do these businesses have to merge to survive?
Most mergers are based on the simple idea of "economy of scale." This is a very Industrial Revolution idea that the company with the biggest manufacturing plant has the lowest cost – and thus wins! Advocates claim that you keep buying competitors so you build more volume in order to spread out marketing, advertising, administrative (accounting and legal for example) costs over more volume – because these costs don’t need to rise as fast as volume (in their estimation). Similarly, within manufacturing or operations there will be costs that don’t rise as fast as volume, and thus the biggest volume competitor should end up with the lowest per-unit cost. And this supposedly leads to victory because the low cost competitor always wins. As though product differentiation, service differentiation and other factors are irrelevant.
In the case of beer, we’re now expected to believe that unless a company has the most beer volume GLOBALLY they can’t afford to stay in business – so poor Budweiser (see chart here) with its multi-million case annual production is such a small fry it’s going to become toast. Do you really believe that? Will combining Budweiser with a Belgian and Chinese brewer suddently, somehow, make Budweiser a more profitable brand? Just because its parent has more global market share?
Well, we all know we know longer compete in an industrial economy. Today, economies of scale advantages are pretty rare. Competitors can get 99% of scale advantages at pretty low volume by sharing resources – from ad buys to distribution centers to trucks and manufacturing plants. Furthermore, there are lots of people out there wanting to invest in "hard assets" so finding money to expand facilities is very cheap – leading to the lowest capacity utilization for fixed assets in American history! Plants aren’t busting with volume as they expand. Quite the contrary plants are regularly being closed to consolidate capacity into other locations! Economies of scale are a proven concept – but having them as a competitive advantage is another point entirely. We now compete in an information economy where the rules are entirely different than before.
So why all this merger mania? Firstly, because so many people believe in economy of scale advantages (which worked really well in the 1960s and 1970s) they keep believeing in them even though they no longer exist. And because merging is something a CEO can drive from his own office. If he runs a company wtih $100 revenue, and he buys another with $100 revenue, he now controls more people, more plants, more costs, more revenues – and by gosh hasn’t he done competitively well? He’s taken over the competition, and made his company bigger and doesn’t that mean competitive success? Given how we hero-worship the CEOs of large companies, and provide more hero attributes the largest of these, we demonstrate regularly that we think of a merger buyer as the "winner" and the merged company as a "loser." But is that true when the only growing beer brands are the craft beers and they are considerably more profitable than the traditional part of the business? Isn’t it time to focus on a different way to compete if we want profitable growth?
Does merger activity produce better products, lower prices, better customer satisfaction, lower cost, more jobs, better communities and higher returns for investors? Oh my, but this are tough questions. Virtally all academic studies of mergers have shown the opposite. The merger reduces product innovation and new product launches, creates higher prices (in fact that’s the objective of airline mergers), lower customer satisfaction, create little change in per unit cost (it goes up more often than down), fewer jobs as layoffs dominate, and investors of the "winning" company receive nothing for the effort.
We have to move beyond out-of-date ideas like "economy of scale advantages" if we’re going to break out of the no-growth, no-jobs economy dominating the U.S. since 2000. We need to use Disruptions to drive new ideas, and implement White Space to test them.
Illinois Tool Works (see chart here) has demonstrated that companies can be very successful with mergers. Acquisitions aren’t inherently bad. But they are if they are done for the wrong reason – like economy of scale advantages. Instead, ITW uses mergers need to make better products, improve customer satisfaction, develop more new products and launch them leading to better revenue growth and better cost/price performance leading to higher profits for investors. Mergers can be very valuable to successful strategy – but they have to be well designed, thought through and managed for those results – not merely assumed to produce lower cost because volume is being consolidated.
by Adam Hartung | May 19, 2008 | Defend & Extend, In the Rapids, Innovation, Leadership, Lifecycle
I attack Defend & Extend Management a lot. Too often, managers try to succeed by just doing more of the same – often faster or cheaper. But when markets have shifted, that can produce ever declining performance instead of improvement. Then why is D&E management so popular, and so frequently taught in business school?
When a business is in the Rapids, because it is participating in a growing market, then D&E Management can produce very good results. GM in the heyday of auto sales made huge money being the largest manufacturer – and Dupont was the same during the zenith of chemicals (remember when Dustin Hoffman was given one word of advice post-college – "Plastics" – that was a good time for DuPont). More recently, first Wang then DEC did tremendously well during the growth of mini-computers. And Dell was an enormous benefactor of the growth in PC sales.
Today, Google (see chart here) is riding high practicing D&E Management. The market for searches is continuing to grow. And we’re still in the early days for internet ad placement. Google is doing well merely by doing more (read AP article about Google here.) When the market is growing at 20%/quarter, management is incredibly busy just trying to hire people, get them on staff, get them directed and keep up with customer demands. Market growth keeps Google growing and making money – and management is encouraged by analysts, and investors, to keep doing more of what it has always done. D&E Management is working – producing results.
And this will continue until the market shifts. Companies that catch these growth waves can do well for many years – sometimes decades. Recall the examples above. Dell rode high for 20 years before growth stalled – along with PC sales and tremendous increase in competitiveness of competitors. And the best leadership teams realize they can’t predict when this stall will happen. They just know it will. The cause will always be something unexpected, and thus a shock to the existing Success Formula results. So the best leadership teams in high growth markets practice D&E, and at the same time create and invest in White Space.
The best time to prepare for a market to slow its growth, or become victim of a Clayton Christensen style disruptive technology shift, is when things are going great. When growth is creating plenty of cash, and investors are throwing money at you. During this time, it’s really smart to Disrupt yourself from time to time and set up White Space projects that can focus on alternative Success Formulas. This prepares the foundation for long-term growth, rather than the boom-and-bust scenario of, say, DEC.
Cisco Systems (see chart here) is a case in point. When most internet companies were getting destroyed at the end of the 1990s Cisco relied upon the foundation for continued growth developed by investing in plenty of projects that weren’t the current fast growers during previous years. Rather than just trying to D&E what had worked (and it was working really well to sell network devices to telecom companies) Cisco had already started looking for other competitive products in other markets. As a result, the cliff fall off that lambasted Sun Microsystems, and 3Com, had a far less impact on Cisco. Cisco’s ongoing Disruptions, by constantly trying to obsolete its own products, with a never-stopping focus on looking at future scenarios, helped the company prepare for the dot.com crash. Now Cisco is as strong as ever and continuing to make tremendous returns in a very different competitive marketplace.
Google is doing great. It’s Success Formula has been Locked-in and its is creating tremendous results. And this scenario is likely to continue for years. In the Rapids, life is fun at Google. D&E Management is making money. But keep your eyes open for a market shift. Without White Space, Google could quickly be the next DEC.
by Adam Hartung | May 15, 2008 | Disruptions, In the Rapids, Innovation, Leadership, Lifecycle, Openness
General Electric (see chart here) announced today it is looking at ways to sell its appliance business (see article here). Great move! Too many companies hold onto a business for all the wrong reasons, and refuse to take action to keep themselves in the Rapids.
GE needs to Disrupt. The old CEO, Jack Welch, was famous for taking Disruptions. That’s how he got the nickname Neutron Jack. Keeping his eyes on the future, he kept GE focused on new opportunities and he used White Space to develop new Success Formulas. And while he had the top job GE performed admirably, growing multi-fold. If a business didn’t meet goals, Mr. Welch sold the business and invested his management talent and money in better opportunities.
Now GE finds itself nearing the Flats. Last quarter saw a profit decline. Two in a row, and the company falls into Growth Stall from which it has only a 7% chance of returning to consistent growth exceeding 2%. So that blip in a century-old record was a very big deal. And the good news is that the current CEO seems not to be ignoring it. He looked around, and found one of the long-legacy businesses of GE with little innovation and limited growth. While competitors were re-introducing front-loading washers, low energy and low water washers, and scads of various innovations in large appliances his team was #1 in share but far from #1 in market leadership. Management was happy to blame poor performance on the bad U.S. economy, and the stagnation in U.S. new home sales, planning on a recovery some time in the future. So sell it! That’s what Mr. Welch would have done, and that’s what Mr. Immelt is now doing. There are always opportunities for innovators in all markets, and keeping around Locked-in management teams that think they are doing OK because their markets turn south only breeds ongoing poor results.
Yes, GE was in appliances for 100 years. But so what? Today appliances are only 4% of this $178billion revenue behemoth. And GE needs to maintain its growth goal of 10%. The CEO can’t accept excuses. Millions of houses are being built in India and China and South America – and with enough innovation current homeowners will replace old appliances. Insufficient growth is a management issue – not a market issue. Markets are how you define them, and if your defined market isn’t growing go into another one! GE needs to stay in the growth Rapids, and having been around a long time is no reason to coddle a management team that doesn’t know how to maintain growth. GE is in a lot of businesses, and it has gotten out of a lot of businesses, and it can get into a lot of new businesses. Congratulations to the top executives for not letting history put the company at risk of going into the Flats and then the Swamp of low returns.
Too many leaders are unwilling to Disrupt. They let ties to Lock-ins keep them trying to "fix" a business. Doing more of the same, trying to be faster or cheaper, when what’s needed is a new Success Formula. GE is showing us that if you keep your eyes on the future, and hold tight to meeting your growth goals, you can’t afford to let Status Quo Police keep you focused on Lock-ins. You can’t try to succeed by merely Defending & Extending what you always did. You have to be willing to Disrupt and do entirely new things. You have to Take Action before it’s too late. Good job GE.
by Adam Hartung | Apr 16, 2008 | Disruptions, In the Swamp, Innovation, Leadership, Lifecycle, Openness
It’s hard to turn around a Locked-In company. But it sure is exciting to see a CEO try. And that’s what is happening at Allstate (see chart here.) I blogged previously about this historically staid company that has begun Disrupting and using White Space to chart a new course.
Taking a page from Neutron Jack Welch’s book about how to be a Disruptive leader, the CEO recently decided to implement the "80/20 Management Principle" which he picked up from Illinois Tool Works (read full article here). ITW, by the way, happens to be one of the most long-term successful companies in the U.S., with decades of experience Disrupting and implementing White Space to grow. So the Allstate CEO said "let’s implement this policy, and see if we can be a better company." It doesn’t matter if 80/20 is a great idea or not – the point is that it is Disrupting the old approaches and making people change they way they work. Mr. Welch used rules like "Be #1 or #2 in your business or get out" and created DestroyYourBusiness.com teams to Disrupt people at GE – and open White Space for new growth. For us as investors, suppliers and employees what’s critical is that the CEO is Disrupting people, and causing them to look for new ways to manage the business.
The Allstate CEO is also on a path to use White Space to "reinvent" Allstate (read article here.) Yes, he’s implementing product extensions intended to defend the historical business. But he’s being clear to call these "horizontal" products and he says they really aren’t "new." Meanwhile, he is simultaneously setting up teams to develop entirely new "vertical" products that he intends to use for changing what Allstate develops and sells. These White Space teams range from new insurance products, to new investment vehicles (like mutual funds) to hybrid products that offer both insurance and investment – but different from the old-fashioned "whole life" policies sold our parents and grandparents.
Kudo’s to CEO Wilson, the management team, Chairman and Board of Directors at Allstate. After reeling from the hurricanes, they could have attempted to persevere with business as usual. But even Warren Buffet has said that the old insurance business will see costs rise faster than revenues. At Allstate leadership is using Disruptions and White Space to create a new future that will reposition the company for customer needs in 2015 and beyond. Good for them. They are on the way to becoming a Phoenix Principle company with long-term above average returns!
by Adam Hartung | Apr 9, 2008 | General, In the Rapids, Innovation, Leadership, Openness
Great companies don’t only get into new businesses, they know when to get out. Look at GE – a company that sells almost as many businesses as it buys every year. Another company following this practice is Philips (see chart here). In the U.S. few people know much about Philips – although it is a global company with many successful products in multiple businesses.
Philips sells consumer products, like radios, telephones, monitors, DVD players, cameras, webcams, Sonicare toothbrushes, Norelco razors, MP3 players and televisions. It also sells medical systems – like CT scanners, ultrasound machines and heart defibrilators. It sells lighting systems which includes everything from home light bulbs to interior designs to products for lighting the exterior of office skyscrapers or religious temples. Philips was a pioneer in developing compact disc technology and optical storage devices and is a leader in high tech plastics and printed circuit board technology. (Read about Philips at its company web site here.)
Philips generated 2007 revenues of $39billion. Founded and run out of the Netherlands, this is pretty remarkable. The Netherlands has only 16.5million people! The whole country’s population is about 2x the five buroughs of New York City – or the same as the New York metropolitan area. Yet this company is bigger than DuPont, Intel, 3M and Merck – all members of the Dow Jones Industrial Average. Founded in 1891, Philips has met the test of time, entering new markets, and growing both revenues and profits, for several decades. Well resourced, Philips has created and implemented White Space to grow for longer than almost any company in the U.S.A.
Yet, today Philips announced it was going to quit making televisions for North America (read article here). A pioneer, and leader, in flat panel televisions – a high growth product line in the consumer-centric U.S. market – Philips is abandoning manufacturing this $1.7Billion product line, shutting its Althanta headquarters. Manufacturing for the Philips and Magnavox brands will transfer to Tokyo based Funai (which makes Emerson brand as well.)
Phoenix Principle companies not only are quick to Disrupt and implement White Space, they are quick to get out as well. And here we see a large company, with big resources, walk away from manufacturing a product line that is huge WHILE GROWTH IS GOOD. Long before the business slips into the Swamp Philips is looking ahead and changing course. Rather than get trapped in a low-profit business as growth slows, they are getting out on the way up to maximize the value – while focusing precious resources on other opportunities.
All companies of all sizes can be fleet of foot. Even large and aged ones. It requires the discipline to be forward-focused on markets and opportunities rather than history focused. It requires not getting blinded to think big businesses need Defend & Extend behavior – but rather the flexibility to move fast as markets move. It requires a willingness to not rely on your own internal focus – and your own resource pool – when making decisions about future investments. It requires the skill to realize that not all White Space is worth additional investment, and there are times to get out.
Long term success requires overcoming Lock-in. Not only by consistently setting up new White Space, but knowing when to get out of White Space rather than Lock-in on its efforts. Constantly getting into new opportunities means, by definition, that not all are worth pursuing. Some get out early, and others later. It takes discipline to overcome Lock-in – and Philips has shown the knack for 10 decades.
by Adam Hartung | Apr 4, 2008 | General, In the Rapids, Innovation, Leadership, Lifecycle
Today the press announced that the U.S.’s #1 music retailer is iTunes (read article here.) This is actually pretty amazing, given that Apple’s (see chart here) iTunes is only 5 years old. To reach this position Apple climbed over Target, Best Buy and finally Wal-Mart. Companies generally considered pretty good retail competitors. And iTunes did it with a handicap. Those who track the stats count songs – so iTunes had to sell 12 tunes to get the credit the traditional retailers get for selling 1 album – so as for number of music transactions iTunes clearly dominates.
You have to ask, why did Wal-Mart (see chart here) and Best Buy (see chart here) let this happen? They arent without resources, and music is profitable. Why didn’t they get out there 4 years ago with web sites that attacked iTunes offering product at great prices? If Wal-Mart is "Always low prices" why didn’t they put out digital music at a discount to Apple? With best guesses now that Apple has 19% market share, to Wal-Mart’s 15%, why didn’t Wal-Mart react to declining CD sales and invest in its own digital music site to slow Apple and get it’s fair share?
Wal-Mart and Best Buy are too busy trying to get people into the store. Those big old buildings are what management thinks about. These buildings are a testament to the company. Management is fixated on keeping people going to the stores. As retail goes on-line, and music has been an early leader, Wal-Mart isn’t about retail. Wal-Mart is about it’s stores. Rather than figuring out how to be a great retailer, thus giving customers what they want, when they want it, at a price they will pay, Wal-Mart is all about trying to get people into those stores by selling things cheap. The decor is allowed to remain lousy, the advertising looks cheap, the products in many cases aren’t stylish or alluring – and in the case of music the product isn’t even what’s growing (digital) but rather they rapidly dying CD.
Wal-Mart doesn’t care any longer about retailing. Wal-Mart is fixated on Defending & Extending its Success Formula, which it has closely tied to those incredibly ugly stores. Wal-Mart is about doing more Wal-Mart. And, unfortunately, Best Buy isn’t a whole lot better. Their approach to on-line sales is to get you to place an order, and then pick it up in the store. Again, all about the physical store – not about retailing. The goal has long been forgotten as the organization fixates on it’s stores as sacred cows they have to justify.
So Apple, which is a well run company, didn’t really have much competition the last 5 years. Apple has been allowed to grab the lions share of the market, while prime, well-funded competitors have ignored it. Not only retailers, but look at Sony – which has all the pieces (a recording company and a leading position in consumer electronics) to mount a considerable competitive attack. But Sony can’t get beyond Defending & Extending its old businesses, completely missing the opportunity to be a leader in the fast growing digital music sales arena. And Apple just keeps growing, and practically minting profits, with ease.
Southwest Airlines did the same thing 30 years ago. There was no reason Southwest should have been allowed to grow so fast, and make so much money. There were lots of airlines. But many went broke (Pan Am, Eastern, Braniff, Continental) and the others lost billions of dollars trying to Defend & Extend their business rather than simply get in and really compete with Southwest. So, like Apple, Southwest grew fast and profitably – and did it with seeming ease.
So who is threatening Apple? MySpace is jumping in, and we all know MySpace is very savvy about internet users. But note that MySpace is a division of News Corporation (see chart here). NewsCorp was once a newspaper company. But today it has interests in not only newspapers but radio, TV, cable TV and the web. Chairman Rupert Murdoch is a leader, like Steve Jobs, who is not afraid to Disrupt – nor is he afraid to invest in White Space. As a result News Corporation has flourished while other companies started as newspapers (Tribune Company, New York Times Company, McClatchey, etc.) have struggled and are floundering.
Businesses that focus on Defend & Extending their past investments become obsolete. Like SS Kresge, Montgomery Wards and Woolworths’s – Wal-Mart’s stores are not a protection against competition. D&E management likes to think big assets (like The Chicago Tribune or New York Times) make them indestructible. Instead, they can easily become albatrosses.
New competitors need not fear large, entrenched competitors. They are most often unlikely to do anything about a successful new competitor. Early entrants not only get in the Rapids, but are often allowed to stay there an amazingly long time (and they longer they continue Disrupting and using White Space the longer they can stay).
