by Adam Hartung | Jul 22, 2006 | Disruptions, General, In the Swamp, Innovation, Leadership, Openness
Everyone wants an evergreen company – one that is constantly growing and self-renewing, generating more revenues and profits year over year. One such company is Illinois Tool Works. Have you heard of it? Do you know what they do?
One of the most important things ITW does is avoid Lock-in. ITW has no fixation with core markets, core customers, core products nor core competencies. In fact, the company is a collection of over 600 small businesses around the world, in a wide range of businesses. They don’t seek imagined synergy and push for consolidations and mergers, instead allowing each business to each maximally develop their customer opportunities and markets. Headquarters does not dictate the strategy or markets for these businesses. ITW doesn’t even try to limit its businesses to being in similar markets, functions, technologies or product lines.
What ITW does is consistently grow, and consistently make more money. For 90 years. Revenues grow at about 10%/year, earnings at about 15%/year and earnings per share about 14%/year.
How? Like I said, the company first and foremost avoids Lock-in. Leadership isn’t trying to follow fad definitions of new markets, or catch the latest wave of analyst hot buttons. They disrupt themselves by constantly looking into new markets, new technologies and new product opportunities. They don’t focus their acquisitions on cutting products or quickly generating more money with cost reduction, instead relying upon customers to help define how they can improve market performance leading to financial performance. By not seeking "optimization" of their acquisitions (like Tyco), they remain constantly in a disruptive state of enquiry. And each and every business is allowed to operate in its own White Space – free of dictates from a hierarchy or home office about how to succeed. Results are what matter at ITW – not slavish response to structural or behavioral Lock-ins.
And the company lauds innovation. Innovators are sought out, and rewarded. ITW is one of American’s largest patent filers, and patent holders, and it works hard to maintain that position – even if you’ve never heard of them. They want White Space projects in their businesses, and they reward the efforts as well as the results.
ITW defies all the rules of best management practice. They don’t optimize. They don’t "focus on the core." Instead they live without Lock-in, constantly innovate and Disrupt, and allow White Space to flourish all over the company. And for that they achieve innovation on the scale of an IBM, and returns like an old-fashioned (Jack Welch era) GE. And the result is an Evergreen Company that grows beyond average and makes above average rates of return.
by Adam Hartung | Jun 28, 2006 | Disruptions, In the Swamp, Innovation, Leadership, Lock-in
Readers of this BLOG know I have been no fan of Roger Deromedi and Kraft. So, you probably think I’m delighted with his ouster this week by Altria (effective parent of Kraft). Actually, I’m unconvinced whether it will matter.
There is no doubt that Kraft was locked-into a Defend & Extend strategy which was producing declining results. The stock price had declined 30% since 2002, and the CEO had no plans for growth. Deromedi laid off 14,000 people and closed 40 factories in 2.5 years. His plans could be summed up in his own quote "strong execution of our strategies will deliver improved results in 2006 and beyond." Just like it had done in 2004 and 2005 – right. Obsessing about execution is one critical telltale signal of a failing, locked-in strategy. There was no plan for growth, sooner or later, as he kept selling brands and investing more money in no-growth categories like cheese. The Chairman of Kraft, currently the CEO of Altria, finally realized that there was no interest in an independent no-growth Kraft, so he’d better make some changes or the spin-out of Kraft was never going to be completed.
But, what’s needed at Kraft is a Disruption to the Lock-in, and replacing the CEO is more of a Disturbance than a Disruption. Changing the CEO doesn’t inherently change anything beyond the sign on the door. And the new CEO, for all the praise now heaped upon her, is a 20-year returning veteran of Kraft. She spent barely 1 year running Frito-Lay, so despite her $2.5million compensation, she wasn’t there long enough for us to know what difference she made, or might have made.
We do know that she left the job running Kraft North America, which was a $30B revenue business to later run Frito-Lay, only a $10B business. That indicates she was no fan of Deromedi when she split, nor most likely of his then co-CEO Betsy Holden. Nonetheless, her career was a pretty straightforward development up the management ranks of what has long been a low-innovation enterprise. But is she ready to create some growth engines inside this behemoth? Does she know how?
Top marketing gurus around Chicago have weighed in, calling for the first steps to include changing the culture toward product innovation from brand extensions, and using portfolio planning to milk some brands for cash while investing in growth with other brands and a refocusing on innovation and new product launches.
What is required, as I said earlier, is a Disruption. Kraft must stop viewing itself as being self-satisfied, and realize there are external Challenges to its brands and its business. Older Americans are changing their diets to live longer, and younger Americans no longer look to these old brands when thinking of meals. A great past does not assure a great future – just look at Brach’s candy company (bankrupt), ConAgra or Sara Lee (themselves drastically downsizing). The new CEOs first step must be to avoid reassuring the people of Kraft, and rather to hlep them see that these Challenges are placing Kraft – soon to be an independent company – at risk of having a viable future. There is no growth in Kraft, and without it the company is doomed to a very unhappy competitive reality.
And she must Disrupt Kraft. The mechanisms which keep Kraft acting like Kraft. She needs to attack Kraft’s critical metrics, its hiring practices, its centralized decision-making processes, its arrogant approach to retailers and end-users, its focus on "do no harm" brand tactics, its rewarding of "farmers" and punishment of "explorers" in the workforce, its deep hierarchy that vets out ideas which don’t look like guaranteed wins (and thus little more than extensions of old businesses), and its obsession with cost reductions. Of course, not all of these should be attacked at once. But, she must attack them. She must identify the Status Quo Police and reduce their numbers while gutting their influence – be they in finance, HR, or marketing. She must create a pattern interrupt in Kraft; she must Disrupt the old Success Formula.
And, she must put in place White Space. Something completely lacking at Kraft. We need to see her create project teams which have explicit permission to behave differently, outside the old Lock-ins. And she must show us that she is dedicating resources, in advance, to these teams so they have the wherewithal to actually create new Success Formulas for the company.
We must keep our eyes on Kraft. When Mr. Zander joined the cross-town company Motorola he too faced a seriously Locked-in organization. Yet, within only 6 months he effectively Disrupted Motorola and put in place White Space projects that almost immediately began changing the fortunes of the company. Let’s hope Ms. Rosenfeld does the same – so Kraft can once again take its place among the leading consumer goods companies of the world.
by Adam Hartung | Apr 28, 2006 | Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
Believe it or not, in 1985 Apple sold more personal computers than all the Microsoft-based machines combined. Hard to imagine that 20 years later. By the mid-1990s almost everyone in TechLand considered Apple a non-player. Apple had become a small, niche company with limited customers using their machines for only particular applications – usually graphic intensive. Microsoft had "checked" Apple by the mid-90’s, and the vast majority of investors had considered the game over.
However, today Microsoft revealed a serious stumble. They have announced (see article) that costs are up, and profits are not going to meet expectations. Not this year nor next year. Microsoft investors have gotten nothing (other than a one-time $3 dividend) for holding their investment for the last several years. The company’s stock price reached current levels way back in 1998. Microsoft has stalled, while Apple is in the throes of a great renaissance. Apple’s value is up 2x to 3x over the same timeframe.
Not many companies do what Apple did – coming back from the brink of failure. But those that do rely upon the techniques Apple used. An internal Disruption used to face up to market Challenges, followed by installing White Space which is used to identify and develop new opportunities.
Lots of companies do what Microsoft is doing. During the heyday, high growth environment for PCs, from the 1980s through the 1990s, Microsoft developed a Success Formula. As it grew, Microsoft Locked-in that Success Formula with its culture, its structure and its costs. Microsoft optimized itself around the market conditions (the environment) that helped it succeed and grow while its first market was in rapid expansion.
Now, the markets are changing. This is creating new Challenges. Apple is using Disruptions and White Space to react to these Challenges and create enhanced value (for employees, suppliers, customers and investors). Microsoft is busy trying to Defend & Extend its past Success Formula. It’s trying to use its old skills to take on emerging new Challengers Google and Yahoo!. Microsoft is stalled, and if it doesn’t follow Apple’s lead, Microsoft could end up in with even more serious problems.
Any company can stall. All it takes is Lock-in to an old Success Formula. Then, a market shift can open the door for new competitors. The answer is to Disrupt yourself and use White Space to find a new Success Formula that meets new market requirements. Not "more, better, faster" of the old Success Formula – that leads to rising costs, poorer returns and the unlikely hope that the past will repeat itself.
by Adam Hartung | Apr 25, 2006 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
Would you get into the wireless phone business today? Can you think of a more cutthroat competitive marketplace than cell phones? Can you think of a market that has more disappointed investors than mobile communications – voice or data? If I told you a company was getting into mobile communications, you’d probably say "good luck." And then you’d make sure you don’t have that stock in your portfolio.
Unless the company is Apple. Last week the reporters started talking about Apple’s potential jump into cellular phone service (see article). For most companies you’d laugh. But, for Apple, you probably believe it. And you likely think they just might pull it off. After all, why not a cell phone iPod?
Why change your opinion when you hear the company name? White Space. Apple has demonstrated it is willing to Disrupt its Success Formula to open up White Space and develop new markets. By demonstrating that skill, Apple is now able to keep competitors off balance. Even competitors in industries where Apple formerly did not participate. Apple creates possibilities for investors and employees, and concern (if not fear) in competitors just because it has shown that by using White Space it can tackle and win in new markets.
Virgin is like Apple in this regard as well. From a recording company Virgin is now an airline, a retailer, and a cell phone company. What is Virgin’s great skill? It is willing to Disrupt itself and create White Space for launching new businesses and entering new markets. By doing this Virgin, like Apple, has demonstrated an ability to remain evergreen. And create concern and doubt amongst its competition.
The Power of White Space. It keeps your company fresh, and long lived. And in the short term, it keeps you competitors off balance. You don’t have to do everything you announce, nor even succeed at all you try. Merely by demonstrating you will do it you create competitive fear – and an advantage for yourself.
by Adam Hartung | Apr 10, 2006 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
Do you remember 1-800-Flowers.com? You probably think that was one of those dot-coms that dot.bombed since 2000. After going public in 1999 the stock shot to $22, only to fall to about $2 the next year. The company is still around, but it gets very little attention – why even a search on Forbes.com search shows that the last time someone featured this company in a newsleter was way back in September, 2004.
If ever a name would Lock-in a company, this one should have done it. Yet, 1-800-Flowers.com, which was certainly Challenged by the bust, has done a lot to open up White Space and find a new future. Only about half today’s revenues come from flowers and plants. It sells home and garden merchandise under Plow & Hearth, popcorn from The Popcorn Factory, cookies from Cheryl & Co., gourmet foods form Greatfood.com, children’s gifts from HearthSong and Magic Cabin and wine gifts through the Winetasting Network. And last week they announced the acquisition of Fannie Mae candies – a brand that had fallen into bankruptcy under old management.
There’s a reason we use the term "dot.bomb." Lots of companies were Locked-in to their initial business plan (remember pets.com?) and they failed. But 1-800-Flowers.com is still growing. By avoiding Lock-in they are finding new White Space opportunities for growth and value creation.
The stock still sells for under $8/share, so it is warranted to to say that there is ample risk in this as an investment. Yet, with so much White Space, 1-800-Flowers.com is a company to keep watching. They are avoiding the traps that have killed so many other companies, and show considerable opportunity to become a break-out success story.
by Adam Hartung | Mar 25, 2006 | Disruptions, In the Rapids, Innovation, Leadership, Lifecycle
In my presentations I impress upon people the need to look into the future to recognize Challenges and unearth opportunities. Don’t let Lock-in keep you projecting the future from the past.
A great example showed itself recently. The Chicago Tribune (see article) wrote about an emerging new jet (as in airplane) that was smaller, cheaper to buy and cheaper to operate. Now, you might say "but I don’t need a jet" and pass this article by. That is Lock-in; the decision to fly by the ariticle was created by what you do today, not what you could do tomorrow.
We all know that air travel has become grueling in recent years. Long gone are the days when flying meant you were treated well, with good service and a nice meal. Today, the airline charges for everything from pillows to potentially an aisle seat. Free meals are a thing of the past. And overworked, underpaid flight attendants struggle to keep a smile as they herd passengers, like so much cattle, onto and off the plane as fast as possible in an effort to drive up usage — and maybe someday create a profit for the lackluster industry.
And all that is after you deal with the struggle of simply getting your ticket, boarding pass, checking bags and clearing that long TSA security line (where you got to take off your belt and shoes, while tearing apart your handbag to place items in separate bins for x-ray screening.)
The whole process of air flight is simply not glamorous – not fun. In fact, it is stressful, and tedious. And for business travelers, the grief and cost have become so great that it’s harder and harder to justify those trips to customers and vendors that you know you really should make.
That’s today. Does it need to be the future? Several new firms – air taxi services – have emerged that offer flight service the way we use taxis – "Take me to there, and maybe back again." They provide the equipment, the pilots, everything to make the trip. They fly from very convenient, small airports nearer to more offices (as well as the large airports). The pre-flight screening is a comparative breeze, the stress of missing flights is gone, flexibility grows immensely, and you can get more done since you aren’t hanging around airports and struggling with the crowds.
You’ll say that sounds good, but isn’t it expensive? And that’s where the Tribune article comes in. While we weren’t watching, lots of these new taxi and charter services have brought on-line aircraft that are cheaper and more fuel efficient. They also have streamlined their business processes to make the system more efficient. The result is much lower cost to use a taxi plane than most of us imagine.
Could the future have business travelers bypassing United and American to visit customers? Maybe. And that makes this a trend worth watching, and considering. If a salesperson makes twice as many calls as her competitor, or is first on-site to deal with a customer problem by using this service it just might lead to more revenue. It could be a competitive edge. And as more people use these services processes will improve and technology will be applied, and who knows what the future opportunity will be in just 10 years?
We have to avoid defining the future by looking in the rear-view mirror. We all have a tendency to project the future off our past. We fall into the mode of extending our old Success Formulas. But, innovations appear that change the environment. And we need to be looking for them. We have to keep our eyes on the windshield if we are to identify Challenges to old ways and start looking for White Space opportunities to test new ideas.
Maybe next time you want to visit a vendor in Omaha, or a customer in Wichita, you should hit the web, find some air taxi services, and find out just what the possibilities are. And keep your eyes open for these new jets – they potentially might change our whole view of personal travel.
by Adam Hartung | Mar 20, 2006 | General, Innovation, Leadership, Lifecycle
Chipotle’s Mexican Grill went public last week. The stock shot up in price, and ended the week posting a whopping Price/Earnings multiple of 36! As you probably know, Chipotle’s has been a subsidiary of McDonald’s. Now, it is it’s own company – albeit with most of the stock still owned by McDonald’s.
McDonald’s, meanwhile, has about an average market multiple of 17. Why is Chipotle’s P/E roughly double McDonald’s? Analyst views are mixed as to the exact future of the stock, but what all agree upon is that Chipotle’s has a great growth path in front of it. While McDonald’s is struggling to find opportunities to grow stores, Chipotle’s is expected to expand at double digit rates for several years. And profit growth is expected to match.
Now that it’s outside of McDonald’s, Chipotle’s has the opportunity to explore new opportunities for growth. It can expand in new ways, and develop new solutions. It has the opportunity to create, and sustain, White Space to prolong it’s growth. And the result is a 2x market multiple.
Some would say this is a win/win. Chipotle wins, and McDonald’s wins – because MCD shareholders keep ownership in Chipotle’s. I would say that is a back-handed compliment. Why couldn’t McDonald’s use Chipotle’s to attract new talent? Why couldn’t McDonald’s let Chipotle’s manage White Space to create growth avenues while inside McDonald’s? Why couldn’t Chipotle’s be a growth vehicle to help McDonald’s provide new opportunities for not only employees, but suppliers and investors?
It’s too bad that McDonald’s is so Locked-in to its Success Formula that it had to resort to letting Chipotle’s go outside. Yes, this is better than holding Chipotle’s back. But, it would have been best if McDonald’s would learn to Disrupt itself, create and manage White Space. That would insure McDonald’s of a long and viable future. Now, the future growth at McDonald’s remains clouded, while Chipotle’s appears loaded with upside opportunity.
by Adam Hartung | Mar 20, 2006 | Defend & Extend, Innovation, Leadership, Lock-in, Openness
Success Formulas are nested. We have personal Success Formulas, which interact with Work Team Success Formulas, which connect with Functional and B.U. Success Formulas, which tie to Industry Success Formulas those are impacted by Success Formulas within the larger economy. Whew! That’s a lot of Success Formulas. But, in fact, achieving superior results mean these Success Formulas all line up. When they are misaligned, resources are spent ineffectively and results suffer.
We frequently focus on the Success Formulas at the top of the pyramid. But, big Challenges occur when changes happen deep. At the deepest are changes in the economy – which we tend to ignore – and yet they create the biggest Challenges.
Just a decade ago the emergence of all the linked PCs across the world wide web created a change in the economy. It challenged Success Formulas throughout the pyramid to align with the new capabilities. We all had to learn how to move faster, and more effectively to keep pace competitively. And it opened the door for international trade on a previous unheard of scale, as we discovered we could use the web to manage work anywhere, from Indiana to India (as detailed in the book The World is Flat).
Now, there’s a new Challenge emerging. And we need to find White Space to identify new solutions.
Any business watcher knows that complaints are high about the cost of health care. Estimates are that $1,500 of every car’s cost is worker health care. And the auto companies are fighting with their unions to cut this cost. The same has happened with health care cost in the airlines, steel, and most other industries. For those of us working in America, we’ve all seen our employers raise our contribution to the insurance premiums, while watching the dreaded co-pays go up and the services offered go down. According to a 2004 Harris poll, a majority of Americans actually favor price controls!
U.S. employers are learning that in a new, no-barriers world they have to compete with companies that effectively have no health care cost. In most other countries, the cost of health care is handled dramatically differently – with the result that employers do not pay for their worker’s plans. As a result, a manufacturer in the U.S. finds the marginal cost of health care actually causes him to lose sales against a global competitor – such as China. And the same with a U.S. services vendor competing with Indian companies.
What’s happening is that we no longer can look just to how we manage the American economy when we compete. We’re now on a world stage. We have to compete with countries which standardize health care, recover much of the cost through various taxing systems, and leave the employer largely out of the equation. The Challenge to American employers – and thus to all of us who work – is very real.
The issue is no longer becoming "what’s the right answer." Instead, we have to realize that Americans are Locked-in to a system that is globally unique. It is affecting our competitiveness – on a company-by-company basis. This system of employer funded private insurers worked well when constructed as part of our Success Formula post Depression. But now it’s hurting our competitiveness. The world has changed.
So far, we’ve been pretty unwilling to recognize this Challenge. We’ve remained Locked-in. Governmental programs to change have been met with attacks from not only insurers, but by most Americans. What’s needed is White Space for us to test some new approaches. Americans are unlikely to change just because they see merits (and deficits) to programs in Canada or the U.K. Instead, we have to develop our own solution. And that will require us giving ourselves permission, and dedicated resources, to experiment with different solutions.
We compete now globally. Thus the requirement becomes aligning our industries, companies and ourselves with changes in the economy. EVen where such alignment can be wrenching. Where will this White Space occur? Probably not in government, that’s not our way. But rather through some form of private approach where we can experiment and learn. The sooner we create this White Space, fund it and put talented people in it the better. And the businesses that pioneer these solutions have the opportunity to generate enormous value, and wealth for investors.
by Adam Hartung | Feb 28, 2006 | General, Innovation, Leadership, Lifecycle, Lock-in
I’m a midwestern guy – born in Oklahoma, college in Kansas and now a long-time resident of Illinois. I love Chicago. But, I have to admit, some things have been concerning me lately.
Illinois lost jobs last year. In fact, Illinois has had a net job loss since 2000. That’s a Telltale of problems. The marketplace is shifting, and it’s not clear Chicago is creating an effective new Success Formula.
Across the business landscape, there are lots of signs of problems. Former bellweather Kraft has been locked in a turnaround for 5 years, without much progress. In 2004 the company closed 20 plants and laid off 5,500. Recently it’s announced plans to shut another 20 plants and lay off 8,000 more. Crosstown, Sara Lee has been struggling as it has sold off business after business in search of "focus," yet it has not been able to improve results. Revenues are predicted to halve over the next 5 years in this prolonged turnaround effort – apparently in plans to shrink itself into success.
Sears has shown misstep after misstep since being acquired by K-Mart. It announced in 2005 it would convert 400 KMart stores into Sears Essentials – but as sales fell 20% in the first 40 conversions that decision has now been abandoned. Sears can’t even buy it’s own Canadian operations, having had its offer turned down by the Canadian Board! And McDonald’s is under attack for everything from bad fat in its food, to unannounced ingredients causing asthma attacks and a 30-something hedge fund manager trying to force management to restructure its operations in order to add value to a stuck stock.
For years, I’ve heard people talk about "midwestern paternalistic companies," "mature management in mature industries," and "old fashioned values exemplified by careful management" when talking about Chicago. Unfortunately, these are a pleasant veneering over of unpleasantly Locked-in management teams. Too many companies are blaming a "midwestern culture" for an inability to Disrupt their failing Success Formulas and implement White Space. Too few new products are being created and introduced, and too few new innovations are being introduced into operations.
Do midwesterners lack innovation? Of course not. Go to any of a number of Chicago area angel investing groups, or entrepreneur groups, or venture clubs and you’ll see, literally, dozens of new ideas for businesses of all types. Ask those entrepreneurs where they go for corporate support and you hear "the coasts. None of these big Chicago companies want to get involved with local innovators." And, alas, you don’t see these companies sending representatives to any of these networking events. These venerable laggards keep looking inward for all the answers, instead of looking outward – where White Space creates a flourishing market of innovation.
I would think that the apparent Challenges – the loss of jobs, or the declining stock prices, or the frustration of limited growth – would lead these company executives to do something different. To Disrupt their ineffective operations. But so far, they have remained Locked-in to those old Success Formulas – and the price is being paid (quoting a famous line from It’s a Wonderful Life) "by those people who do most of the working, and eating, and living, and dying in this town."
by Adam Hartung | Jan 8, 2006 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
Motorola has done it again. As reported by every news agency that attended the Consumer Electronics Show, Motorola has joined up with Google, Yahoo and Kodak to improve its products and make new products. This is, of course, after partnering with Apple months ago.
What’s really important about this news is it shows the ongoing effort to create White Space in Motorola. As I blogged a year ago, Motorola’s efforts to create White Space where new innovation can flourish is a key success factor for turning around the struggling behemoth. Now, it’s ventures not only are opening the product development doors for licensing and creation, but in fact the Kodak venture will co-locate people from both companies into a joint development facility.
Many people have pointed out that several new products, including the RAZR, were mostly developed prior to Zander showing up. So why am I such a fan of Zander? Why so eager to talk about these projects? Because Zander Disrupted Motorola and unleashed the creativity which was there. The sparks already existed, but previous leaders did not know how to Disrupt the environment, attack the Lock-ins that held Motorola hostage to its worn out Success Formula, and create White Space to migrate the company into a new Success Formula. What’s happening in Motorola’s turn-around isn’t just a product story. It’s a story about how to overcome Lock-in to the past and launch yourself forward. And for that a lot of credit does go to Mr. Zander.
A lot has happened at Motorola since Ed Zander took over. Most of it, from raising cash by selling automotive businesses to aggressively promoting DVRs to putting real pizzaz into the phone marketing and creating new ventures has all been good. This is a company to watch, and probably a stock to own.
