by Adam Hartung | Oct 16, 2006 | Defend & Extend, In the Swamp, Leadership, Lock-in
I hear frequently about the conflict between management and investors. The argument typically goes along the lines that management could do many exciting and strategic things if it wasn’t for those pesky investors who want a consistent return on their equity. It sounds like somehow investors know too little, and they hamstring managment’s ability to succeed. In too many occasions, however, the opposite seems to be true.
Readers of this blog know I see McDonald’s as hurting its own future. The company has systematically been selling off its best growth prospects to protect itself from an outside investor who would like to make changes. Recently, a number of other investors voted that sentiment. As I blogged a few weeks ago, McDonald’s offered to investors that they could trade their McDonald’s stock for Chipotle shares – in an effort to finalize the sale of Chipotle and bring back in more McDonald’s stock to protect itself from a hostile investor. Last week Bloomberg reported that 262.7 million shares were tendered for the mere 18.6 million shares of Chipotle available. The offer was 14X oversubscribed. Indicating that a lot of investors knew a good deal when they saw it – swapping shares of a low-growth, Locked-in McDonald’s for the high growth innovative Chipotle – even though its profits were lower and its P/E much higher.
But now Wendy’s has decided to join the act. As reported on 10/13, Wendy’s is offering to sell its Baja chain in order to get cash to —– buy back more Wendy’s stock. Apparently influenced by the fast run-up in McDonald’s shares (which have had a very nice run this last year), Wendy’s is willing to sell off its new growth machine in order to protect its aging hamburger franchise. Rather than look to Baja as a replacement for the sagging Wendy’s, which has had declining same-store revenues for 6 of the last 8 quarters, they are going to sell it in order to buy back stock to prop up the equity value in a concept that has little growth opportunity left. In order to maximize its short-term value, Wendy’s is literally trading in its White Space future.
Too often, management behaves like Lemmings. One competitor follows another. Lock-in doesn’t exist just at the company level, but at the industry level as well. In several industries (steel, airlines, automobiles to name a trio) we’ve seen competitors simply walk off the cliff as they follow a Locked-in industry paradigm that does not produce returns. Management should listen to investors, and recognize that their chorus is not just for short-term profits. Rather, they seek growth and a market or higher rate of return on their equity. No private owner would expect less. But to meet this hurdle requires creating and maintaining White Space rather than letting Lock-in turn you into a Lemming.
by Adam Hartung | Oct 7, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
If you don’t live in Chicago or Los Angeles you might have missed a recent set of stories about problems in the newspaper industry. The Tribune company (owner of Chicago Tribune and 9 other papers) also owns the LATimes. Like the New York Times company, Dow Jones and many other newspaper companies, the last 2 years has seen the equity value of Tribune plummet. Newspaper margins have been narrowing, caused by rising competition from new entrants, such as Google and other on-line sources as well as more nimble local competitors and brazen new business models from the likes of oil and railroad billionaire Philip Anschutz (articles here, here, and here). All traditional competitors have been cutting costs, including big layoffs.
Recently, this created an enormous bruhaha between the publisher and top editor at the LATimes and the owners in Chicago. This week things took another difficult step as the Tribune fired the LATimes publisher (article here) for outspokenly disagreeing with top management. The newspapers are reporting on themselves as they discuss the difficulties being encountered inside the executive suite – as well as by competitors (additional coverage here).
The problem is that these companies are following other large newspapers in trying to wring more blood out of the proverbial stone. Margins are down, and the answer they’re trying to implement is "more, better, faster" of what they always did. But, as the fired Times publisher recognized, when you try to get more out of a broken business model by working it faster and harder, all you get is worse results quicker. You can’t fix a failing Success Formula by trying to operate it better, or faster, or with fewer resources. Those actions just help you fail faster.
The problems in these newspapers, like all newspapers, relate to more competition for readership from the internet and other targeted news products. The old big-city newspaper "natural monopoly" has been erased by these new players. As a result, subscribers are declining – especially in coveted younger demographics (see article on shifting readershipfrom 2005! here). That leads to lower advertising rates and dollars, because who will pay for declining readership? Why pay $75 for a classiifed ad for your used cars when you get one, with pictures, from Vehix.com for $39? Why buy full page movie ads for one shot at viewership when you can get a week of repeated hits on Yahoo!? So ad dollars have been moving to on-line media, and other new competitors. All the fighting inside the newspaper companies about how many writers, or copy-editors or salespeople to lay off this quarter or next does not address the broken Success Formula. It only creates a huge opportunity for the new competitors to continue stealing customers and growing.
Lock-in can kill any business. Even the most venerable. When market Challenges emerge that create a need to redefine the Success Formula, only the companies that Disrupt themselves and move into White Space will re-create success. More, Better, Faster just creates more problems, and a vicious cycle that eventually leads to the Whirlpool of failure. The LATimes has had 12 publishers in 120 years – and now 3 of those have been put in place in the last 5 years by the Tribune company. Changing the captain will not change the destiny of a ship Locked-in on a course headed right for an iceberg.
by Adam Hartung | Oct 2, 2006 | Disruptions, In the Swamp, Leadership, Lifecycle, Openness
Two very unlikely companies demonstrated this week that anyone can Disrupt and create White Space to develop a new Success Formula. IBM and General Motors both showed signs of what any company can do.
Last spring the leaders of IBM Disrupted their product development process when they opened it up to all employees, suppliers and their family members (read article here). As a result, they involved 53,000 people and generated 37,000 ideas. How, by simply asking for their input. CEO Palmisano attacked hierarchy and sacred notions of product development in high-tech, and as a result he achieved a breakthrough in the potential to redefine IBM’s Success Formula. Now IBM is creating White Space to develop those ideas, committing (in advance!) $100million for operation InnovationJam to see what can work. When Louis Gerstner wrote "Who Says Elephants Can’t Dance" about IBM’s turnaround he demonstrated that size does not preclude innovation and growth. And now that legacy is living on in a tremendous example of just what any company can do.
Even more surprising is what is happening at GM – a company I have unabashadly beat up on the last year. Yet, within the confines of a horribly Locked-in organization we now can see the use of White Space in product design (see complete article here.) As recently as 2001 the hierarchy gave vehicle line executives the say on a car’s appearance – the kind of analytical, cost saving process that produced such great autos as the Pontiac Aztek (don’t remember it? – that’s the point!). "Design had been relegated to putting a wrapper on something that everyone else had decided what the dimensions, the proportions and the interior package were going to be", according to design head Bob Lutz.
What’s different now? "Tom Peters, a GM designer for 22 years called Lutz a ‘breath of fresh air’ because he lets designers start with a fresh sheet of paper." Lutz was brought in, at almost age 70 mind you, by CEO Waggoner as a Disruption to the old hierarchy. As head of design, he reports outside the old hierarchy and directly to the CEO. And his dedicated budget was carved out of the old product groupls. Thus permission and resources were both granted up front, and Lutz has made the most of it.
Many people accept the notion that older companies are unable to change. Like somehow organizations are destined to Lock-in and eventually fail. Unfortunately there is no data to support that notion. The ability to Lock-in and fail is just as apparent in start-ups as in behemoths. And, behemoths can Disrupt and use White Space just as well as a start-up. IBM has shown it’s ability to do so, and we can hope they will keep up their efforts to again be reborn – continuously, like a Phoenix. GM has a much longer and tougher road, but it can be done. If they can just get the rest of the company to behave like Bob Lutz and his design group!
by Adam Hartung | Sep 20, 2006 | Disruptions, General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
I recently blogged about the way Honda managed to be in so many markets, from lawn mowers to airplanes. Maybe not focused, just consistently growing revenues and profits. A very good thing for employees, suppliers, investors and customers.
In that vein, I was delighted yesterday to hear that Motorola is buying Symbol Technologies. Most analysts thought the acquisition "ho-hum" (see Chicago Tribune article here). But they should be excited, because in fact it demonstrates another clear move into White Space.
Most people would think of Motorola as a cell phone manufacturer. And there is no doubt that is their largest business. So, analysts get excited when Motorola talks about cell phones. But there is so much more to Motorola. Their last big acquisition was General Instrument in 2000 (before Ed Zander took over), growing their dominant business in set-top boxes and helping them grow their DVR business. Remember a fast-growing gadget called TiVo? That’s a DVR.
Now, Symbol gets Motorola into bar code readers, mobile computers and enterprise software for inventory management and retail. Included in this business is RFID systems, a new market that lots of people are trying to develop. You could challenge this kind of acquisition as being "off focus", but then you wouldn’t understand the importance of White Space. Here Motorola has just bought itself a nice business, at a good price, that it can use to explore expanding technologies and solutions for people on trucks, in warehouses, using all kinds of wireless technology. New markets, new technologies, new solutions – and even more important new customers.
This is not one of those "restructuring" acquisitions intended to drive up revenue through industry consolidation. This is bona fide expansion into new markets, and creation of more White Space. An effort that can create Disruption opportunities and help define a new Success Formula. All hallmarks of what has been turning Motorola around the last few months. Bravo to management for doing the right thing again!
by Adam Hartung | Sep 3, 2006 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
When I was young the word Google meant a very large number in math class. Today, Google means "to search" – or even more importantly Google represents the latest meteoric growth company. The interesting question, is Google just lucky (right company in the right market at the right time), or is there something more systematic going on?
It shouldn’t surprise you to hear that I think it is systematic. Let’s just take a look at Google’s IT department, and you can compare it to the typical department. Or possibly your own. (For specifics, go to Information Week article here.) Look for the White Space to innovate growth, and compare to most IT departments.
Firstly, despite spending 50% of revenues on IT, the company has no CIO or CTO. Instead, IT responsibility is distributed amongst several Vice Presidents. The closest thing to a CIO they have is a 36 year old with an undergraduate degree in social and political organizations, then a Ph.D. in Psychology. So much for the "tech bent" requirement in the role – or in Google. The fact is, that having distributed responsibility is a Disruptive design element which keeps projects, and people, from getting Locked in.
When it comes to managing technology he says "What we put on each desktop is not as important as how we think about what to put on each desktop…choice is always better than control…control gets in the way of innovation….sees a distinction between tools that tell you something and tools that stop you from doing something….I try to control as little as possible."
Google manages engineers with a matrix system. Employees have mutliple managers, and projects typically last as little as 3 months. Rather than a "good old boy referral" system for placing people, the project assignment system is automated with AI. Every person and every project is reviewed, and input is put in a database, and the information is completely available to EVERYONE to see. That’s right, performance reviews are public knowledge. Another design element that creates Disruptions and avoids Lock-in.
To encourage collaboration, people stay on projects for only a short time. And, to keep people talking lunch is free in the cafeteria. Most people would say that free lunch is simply wasted money. But then again, most people have never come close to Google’s growth rate.
The fact is, Google is loaded with White Space. Its organizational structure is designed to constantly Disrupt the way people work and think, by moving them frequently and rapidly across projects. Feedback is public, so that everyone knows what is working and what isn’t. AI creates job assignments, rather than people, forcing new collaboration and new insights. And R&D is not budgeted separately from IT, engineering or product development, in order to keep work and people moving freely and focused upon results rather than myopic projects or budgets.
There is very little "Focus" at Google. Just dramatic growth, fantastic new product development and introduction, and superb rates of return.
by Adam Hartung | Aug 28, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in, Quotes
I need to thank one of my readers for bringing to my attention a recent BusinessWeek article on Dell (see article here.) As he pointed out, this article comes almost exactly 3 months after I talked about how Dell’s Lock-in was disastrous. There are some great quotes worthy of sharing:
Regarding Lock-in:
- "Dell remained slavishly loyal to its core idea of ultra-efficient supply-chain management and direct sales to consumers, even as rivals have stepped up their game and markets have shifted to take away some of Dell’s key advantages. Instead of adapting, critics say, Dell cut costs in ways that compromised customer service and, possibly, product quality."
Some readers may recall on April 16, 2006 when I pointed out Wal-Mart’s problems and discussed the risk of being a 1-Trick Pony:
- "They’re a one-trick pony. It was a great trick for over 10 years, but the rest of us have figured it out and Dell hasn’t plowed any of its profits into creating a new trick."
Regarding identifying Telltales of big problems that indicate a company is moving into the Swamp – or Whirlpool:
- "Dell’s culture is not inspirational or aspirational," says Geoffrey Moore, a tech consultant and author of Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution. "This is when they need to be imaginative, but [Dell’s] culture only wants to talk about execution."
Of course, in an execution focused company there is no room for White Space, and you don’t get innovation:
- "They don’t feel they’re part of something at Dell, and they generally leave because they feel frustrated," says Snyder. "Dell is not a fun place to work, and it’s less fun now than it used to be."
- "Even the CEO admitted so in 2003 – "There are some organizations where people think they’re a hero if they invent a new thing," he said. "Being a hero at Dell means saving money."
- "Inside Dell, ideas that break from the model are discouraged, say former Dell managers. Notes one: "You had to be very confident and thick-skinned to stay on an issue that wasn’t popular. A lot of red flags got waved—but only once."
Lock-in makes you an easy target for competitors:
- "But it was clear some time ago that Dell’s model was not keeping pace and was not going to be such a big advantage in the future… And while experts believe Dell got the best prices on components when it was outgrowing all of its rivals, these days newly ascendant HP and Asian rivals Lenovo Group (LNVYG) and Acer are offering plenty of growth themselves."
Once a company commits to a Defend & Extend strategy, it becomes so structurally Locked-in it becomes almost powerless to change:
- "So why hasn’t Michael Dell—clearly a brilliant guy—changed tactics? For starters, say rivals and Dell alums, shifting gears would upset investors who expect hyper-profitability from Dell’s hyper-efficiency. And having stuck to his guns in the past, he can’t risk letting customers think that "Direct from Dell" is no longer the cheapest, smartest way to go."
By following the Siren’s song of "operational excellence" Dell adopted a Defend & Extend strategy that has placed it at great risk. Now it lacks the tools for innovation that could help the company to have a longer, more successful future. Without a serious Disruption, and new leadership that can implement and manage White Space Dell’s future is easy to predict.
by Adam Hartung | Aug 27, 2006 | Defend & Extend, General, Leadership, Lock-in
Almost two years ago I published a case study comparing McDonald’s and Motorola (download paper here). As a reader of this blog you know the former I don’t care for, while the latter is doing all the right things.
This week, the #2 fellow at McDonald’s abruptly left. Why? Because he was considered to radical, and too quick to try and change things. As you know, McDonald’s dramatically cut back its number of stores 4 years ago. Since then, the company has sold off all it’s growth businesses, and has made minor changes to the existing stores which has helped them to improve sales and profits – although the company still does not support the number of stores it once did. And McDonald’s still is not winning the battle for growth against Starbucks and other less Locked-in competitors.
The thing McDonald’s most needs is someone willing to Disrupt the organization, install White Space and get the company on a growth path for the future. Unfortunately, the current CEO, Chairman and Board members are more interested in historical consistency. Content to Defend & Extend a Success Formula that is no longer leading the marketplace, they have pushed out their best hope for rejuvenating the organization.
Meanwhile Motorola last week again announced it is taking market share from competitors. Its phones simply keep attracting new customes, as unit volumes are up 46% versus a year ago. As you know, Motorola’s Board took the opposite set of actions that McDonald’s took, putting in place a CEO who has Disrupted the company and installed White Space in multiple locations.
While McDonald’s has shown signs of reviving the last couple of years, it is important to remember that it still is smaller than at its peak, it has sold off its growth businesses (such as Chipotles) and it is not the dominant market leader it once was. This most recent action simply demonstrates that the Board is more interested in Consistency than Success. Too bad for all those employees and shareholders.
by Adam Hartung | Aug 9, 2006 | Defend & Extend, General, In the Rapids, In the Swamp, Innovation, Leadership, Lock-in, Openness
Once again we have the opportunity to view the tale of two companies. Both troubled, yet capable of success if they do the right things.
Motorola was struggling a few years ago. Then, a new leader came on board and started Disrupting the old Success Formula. Simultaneously, he opened up White Space all around the company. Sales went up, and so did innovation. While everyone knows about the success of RAZR, Motorola also built its business in digital video recorders and networks. Now, today, we learn that Motorola has further grown its success, winning a $3billion deal to build out a wireless data network for Sprint/Nextel. (See full article here.)
Sara Lee found itself also struggling a few years ago. They also hired a new leader. But this leader chose to disturb the organization without really changing the Success Formula – focusing on cost cutting and selling businesses without creating any new White Space. Now, today, we find out that the leader is conceding she won’t meet her margin goals (even as the business shrinks more than 50%), and isn’t really sure when the company will be growing again. (See full article here.)
Motorola is up over 30% in market value. Sara Lee is down more than 30% in market value. Those who read this blog know that I was a very early fan of Motorola’s turnaround, and recommended it as an investment. They also know I’ve been a longstanding pessimist of Sara Lee. Why? It’s as simple as White Space. At Motorola you could observe a leader attacking the Lock-in and implementing White Space. At Sara Lee there was no attack on company, or industry, Lock-in to old formulas and there was absolutely no White Space.
A successful turnaround absolutely requires fast action to Disrupt and implement White Space. It is the single best predictor of whether a company will overcome its growth stall, or not. Any time you need to decide whether to invest in, join, or supply a troubled company follow one simple rule – Follow the White Space.
by Adam Hartung | Jul 30, 2006 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
When I was young (40 years ago) GM and Ford made cars and trucks. Harley Davidson made big, loud motorcycles. Boeing and Cessna made airplanes. Briggs and Straton made the engines for lawn mowers and other yard equipment. Today, you pretty much can make those same statements.
In the 1960s a company named Honda came to America with a little 50cc motorcycle. No one knew much about this company or what it did. But today, Honda does a lot. Motorcycles, all terrain vehicles, personal watercraft (jet skis), automobiles, full size pick-up trucks, electric generators, lawn mowers and garden tractors, outboard boat motors, water pumps, scooters, snowblowers, robots and airplanes. So, what market are they in?
Honda eschewed the commonly held notions of "core market" and "core customer". They don’t try to be #1 or #2 in their markets (they are the #3 Japanese auto company, for example). You can’t define them in any easy way. Just that they keep growing well above the market average, they keep making money, and they keep providing a doubling our tripling of value for their investors every 7 years or so (quite better than the market average.)
So what drives this success? A focus on innovation as a tool to avoid Lock-in. Let’s look at their recent move into jet airplanes (could you imagine GM, Ford, Harley Davidson or Briggs & Stratton announcing they intend to make and sell airplanes?) The project is led by the V.P. of North American R&D – not the Marketing or Strategy head. His approach has been to apply innovation. Honda is using unique engine mounting (top of wing instead of on the fuselage), building with composite material instead of aluminum and implementing a unique wing shape which achieves a larger interior cabin, higher cruising speed and greater fuel efficiency.
Of course, the competition is belittling this new Honda entry with statements like "It’s a brand new territory for Honda… It’s very different than the consumer market." OK. Sounds a lot like what the original players said when Honda entered the motorcycle market, the auto market, the lawn/garden market, the full-size pickup market and then the outboard motor market. Yet, in each, the innovations Honda brought to market allowed them to attract customers for their products at a good price and a great margin.
Honda does not fixate upon its "core markets", it’s "core capabilities" or even its "core customers". Instead, it constantly looks for new opportunities to innovate and add value. It does not fear new markets, but rather sees each new market as an opportunity to Disrupt itself and create White Space for a new solution. Then, they are merciless in their efforts to do what no previous competitor has done to create value for customers. And now, they are far more successful than #1 or #2 in almost every market they compete.
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.
