by Adam Hartung | Apr 14, 2009 | Books, Current Affairs, Disruptions, General, In the Rapids, Innovation, Leadership, Lifecycle
Last week I blogged about how Segway and GM were taking all the wrong steps in launching the PUMA. Today let me explain why Amazon is the mirror image – doing the launch of Kindle correctly. Kindle is the new "electronic book" from Amazon which allows people to download whole books, or parts of books, onto a very small, light and thin device where they can read the material, notate it and even convert it to audio. Even Marketwatch.com is bullish in its overview of the product "Amazon's Kindle, e-books are future of reading."
Firstly, Amazon recognized it had a Disruptive innovation and didn't pretend this was a small variation on printed material. Perhaps "over the top" a bit with the PR, Mr. Bezos called Kindle the biggest revolution in reading since Gutenberg invented the printing press. This bold claim causes people to realize that Kindle is something very different than anything prior. Which it is. Kindle is not like reading on a PC, nor is it like reading a book, nor is it like reading a magazine or newspaper (should you download those). It's different, and it requires buyers change their habits. By highlighting the uniqueness of the product Amazon doesn't undersell the fact that users really do have to change to enjoy the product.
Secondly, the product isn't being run through some high volume distribution that will struggle with the uniqueness and potentially low initial volumes. Amazon isn't trying to sell the product today at Best Buy or Wal-Mart, which would demand instant volume in the millions supported by huge ad spending. Something which would not only be expensive, but probably would not meet those retail expectations. Instead, Amazon is selling the product itself and closely monitoring volumes.
Thirdly, Amazon isn't pushing Kindle as a product for everybody. At least not yet. Amazon isn't offering Kindle for $20, losing a huge amount of money, and saying everyone needs one – which would likely lead to many people buying a Kindle, deciding its not for them, and then throwing it away to wait a very long time before a repurchase – with lots of negative comments. Instead, Amazon prices Kindle at $359 and targets the product at early users who will really benefit. Like the heavy volume book reader. This allows Amazon to build a base of initial users who will use the product and provide feedback to Amazon about how to modify the product to make it even more valuable. Amazon can cycle through the learning experience with users to adapt and develop the product for a future mass market.
Fourthly, the Kindle doesn't come with 30 options to test. It has just a few. This allows Amazon to learn what works. And add functionality in a way that tests the product. Amazon can add features, but it can also drop them.
Will Kindle be the next MP3 device. Probably. How long will it take? Probably not as long as people think. Because Amazon is introducing this innovation correctly. Publishers, authors, book readers and other application users are all learning together. And while traditional paper publishers (from books to newspapers) are waiting to see, Amazon is preparing its new products to "jump the curve" on these old publishers. It's not hard to imagine in 3 or 4 years how authors might go straight to Amazon with their writing, for publication as a Kindle-only product. This would be incredibly cheap, and open the market for many more authors (books or periodicals) than have access today. Since the cost of reading drops precipitiously (due to no paper) the pricing of these new books and periodicals may well be a few dollars, or even less than a dollar. Thus exploding the market for books the way the internet has exploded the market for short-form blog writers.
Even in a recession, people look for new solutions. But capturing those new customers takes careful understanding of how to reach them. You can't act like Segway and dump a strange new product onto users with mass distribution and a PR highlight reel. You have to recognize that Disruptive innovations take better planning. You have to find early customers who will enter White Space with you to test new products, and provide feedback so you both can learn. You have to be honest about your Disruptive approach, and use it to figure out what the big value is – not guess. And you have to be willing to take a few months (or years) to get it right before declaring your readiness for mass market techniques.
Amazon did this when it launched on-line book selling. It didn't sell all books initially, it mostly sold things not on retailers shelves. It didn't sell to everyone, just those looking for certain books. And it learned what people wanted, as well as how to supply, on its journey to Disrupt book retailling – later about all retailing – and build itself in to the model for on-line mass retail. Following that same approach is serving Amazon well, and portends very good things for Kindle's success.
by Adam Hartung | Apr 3, 2009 | Current Affairs, General, In the Rapids, Lifecycle, Openness, Science
Since before writing Create Marketplace Disruption I've been a fan of GE. The company is the only company to be on the Dow Jones Industrial Average since started 100 years ago. While so many other companies have soared and failed, GE has continued to adapt and grow. But it's been hard to be a GE proponent the last year. Even though GE continues to follow The Phoenix Principle, fears about the recession, GE's massive commercial real estate holdings, and risks in GE Capital drove the stock from $40 a year ago to $6.50!!! A whopping 84% decline!!!
I've also long been a fan of Intel. Intel transformed itself from a memory chip company facing horrible returns into a microprocessor company by maintaining a healthy paranoia about markets and competitors. The company has worked with Clayton Christensen over the years to not only keep up with sustaining innovations, but to implement Disruptive ones as well. But Intel was recession-slaughtered over the last year, losing half its value.
It's been enough to make an innovation lover cry. But, simultaneously, it's not clear that over the last year ever stock has been accurately priced for its long term value by the market. As we know, fears about bank and real estate failures have simultaneously destroyed investor confidence while pushing up cash needs. Don't forget that Warren Buffet made an insider deal to provide money to GE with warrants to buy the stock at $23 – about double the current value. So perhaps the bloodbath in these two companies went beyond what should have been expected?
Today there's more heartening news. "GE and Intel join forces on home health" is the FT.com headline.
GE and Intel both have identified that health care will be a growing market into the future, expecting the home health monitoring business alone to grow from $3B today to $7.7B by 2012. By keeping their eyes on the future, both companies are showing that they are investing based on future expectations, not just historical performance. And, both have identified opportunities that reside outside their existing health care markets, such as the medical imaging market where GE is currently strong. Thus, they are investing $250million into a new joint venture company to develop new markets.
This shows the earmarks of good White Space. It's focused on developing a growing future market, not trying to preserve an existing market position. It's outside the existing business manager's control, thus given permission to develop a new Success Formula rather than operate within existing constraints of existing businesses. And the project is given enough resources to succeed, not just get started.
Maybe now is a great time to buy stock in these companies? GE has gone out of its way recently to divulge information about its real estate and finance units to analysts in order to be more transparent. And the company is demonstrating a commitment to the behaviors, future-oriented planning and White Space, that have long helped the company grow.
Now, if we could just start seeing the kind of disruptive behavior out of Chairman Immelt that former Chairman "Neutron Jack" Welch demonstrated my comfort level could go up even more…..
by Adam Hartung | Mar 30, 2009 | Current Affairs, Defend & Extend, General, In the Rapids, In the Whirlpool, Leadership, Quotes, Television
"This is the future of media. Whether in print, over the air or online — the delivery mechanism isn't as important as the unique, rich nature of the content provided." That's what the Tribune Corporation's COO, Randy Michaels, said in "Tribune Merges Conn. paper, stations" as reported on Crain's ChicagoBusiness.com. After filing bankruptcy, and seeing both newspaper subscribers and advertisers hacked away dramatically, Tribune is merging together all operations – newspaper and 2 TV stations – in Hartford, CT. They are cutting costs again.
We can hope Mr. Michaels means what he says, but excuse me if I'm doubtful. Despite the rapid acceleration of on-line news readership, and the fact that in most major markets Tribune has one or more TV stations as well as a newspaper, Tribune has never consolidated it's news operations or its advertising sales force. This is sort of remarkable. Going back at least 5 years, it made sense when gathering the news, or talking to an advertiser, to discuss how you could maximize his value for ad money spent. That meant a sharp company would have laid out programs showing how they could give advertisers access to eyeballs from all sources. But instead, at Tribune each station had its own salesforce, each newspaper, and each on-line edition of the newspaper. There was little effort to give the customer a good value for his spend – and no effort to discuss how he could transfer dollars between media to be a big winner. Even though Tribune was an early investor in the internet, it has not learned from its investment and migrated to a new Success Formula.
At a time when advertisers are unclear about how to justify their spending, a sharp media company would be explaining how many eyeballs in are in each format, the demographic profiles and the cost to reach those eyeballs. A company that really is "media independent" would have a big advantage over one trying to sell only the legacy products, because it isn't learning from the marketplace how to offer the best product at the best price and make a profit.
And Tribune had better move quickly. Arianna Huffington has announced the launch of the "Huffington Post Investigative Fund," as announced on the website HuffingtonPost.com. This is her effort to create a pool of investigative journalists for on-line sites who will do the kind of work we historically expected newspapers to do. She is throwing in $1.75million, and asking others to put up additional money. Thus giving this White Space project not only permission to figure out a "new age" model for investigative reporting, but hopefully the resources with which to experiment and learn. Whether this project will succeed or not is unclear, but that it is intended to make on-line news (and her website) more powerful and successful is clear. With each step like this, and this one she took all over the airwaves Monday discussing on multiple television stations, the case against quality of on-line news declines – and increases the on-line competition for eyeballs with television, radio and newspaper formats.
What we'd like to see is an announcement that the Tribune project in Hartford is a White Space project intended to figure out the Success Formula for future media. As we come ever closer to the "Max Headroom" world, depicted in the 1980s of a future where there is 24×7 news around all of us all the time, what no one knows for sure is how the profit model will work. Those who experiment first, and learn the fastest, will be in a strong position to be the leader.
Unfortunately, the Tribune announcement does not look like White Space. The Tribune leadership has still not Disrupted its grip on the old Success Formula. The project in Hartford looks more like a cost-saving effort, trying to defend the old newspaper, than a learning proposition. The project seems to lack the permission to do whatever is necessary to succeed (like perhaps stop printing), and it has no resources coming its way with which to experiment as it keeps trying to maintain all 3 of the legacy business units. Rather than a learning environment, this looks more like an effort to save 3 troubled businesses by cost saving - a Defend practice that doesn't work when markets shift and new competitors are trying all kinds of new things.
by Adam Hartung | Mar 18, 2009 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, Innovation, Leadership, Web/Tech
We hear people say that eventually there will be no PC. Did you ever wonder what "the next thing" will look like that makes the PC obsolete? For most of us, working away day-to-day on our PC, and talking on our mobile phone, we hear the chatter, but it doesn't ring for us. As customers, all we can imagine is the PC a little cheaper, or a little smaller, or doing a few new things. And same for our phone. But, for those who are making the technology real, imagining that next way of getting things done – of improving our personal productivity the way the PC did back in the early '80s – it is an obsession.
I think we're getting really close, however. In what Forbes magazine headlined "Apple's Explosive iPhone Update" we learn that Apple is dramatically enhancing what it's little hand held device can do. USAToday hit upon all the new capabilities of the iPhone in its article "Apple iPhone software prices may rise," but these are just the capabilities us mere users can see. On top of these, Apple has provided 1,000 new Application Programming Interfaces (APIs). These allow programmers all kinds of opportunities to do new things with the iPhone (or iTouch). We all know that the netbook direction has small devices doing spreadsheets, presentations and documents – and that is, well, child's play and not the next move to personal productivity. You have to go beyond what's already been done on these machines if you want to get new users – those that will make your product supercede and obsolete the old product. And these APIs open that world for programmers to do new things on the iPhone and iTouch.
So go beyond your PC and phone with your thinking. With just one of the new offerings, Push, your iPhone could recognize your location (via GPS), know you are walking in front of a Pizza Hut (example) and ring you that this store will give you $2.00 off on a lunch pizza. Right now. And it'll create that magical bar code so the minimum wage employee at the register can scan your phone to get the price right when you check out. Or link your phone via bluetooth to your heart rate monitor in your running watch and automatically email the result to your cardiologist for the hourly profile she's building to determine your next round of pills – with a quick ring and reminder to you that you best slow that walk down a little if you want to get positive, rather than negative, impact. Or you get an alert that UBS just posted on the web a new review of GE (in your stock portfolio) and your phone automatically forwarded it to your broker at Merrill asking him for a comment and executed a stop-sell order at $.30 below the current market price via the on-line ML order application. By the way, you were supposed to turn at the last corner, but you were so busy listening to your alert that you missed the intersection so the GPS is re-orienting you to the destination – especially since there is construction on the next street and the sidewalk is closed – as per the notice posted by Chicago Streets and Sanitation this morning.
What makes this interesting is that it's the device, plus the open APIs, that make this stuff real and not just fairy dreams. That makes you wonder if you really want to lug around that 7 pound laptop, now that you get the newspaper, magazines and your books from Amazon all on the iPhone as well. And when you're delayed at O'Hare you can download last night's episode of Two-and-a-half Men and watch it on the screen while you wait to board. The laptop can't do everything this new device can do – and the new thing is smaller, and cheaper, and easier. This is all getting very real now. And with Google and Palm close on Apple's heals, it's now a big race to see who delivers these applications.
Does your scenario of the future have all this in mind? Are you planning for this level of productivity? Of information access? Of real-time knowledge? Are you thinking about how to use this capability to improve returns so you can explode out of this recession in 2010? Do you think you better take some time now to check?
In the meantime, IBM wants to buy Sun Microsystems according to the Marketwatch.com article "IBM May get Burnt." Talk about "other side of the coin." Why would anybody want to buy a company with declining sales? In IBM's case, probably to eliminate a competitor. Now that is typical 1980s industrial thinking. "So last century" as the young people say. The financial services and telecom industries are "soft" – to say the least. IT purchases are lowered. IBM and Sun are big suppliers. So IBM can buy Sun and hope that it will get rid of a competitor, and then raise prices. And that is typical industrial era – circa Michael Porter and his book Competitive Strategy – thinking. Lots of people are probably saying "why not, sounds like a good way to make money."
At least one problem is that this is no cheap acquisition. Ignoring integration problems, even though Sun is down – a huge amount down – the acquisitions is still over $6billion. Sure, IBM has that in cash. But what happens in information businesses is that competition never goes away. With budgets low, what sorts of PC servers (maybe from HP) running Linux are coming out that the customers will compare with Unix servers – and push down prices even if IBM has no Unix server competition? What opportunities for outsourcing applications to offshore server farms, running Chinese or Korean-made boxes with Linux, taking the business away from IBM exist? Or what applications will be eliminated by banks and telcos that need to axe costs for survival now that markets have shifted? You don't get to "own" an information-based business, and you don't get to control the pricing or behavior of customers. IBM needs to wake up and realize that it's investment in Sun within 2 years will be washed away.
We should be heading forward, not backward. Especially during this recession. Those companies that deliver new products that exceed old capabilities will be winners. Those that seize this opportunity to Disrupt markets – like Apple is doing – will create platforms for growth. Those that try applying industrial practices will find themselves looking in the rear view mirror, but never find that lost "glory land" that disappeared in the big recession of 2008/09. As investors, we need to keep our eyes on the growing companies building new applications, rather than the ones trying to regain yesterday.
by Adam Hartung | Mar 9, 2009 | Current Affairs, Defend & Extend, General, In the Rapids, In the Swamp, In the Whirlpool, Innovation, Science
The headlines scream for an answer to when markets will bottom (see Marketwatch.com article from headline "10 signs of a Floor" here) . But for Phoenix Principle investors, that question isn't even material. Who cares what happens to the S&P 500 – you want investments that will go up in value — and there are investments in all markets that go up in value. And not just because we expect some "greater fool" to bail us out of bad investments. Phoenix Principle investors put their money into opportunities which will meet future needs at competitive prices, thus growing, while returning above average rates of return. It really is that simple. (Of course, you have to be sure that other investors haven't bid up the growth opportunity to where it greatly exceeds its future value — like happened with internet stocks in the late 1990s. But today, overbidding that drives up values isn't exactly the problem.)
People get all tied up in "what will the market do?" As an investor, you need to care about the individual business. For years that was how people invested, by focusing on companies. But then clever economists said that as long as markets went up, investors were better off to just buy a group of stocks – an average such as the S&P 500 or Dow Jones Industrials. These same historians said don't bother to "time" your investments at all, just keep on buying some collection (some average) quarter after quarter and you'll do OK. We still hear investment apologists make this same argument. But stocks haven't been going up – and who knows when these "averages" will start going up again? Just ask investors in Japan, where they are still waiting for the averages to return to 1980s levels so they can hope to break even (after 20 years!). These historians, who use the past as their barometer, somehow forgot that consistent and common growth was a requirement to constantly investing in averages.
When the 2008 market shift happened, it changed the foundation upon which "constantly keep buying, don't time investing, it all works out in the end" was based. Those days may return – but we don't know when, if at all. Investors today have to return to the real cornerstone of investing – putting your money into investments which will give people what they want in the future.
Regardless of the "averages," businesses that are positioned to deliver on customer needs in future years will do well. If today the value of Google is down because CEO Eric Schmidt says the company won't return to old growth rates again until 2010, investors should see this as a time to purchase because short-term considerations are outweighing long-term value creation. Do you really believe internet ad-supported free search and paid search are low-growth global businesses? Do you really believe that short-term U.S. on-line advertising trends will remain at current rates, globally, for even 2 full years? Do you think Google will not make money on mobile phones and connectivity in the future? Do you think the market won't keep moving toward highly portable devices for computing answers, like the Apple iPhone, and away from big boxes like PCs?
When evaluating a business the big questions must be "is this company well positioned for most future scenarios? Are they developing robust scenarios of the future where they can compete? Are they obsessing about competitors, especially fringe competitors? Are they willing to be Disruptive? Do they show White Space to try new things?" If the answer to these questions is yes, then you should be considering these as good investments. Regardless of the number on the S&P 500. Look at companies that demonstrate these skills – Johnson & Johnson, Cisco Systems, Apple, Virgin, Nike, and G.E. – and you can start to assess whether they will in the future earn a high rate of return on their assets. These companies have demonstrated that even when people lose jobs and incomes shrink and trade barriers rise, they know how to use scenario planning, competitor obsession, disruptions and white space to grow revenue and profits.
You should not buy a company just because it "looks cheap." All companies look cheap just prior to failing. You could have been a buyer of cheap stock in Polaroid when 24 hour kiosks (not even digital photography yet) made the company's products obsolete. Just because a business met customer needs well in the past does not mean it will ever do so again. Like Sears. Or increasingly Motorola. Or G.M. These companies aren't focused on innovation for future customer needs, they prefer to ignore competitors, they hate disruptions and they refuse to implement White Space to learn. So why would you ever expect them to have a high future value?
Why did recent prices of real estate go up in California, New York, Massachusetts and Florida faster than in Detroit? People want to live and work there more than southeastern Michigan. For a whole raft of reasons. In 1920 the price of a home in Iowa or Kansas was worth more than in California. Why? Because an agrarian economy favored the earth-rich heartland over parched California. In the robust industrial age from 1940 to 1960, the value of real estate in Detroit, Chicago, Akron and Pittsburgh was far higher than San Francisco or Los Angeles. But in an information economy, the economics are different – and today (even after big price declines) California homes are worth multiples of Iowa homes. And, as we move further into the information economy, manufacturing centers (largely on big bodies of water in cool climates) have declining value. The market has shifted, and real estate values reflect the shift. Unless you know of some reason for lots (like millions) of health care or tech jobs to develop in Detroit, the region is highly over-built — even if homes are selling for fractions of former values.
We seem to have forgotten that to make high rates of return, we all have to be "market timers" and "investment pickers." Especially when markets shift. Because not everyone survives!!!!! All those platitudes about buying into market averages only works in nice, orderly markets with limited competition and growth. But when things shift – if you're in the wrong place you can get wiped out!! When the market shifted from agrarian to industrial in the 1920s and '30s my father was extremely proud that he became a teacher and stayed in Oklahoma (though the dust storms and all). But, by the 1970s it was clear that if he'd moved to California and bought a house in Palo Alto his net worth would have been many multiples higher. The same is true for stock investments. You can keep holding on to G.M., Citibank and other great companies of the past — or you can admit shift happened and invest in those companies likely to be leaders in the information-based economy of the next 30 years!
by Adam Hartung | Mar 4, 2009 | Current Affairs, In the Rapids, Innovation, Openness, Web/Tech
I teach college classes on innovation, as well as speak regularly on the topic. And I am frequenty asked how to determine whether new products are sustaining innovations, or disruptive ones. In 2008, the most common product I was asked about was the iPhone. To me the answer was obvious. As a phone, the iPhone was sustaining. But, as a new platform from which to do a multitude of things that went way, way beyond phone use it had the potential to be very Disruptive. For those reasons, it's initial (if expensive) ability to be sustaining, coupled with it's long-term potential to be Disruptive (and therefore wildly inexpensive), made iPhone look like an easy product to introduce yet really important as time and applications progressed. It was easy to predict the iPhone as a product that would make a big difference in the marketplace.
So far, I've not been disappointed. Today, Apple announced an iPhone application allowing it to behave like a Kindle (read article here). The Amazon.com launched Kindle was the most successful new product of 2007 and 2008 Christmas seasons, selling out production and selling in greater volumes than the initial launch of the iPod. Kindle offers the opportunity to read anything digitally – from the morning newspaper (why have a paper if you can get the info digitally), to magazines to books. Literally thousands of publications and hundreds of thousands of books. When I had to buy a Kindle device to gain this access, I had to deliberate. Yet another device to carry? But now that I can get this "library" access on a device which can also deliver internet access, text messaging, mass messaging on twitter, my PDA services and telephone connectivity — well this is pretty amazing. It keeps demonstrating the iPhone as a device not like any other device in the market — a game changer – that can bring in new users to each of the individual markets it serves by offering such strong cross-market delivery.
Just 3 months ago tech reviewers felt that "netbooks" were the next "hot" item. These downsized, book-sized laptops gave basic computer performance at a very low price. And analysts chided Apple for not participating. Forbes seemed to chide Apple recently with a headline that the company was living in denial (see article here). But a closer read shows that the headline was tongue-in-cheek. Forbes too recognized that Apple has a product in the netbook class – but it does a whole lot more – and its called the iPhone. Meanwhile, Apple doesn't intend to lose value on Macs by chasing downmarket with the larger platform.
I've told many audiences that sustaining innovations – those that do the same thing but a little better – create 67% of incremental revenue. They feel comfortable, and are easy to launch. And because they give revenue a shot, we justify doing more and more of these product variations and simple derivatives. But, disruptive products produce 85% of incremental profits. Variations and derivatives are easy for competitors to knock-off, and their value is short-lived (if they produce any value at all). Disruptive products are hard to imitate, and produce long-term profits. The iPod disrupted the music business, and now years later it still has the #1 market share as an MP3 device (despite a market attack from behemoth Microsoft with Zune) and iTunes remains #1 in music downloads even though Apple produces no music. iPod and Mac make money because they cannot be easily imitated. And the same is proving true for iPhone. It is more than it looks, and it has lots of opportunity to keep growing.
Apple demonstrates every day that even in very tough economic circumstances, if you go to where the market is headed YOU CAN GROW. You don't have to sit back and bemoan the lack of credit or the change in markets. You do need to have a clear view of where markets are headed, with vivid scenarios allowing you to track behavior and target. You also have to be obsessive about competition, and realize you must relentlessly take action to remain in front. And you can't fear Disruption as you use White Space to enter new markets and test new products. That's why Apple stock is flat in 2009, while almost everyone else has gone down in value (see chart here).
by Adam Hartung | Dec 9, 2008 | General, In the Rapids, Innovation, Leadership, Openness
We keep hearing about all the bad news in this recession (Tribune Company, GM, Circuit City for example). You could easily believe there is no good news. But if we look a little harder we can see that there are businesses which are looking forward and taking actions to build market share – winning against competitors that are reacting by retrenching and hiding in a foxhole. There is a better way to manage when times are tough than cutting costs and "waiting for times to get better."
Ever heard of Tractor Supply Company (see chart here)? If you live in a big city, probably not. As the name implies, this retailer has largely supplied products to farmers and competitors in the agrarian economy. Of course, the number of individual farms has been declining for decades as the economy shifted from agrarian to industrial – and now to information. So you would expect Tractor Supply to be disappearing from the retail landscape, especially during times so difficult that much better known retailers are disappearing and filing for bankruptcy.
But that is not the case. Tractor Supply realized that while "production" farms are fewer and becoming a less attractive market, on the periphery of more and more cities there were people with unsupplied needs. And as cities expanded, and corporations moved headquarters to the suburbs, these ex-urban and suburban families were increasing the number of pets – and in some cases picking up pets like horses and other animals traditionally considered livestock. "Gentleman farms" of only 5 or 10 acres were increasing, where families escaped urban lifestyles to enjoy a connection with gardens, small crops and a few animals. They also needed tools, and hardware for fences and buildings – in short a panoply of products not readily available at Home Depot. And with that insight to the changing market, Tractor Supply has been expanding. The chain has 834 stores (and you never heard of them?). The company opened 20 new stores last quarter, compared to 21 a year ago and 70 this year compared to 63 last year. They are now opening 2 stores in outlying Chicago. The company is growing more today than last year, and moving into new markets where even Wal-Mart has chosen to leave. (Read article about Tractor Supply growth moves here.)
Another great example is Papa John's pizza restaurant chain (see chart here). We keep hearing about how people are eating out less now than before. The marketplace is struggling, as chains such as Bennigan's have shut their doors, unable to draw enough customers. So analysts keep talking about more failures in restaurants. Yet, Papa John's ignored the analysts and figured out a way to grow.
Instead of restricting itself to the "tried and true" revenue growth approaches used by most chains – such as television advertising and newspaper coupons – Papa John's studied how people were using the internet, and created White Space to develop new marketing approaches. They created a one-day campaign, flooding websites such as MySpace.com, NHL.com and others with display ads, via Google ad placement. The result was a 20% revenue jump. By driving people to order on-line, rather than old-fashioned telephone orders, they saw average ticket sizes increase 10-15% due to increased ordering. And they have connected many more customers to Papa John's email marketing. For example, on Facebook the number of Papa John's fans increased from 10,300 to almost 187,000 – an 18X increase in just 3 weeks! Now Papa John's is adding more on-line opportunities for customers, such as advance ordering (up to 21 days – say for a party) and "repeat last order" capability to make transactions fast and easy. As the world moves to the web, Papa John's is learning to use the web to connect with customers and grow! (Read about Papa John's on-line marketing programs here.)
It's easy to bemoan a recession, say there's little you can do, and start whacking at costs. It's easy to get down in the dumps, and lose interest in trying to do better. Tough market news can breed discontent and worry and inaction. In the cost-cutting process you well might lose some of your most valuable employees – and leave yourself quite unprepared for future competition (read here at Harvard Business Press about how traditional recessionary cost cutting reduces competitiveness). Even worse, while you tread water, you greatly increase your vulnerability to competitors who focus on market shifts, analyze competitors to upend them, Disrupt their old behaviors to create future focus, and use White Space to try new things which can create a much better returning Success Formula in the changed marketplace. These Phoenix Principle companies are the ones that will lead future growth in revenue and profits by not running for foxholes today, instead concentrating on how they can Disrupt and use White Space to become a far more successful competitor.
by Adam Hartung | Dec 1, 2008 | Disruptions, General, In the Rapids, Innovation, Leadership
You don't have to agree with Rupert Murdoch's politics to recognize his business savvy (in fact, ignore them if you want to understand his business acumen). A new book is coming out today on his life, and according to reviews and interviews with the author, it continues to reinforce how Mr. Murdoch followed The Phoenix Principle for building News Corp. into a major, industry leading, corporation. (read about the book here)
Don't forget that News Corp. began as a small Australian newspaper company. As large as Australia is physically, it is sparsely populated. While you may recognize an Australian accent, I bet you struggle to name an Australian corporation. It's relatively small population, abundant natural resources and remote geography (don't forget, it's an island continent) means it is easy for Australia to be missed on the global business landscape. But it is from these humble roots that Rupert Murdoch saw great opportunities for growth if he first moved into newspapers around the globe - eventually becoming what is now America's largest media empire.
Not only does Mr. Murdoch plan for the future, rather than fixating ont he past, but that Mr. Murdoch obsesses about competitors is made clear in his biography. His fixation on CNN helped move Fox News from a fledgling idea to the #1 rated news channel. He fixated on CNBC when deciding to recently launch Fox Business Network. Obsessing about competitors, especially when in a different field, is a trademark of Phoenix Princicple companies that make long-term higher rates of return. They let competitors lead them into new businesses – where they learn and grow.
Mr. Murdoch is certainly Disruptive, and his biographer describes him as "the least corporate person I've ever met in corporate life." And this sort of willingness to Disrupt is what made it possible for News Corp. to win the bidding for MySpace.com. News Corp. is not just a newspaper company – it has vast interests in fim, broadcast television, cable television, direct broadcast satellite, magazines, inserts, books and the internet. Such widespread White Space keeps News Corp. out front of its competitors. (See News Corp holdings and business interests here.)
Contrast this with Ted Turner's empire, for example. Like Rupert Murdoch, Mr. Turner started with a company that was almost exclusively a billboard enterprise – and almost exclusively in the south. Yet, he was able to see that the future of broadcast media was much stronger than billboards, leading him to move forward with projects in radio, broadcast TV and eventually cable television. Launching CNN as the world's first global news network put his company in the forefront of the media industry.
But, eventually Mr. Turner sold his company to another television, film and magazine company – Time/Warner. Rather than continuing to branch out with White Space onto the internet, Mr. Turner agreed to a "grand play" by merging with AOL. Instead of White Space where Turner could learn to expand and grow, with multiple investments in the new media environment, Turner/Time/Warner became trapped in a very costly, and over-committed, situation with AOL. Too early in the lifecycle, and with insufficient learning opportunities, this became a grand disaster leaving Time/Warner a far weakened competitor – and making it possible for Google to emerge as the leading American on-line media company.
I don't ask that you like Rupert Murdoch. Nor that you like News Corporation. Nor that you agree with the heavy political overtones of Mr. Murdoch and those on his executive team. In fact, feel free to disagree with their politics vehemently. But if you look at their business results you see an organization that followed The Phoenix Principle to great success. And, as the media business keeps changing, we will see many competitors disappear – especially those too closely aligned with print and broadcast news. But I would not expect News Corporation to be one of those struggling to survive. Its practices have positioned the company well to continue growing, despite dramatic industry dynamism. And that's what being a Phoenix Principle company is all about.
by Adam Hartung | Nov 24, 2008 | General, In the Rapids, Openness, Television
As consumers, it's easy to forget that news is a business. After all, we don't directly pay for news. It comes free to us via television, radio, print or the web. Thus, it's easy to forget that the providers rely on advertisers to foot the bill. Of course, they attract advertisers by competing to get us consumers to watch, read or listen to their news programming. So, you may not have noticed the change in competitors recently in national news – and the big difference this is having on some valuations.
Focusing on television, CNN was the first at making news into a stand-alone business. For many years, CNN was practically uncontested. But in the late 1980s Rupert Murdoch woke up to realize that any business with one player deserved some competition, and he launched Fox. Using tools right out of The Phoenix Principle, he managed to unseat CNN and become #1:
- Fox looked into the future and predicted the market for news was likely to grow, even if the market for newspapers was not. Thus, even though News Corporation had been a newspaper company up until that time, Murdoch invested the vast bulk of all money he could raise into creating a brand new, from scratch, television news company that would be on broadcast television as well as cable. Many people thought he was nuts – but he quickly proved them wrong creating enormous profits.
- Fox obsessed about competition. The new leaders studied what the competitors in broadcasting (NBC, CBS, ABC) did, and studied CNN. They looked for what they could copy – and the weaknesses.
- Fox Disrupted. Where everyone thought news had to be neutral, Fox chose to be non-neutral. Recognizing that many advertisers were corporations that perceived news media were biased liberally politically, Fox news proposed to counter that bias by being biased conservatively politically. Not only was this opportunity available, but Fox recognized there was no way to counter this position by the existing competitors. What could they say they would do differently once Fox said they were going to be conservatively biased? That they would be more neutral? Fox found a way to change how viewers thought about news coverage and what they would watch.
- Fox used White Space to develop new programming. News was not just reporting, but stealing an idea from Nightline people were hired to interpret the news. Bill O'Reilly, Sean Hannity and many others were hired to interpret the news for viewers, not merely report it. While not all of these efforts succeeded, some were wildly successful drawing so many viewers Fox surpassed CNN as #1 in cable news.
Fox developed a Success Formula that grew revenues quickly. The Lock-ins helped Fox attract viewers, and grow revenues and produce prodigous profits. But, that's not the end of the story.
In the 1990s Microsoft joined with NBC investing in a new company to launch a cable channel and internet presence. That company had wide berth, but was intended to provide news. MSNBC faced the competitive marketplace that now had both powerhouses Fox News and CNN. So, what did they do?
- Looking into the future, the leaders recognized that if there was a market for neutrality, and for political conservatism, there was probably a market for political liberalism. So they identified a counterpoint to Fox and CNN.
- They studied what worked at CNN, Fox and cable news. They identified weaknesses in them all. They recognized that many of the programs on both stations had audiences that weren't growing, leaving time slots available for alternative programming.
- And they Disrupted. MSNBC mixed general news coverage with "special investigation" programs into prisons and other locations with news interpretation programs that took a distinctly politically liberal bent. Additionally, program hosts directly compared their programs to Fox and CNN, and even blatantly compared their competitive audience size ratings.
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And there was plenty of White Space. Programs were tried, added and dropped as fast as they could get them to market. Some were produced fewer than 2 months. Others were tried in multiple time slots. And as programs were shown to have audiences, they were moved around to compete directly with similar programs on the other channels. Newscasters from other NBC programming, such as CNBC or NBC news, were shared with MSNBC creating a different operating model than existed at either CNN or Fox News. Links to MSNBC web programming were added to augment the television programs, offering multi-media capability for viewers.
As a result, MSNBC is now closely tied with Fox News and has a lead in many age groups and time slots (read Marketwatch article here.) The valuation at News Corp. has fallen 67% in the last year (see chart here) – a staggering $10.5billion.
In any market, no matter how strong the competition, the opportunity exists to attack competitor Lock-ins and introduce a new Success Formula which can grow. Even if earlier competitors used The Phoenix Priniciple, if they change to Defending & Extending Lock-in on their Success Formula and do not keep applying the principles to remain evergreen new competitors can re-apply the principles to grow and take share.
Now, in this soft economy, the tendency is to focus on what you always did. But it is during this kind of economy that weaknesses in competitors become more apparent. Opportunities to change competition can become clearer. Customers are more willing to try alternative solutions, giving new competitors a better chance of success. Suppliers are willing to take greater risks to develop new business, making new business launch easier. If you programmatically apply The Phoenix Principle, it is possible to tackle the new economic/customer requirements more quickly, and improve your competitive position.
by Adam Hartung | Nov 6, 2008 | In the Rapids, In the Swamp, In the Whirlpool, Leadership
Companies get into trouble when they stop developing scenarios and plan to succeed by merely Defending & Extending what they’ve always done. In the last few weeks we saw Bear Stearns and Lehman Brothers disappear because they did not prepare for market shifts. Merrill Lynch almost followed them, and may still if Bank of America (chart here) decides to change the name (now that Merrill is becoming a wholly owned subsidiary of BofA).
Companies get into trouble when they stop developing scenarios and plan to succeed by merely Defending & Extending what they’ve always done. In the last few weeks we saw Bear Stearns and Lehman Brothers disappear because they did not prepare for market shifts. Merrill Lynch almost followed them, and may still if Bank of America (chart here) decides to change the name (now that Merrill is becoming a wholly owned subsidiary of BofA). Another example popped up today when we learned the Las Vegas Sands (chart here) is on the brink of failure (read article here). As Sands management ran up the debt, it failed to consider scenarios which could have caused people to not gamble – like a recession! When you aren’t looking at the range of possible shifts, it’s easy to be blindsided. In the last year, the Sands stock price has declined from $120/share to $8. That’s an amazing $40billion loss of value! And all because it forgot to plan for market shifts.
On the other hand, let’s look at Apple (see chart here). Apple is highly dependent upon computer chips for all its devices, from the Mac to the iPhone. Originally the company was built on microprocessors from Motorola. But that changed years ago as the company adopted chips from IBM. Now Apple is using chips from Intel. In its phone products, Apple once used IBM chips but now licenses its chips designs from ARM holdings and modifies them for its own use. And recently Apple hired the former IBM chip head to a new position managing device hardware engineering (read article here).
Wow, Apple looks to be all over the board. Some accuse Apple of being a lousy partner with is chip suppliers. Or accuse CEO Jobs of being a control freak who is trying to get into the chip business. But think again:
- Apple is highly dependent on chips. If they guess wrong on the chips, and over-commit, they could end up suddenly behind competitors and in big trouble.
- How is Apple to know if its vendors will remain on top of the technology curve? If the partner slips, Apple could slip with it.
- Competitors are all around Apple with new products, including Google with its new phone and Motorola with its new commitment to the same software Google is using. They are trying different technology solutions with the hope of eclipsing Apple.
What we see is Apple looking forward, and seeing a range of potential scenarios. Any of these vendors could be dominant, or could be a flop. Additionally, Apple itself has some ideas about what could create market leading product that might eclipse the vendors. What we see is a company that is keeping its options open. Apple is using scenario planning to identify a range of potential outcomes, and it is trying its best to keep itself positioned to win regardless of which outcome occurs. It is obsessing about competitors, and keeping itself flexible to move quickly with market shifts should a competitor take an action which could jump it into the lead.
Making big bets is NOT the job of management. That’s a fool’s folley. Good leaders use scenario planning to identify a wide range of options, and work hard to keep their options open to win regardless of which scenario develops. You have to marvel at how clever CEO Steve Jobs is to position Apple for future success, and how good it is for investors that he would add someone to his top staff who can help keep all options open. This is a very good sign for Apple investors, employees and customers that Apple will remain a strong, viable competitor into the future – even as the shifts of technology threaten to whipsaw the market.
