by Adam Hartung | Oct 28, 2008 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lifecycle, Lock-in
Wal-Mart (see chart here) has not been doing badly the last couple of quarters. Of course, it hasn't done great either. And if we look back the last 8 years – well there's not been much to get excited about. Wal-Mart Locked-in on its low price Success Formula 40 years ago and hasn't swayed since. Today as incomes go down and fear is huge about jobs and investments people are looking for low prices so they are returning to Wal-Mart. But those sales aren't coming easily, because Target, Kohls and other retailers are battling to get recognized for value while simultaneously offering benefits consumers demonstrated they enjoyed before economy went kaput. It's not at all clear that the small uptick in sales at Wal-Mart is anything more than a short-term blip in a very flat environment for Wal-Mart.
It's unclear that there's much growth. This week Wal-Mart admitted it was finding fewer opportunities to open new stores as saturation of its low-price approach appears imminent in the USA (read article here). Instead of opening new stores capital expenditures are going to decline by 1/3, and dollars are being shifted to store remodeling rather than new store opening. This implies a far more defensive tactic set, reacting to inroads made by competitors, rather than an understanding of how to regain the growth Wal-Mart had in the previous decades.
So now Wal-Mart is saying it will turn investments toward emerging markets (read article here). Sure. Wal-Mart wrote off huge investments and exited failed efforts in Germany and France, It's efforts to expand in Canada and the U.K. have been marginal. In Japan it only avoided a huge write-off and failure by making an acquisition. And its China project has gone nowhere, despite much opening hoopla 5 years ago. So why should we expect them to do better with a second attack into China, possibly going into India and Mexico?
The Wal-Mart Success Formula worked in the USA and drove incredible growth, but it is unclear that shoppers in developing countries get much benefit from a strategy largely based on buying goods from low-cost underdeveloped countries and importing them to the USA for mass-market buyers in low-cost penny-pinching store environments. What's the benefit to Wal-Mart's approach in Mexico or India? In India and China customers must pay high duties on imported goods, and low-cost retail exchanges already exist across the country for domestic products. Additionally, lacking a robust infrastructure (meaning a big car and good roadway to carry home mass quantities of stuff bought in large containers) it's unclear that Wal-Mart's approach is even viable. If you have to carry goods home on a bicycle, why would you want to go to a big central store? Isn't buying regularly what you need better? Wal-Mart has made no case that it's Success Formula is at all viable outside the USA, and especially in emerging countries.
Compare the Wal-Mart approach to Google (see chart here). In the last year Google has moved beyond mere search into other high-growth businesses such as mobile telephones. And today Google announced it is going to legally offer books and other copyrighted material to customers in some ways unique – but competing with Amazon's e-book (Kindle) business (read article here). Google keeps entering new high-growth markets with new demands from new customers. And in each market Google enters with new products intended to be better than what's out there today.
Wal-Mart keeps trying to find a way to Defend & Extend its old, tired Success Formula. Wal-Mart is huge, but its growth has slowed. Competitors have entered all around it, and every year they are chipping away at Wal-Mart by offering different solutions to customers. The competitors are getting better and better at matching the old Wal-Mart advantages, while offering their own new advantages. And we can see Wal-Mart is now being defensive in its histiorical markets while naive in trying to export its old Success Formula to markets that don't show any need for it. Wal-Mart is mired in the Swamp, struggling to fight off competitors while its growth is disappearing and its returns are under attack. On the other hand, Google keeps throwing itself back into the Rapids of growth in new businesses that offer new revenues and increased profits. And it enters those markets with new solutions that have the opportunity of changing competition. Google doesn't have to have everything work right for it to find growth through its White Space projects and continue expanding its value for customers, suppliers, employees and investors.
by Adam Hartung | Oct 21, 2008 | Disruptions, In the Rapids, Leadership, Openness
Yesterday I talked about how Lock-in to an old Success Formula kept Sun Microsystems from undertaking Disruptions in the 1990s that would have helped the company keep from floundering. One could get the point that with this weak economy, the die has been cast and there’s little we can do. "Oh Contrare little one".
Let’s look at Apple (see chart here) – the company Sun passed up to focus on its core server business in the 1990s. Today Apple announced profits are up 26% this year – despite the soft economy (read article here). We all know about the iPod, iTunes, iTouch and now iPhone. Apple has demonstrated that it is willing to bring out new products in new markets without regard for "market conditions", and as a result drive new revenues and profits. It would be easy to delay new investments and new launches in this economy to drive up profits, but the company CEO maintains commitment to internal Disruptions and ongoing White Space to drive growth – especially while competitors are retrenching.
Another recent example is Coach (see chart here) the maker of high-end luggage, leather goods and fashion accesories. Most high-end goods are seeing sales plummet. But Coach used its scenarios about the future to invest in its 103 factory outlets and many discount outlets. Instead of running to the high end and doing more of the same, while cutting costs, Coach has put new products into the market and offered new discount programs – in addition to its growth of outlets beyond the traditional Coach stores (read article about Coach here.)
Any company can take action at any time to grow. All it takes are plans based on future scenarios, rather than based on just doing "more of the same." Being obsessive about competitors allows for launching new products before anyone else, and gaining share. And using Disruptions to create White Space for successful new business development. This can happen at any time – not just when times are good. In fact, when times are bad (like now) it can be the very best time to focus on growth. When competitors are trying to retrench it creates the opportunity to change how customers view you, and grow. This might well be the best time ever to not only Disrupt your own thinking – but Disrupt competitors by changing your Success Formula and doing what’s not expected!
by Adam Hartung | Oct 16, 2008 | General, In the Rapids, In the Swamp, Leadership, Lock-in, Openness
Traders help markets function. Because they take short-term positions, sometimes hours, a day or a few days, they are constantly buying and selling. This means that for the rest of us, investors who want to have returns over months and years, there is always a ready market of buyers and sellers out there allowing us to open, increase, decrease or close a position. Traders are important to having a constantly available market for most equity stocks. But, what we know most about traders is that over the long term more than 95% don’t make money. Despite all the transaction volume, their rates of return don’t come close to the Dow Jones Industrial Average – in fact most of them have negative rates of return. Only a few make money.
For investors it’s not important what the daily prices are of a stock, but rather what markets the company is in, and whether the markets and the company are profitably growing. On days like today, which saw the DJIA down triple digits and up triple digits in the same day (read article here), it’s really important we keep in mind that the value of any company in the short term, on any given day, can fluctuate wildly. But honestly, that’s not important. What’s important is whether the company can exp[ect to grow over months and years. Because if it can, it’s value will go up.
Let’s take a look at a couple of companies in the news today. First there’s Google (see chart here). Despite the recession, despite the financial sector meltdown and despite the wild volatility of the financial markets, the number of internet ads continued to go up. Paid clicks actually went up 18% versus a year ago. (read article about Google results here). Gee, imagine that. Do you suppose that given the election interest, the market interest during this financial crisis and the desire to learn at low cost more people than ever might be turning to the internet? Does anyone really think internet use is going to decline – even in this global recession? Google is positioned with a near-monopoly in internet ad placement (Yahoo! is fast becoming obsolete – and is trying to arrange to use Google technology to save itself see Yahoo! chart here]). By competing in a high growth market – and constantly keeping White Space alive developing new products in this and other high-growth markets – Google can look out 3, 5, 10 years and be reasonably assured of growing revenues and profits. And that’s irrespective of the Dow Jones Industrial Average (where Google might well replace GM someday) or whether Microsoft buys the bumbling Yahoo! brand (read about possible acquisition here).
On the other hand, there’s Harley Davidson (see chart here). Motorcycles use considerably less gasoline than autos, so you would think that people would be buying them this past summer as gasoline hit record high $4.00/gallon plus prices. Yet, Harley saw it’s sales tumble 15.5% (much worse than the heavyweight cycle overall market drop of 3%) (read article about Harley Davidson’s results here.) The problem is that Harley is an icon – for folks over 50! The whole "Rebel Without a Cause" and "Easy Rider" image was part of the 1940s post war rebellion, and then the 1960s anti-war rebellion. Both not relevant for the vast majority of motorcycle buyers who are under 35 years old! Additionally, long a company to Defend & Extend its brand, Harley Davidson has raised the average price of its motorcycles to well over $25,000 – a sum greater than most small cars! Comparably sized, and technologicially superior, motorcycles made by Japanese manufacturers sell for $10,000 and less! Worse, the really fast growing part of the market is small motorcycles and scooters that can achieve 45 to 90 miles per gallon – compared to the 30 mile per gallon Harley Davidsons – and Harley has no product at all in that high growth segment! Harley Davidson is a dying technology and a dying brand in an overall growing market. No wonder the company is selling at multi-year lows (down 50% this year and 67% over 2 years) . Even though the stock market may be down, Harley Davidson is unlikely to be a good investment even when the market eventually goes back up (if Harley survives that long without bankruptcy!)
Watching the Dow Jones Industrial Average, or the daily stock price of any company, isn’t very helpful. Daily, prices are controlled by the activity of traders – who come and go incredibly fast and mostly lose money. What’s important is whether the company is keeping itself in the Rapids of Growth. Google is doing a great job at this. Harley Davidson is Locked-in to its old image and thoroughly entrenched in trying to Defend & Extend its Lock-in – completely ignoring for the past decade the more rapid growth in sport bikes, smaller bikes and scooters. As investors, customers, employees and suppliers what we care about is the ability of management to Disrupt their Lockins and use White Space to stay in the Rapids of growth.
by Adam Hartung | Oct 2, 2008 | General, In the Rapids, Leadership, Lifecycle, Openness
I was asked today what I thought about Berkshire Hathaway’s bail-out of GE – did it make me less of a GE fan?
No. Firstly, Warren Buffet’s $3B investment in GE is not a bail-out (read about the deal here). The U.S. bail-out package is for purchasing distressed assets that have questionable value. That is not what Berkshire Hathaway did. Mr. Buffet created one of those private equity deals you and I could only dream of getting. For his investment he gets preferred shares, which have a 10% coupon yield — that’s about 5x what you or I can get on a savings account now – and places his dividend right up there at the top of the payments G.E. will make. If GE would like to repay the money Mr. Buffet is investing they can do so in 3 years – as long as the company pays an additional 10% premium over the dividend. Thirdly, Mr. Buffet receives warrants to purchase $3B of GE stock at $22.50 a share – about half what the stock was worth a year ago, equal to its recent lows, and a price not seen by GE shareholders since the market crash of 2001 (see GE chart here). So Mr. Buffet has what would be called a real sweetheart deal. A big dividend, a buyout premium, and options to make billions if GE survives and remains a long term winner. Mr. Buffet did not simply buy GE common stock, the option available to us mere investing mortals, so we have to look at GE differently than Mr. Buffet did.
GE is the only company that has been on the Dow Jones Industrial Average since its inception. The only one. More than 100 years. But this does not mean it will remain on the DJIA. History is not a good reason to be optimistic about GE – and Mr. Buffet’s likelihood of pocketing a few billion more dollars for the Gates charity. You should be optimistic about GE because in the middle of this rather dramatic market disruption, GE is fast taking action to become a more competitive company. Not just shore up its old business, like most of the banks are doing, but rather repositioning its portfolio to be more successful in the post-crisis market.
We have already heard that the crisis is causing, and will for a goodly while cause, debt to be more expensive. And harder to come by. Long before debt becomes a problem, and long before anyone questions GE’s credit worthiness, GE is already taking action to increase its cash hoard and preserve it’s AAA debt rating. While others are contemplating what to do, GE is raising money from its businesses, Mr. Buffet, from its planned sale of another $12billion in stock. Given the currently low stock price, many CEOs would say "I won’t sell more equity until the markets recover and the value goes back up. I want to avoid earnigs dilution." But GE’s Chairman is acting now to prepare the company for competition in the post-crisis market.
Instead of worrying about dilution, Chairman Immelt admits he is raising cash because "it gives us the opportunity to play offense in this market should conditions allow." Get that – rather than being on his heals and reacting defensively, GE’s leadership is getting its act together to take advantage of low asset values during and after this crisis. It is making sure the company has the resources to continue investing in White Space – to continue being a Disruptive market player in markets that others are just now trying to figure out. GE is revamping its portfolio to be a market leader in 2012, 2015 and 2020.
GE is reporting a bad quarter – and none too good year. But the leadership has recognized the risk of falling into a growth stall. Rather than trying to wait and see what happens, and drift off into the Flats and the Swamp, leadership is taking fast action to throw GE right back into the Rapids. GE is revamping its financial services business to adjust to the market shift. And it is selling many of its long-held U.S. businesses that are facing far slower growth – like the iconic appliance and light bulb businesses. Imagine that, selling the business most closely identified with founder Thomas Edison – the light bulb. In this "nothing is sacred" attack on the existing business portfolio the company is moving rapidly into infrastructure projects like water production in developing markets China and India.
Short term GE’s equity value is subject to the whims of traders and the overall market direction. But looking long-term, it’s hard not to be optimistic about a company that’s doing such a good job of using scenarios to do its planning, keeping track of competitors, taking action leveraging market disruptions and keeping White Space alive and vibrant for future growth.
by Adam Hartung | Oct 1, 2008 | General, In the Rapids, Leadership, Openness
I’ve talked about scenario planning several times during this recent financial crisis. Scenario planning is the first step in becoming an evergreen Phoenix Principle organization that can achieve above-average long-term performance. If we overcome our tendency to focus on what we’ve always done, and what we do today, by getting our eyes set forward we can do a lot better job of providing markets what they want, when they want it and at a healthy profit to boot.
First, think about big trends. It was 3 years ago that home values flattened, and the decline in sales started. Using that information, it was possible to think ahead to what it would mean. U.S. consumer consumption would decline (which has now happened for more than a year) as home values flattened, and then declined, because there would be less home equity to be used for buying stuff. Additionally, holding on to higher mortgages meant that consumers would have less debt capacity. Further, falling prices would mean fewer new home creations, which would mean less being spent on carpeting, refrigerators, furniture, and all that other stuff. Furniture retailers and appliance retailers would struggle.
Of course, it wasn’t hard to imagine that some people on a merry-go-round of home sales would see the merry-go-round stop — leaving them with mortgages they couldn’t afford and homes worth less than they paid. That would lead to foreclosures – and then what would happen to all those packaged mortgage instruments being sold by investment bankers? And if banks couldn’t resell the mortgages, where would the deposits come from to support new mortgage creation? And if the bankruptcies rose, what would happen to those who guaranteed the mortgages (like Freddie Mac and Fannie Mae) and those who bought all those bonds (like AIG)?
OK, so it’s easy to see in retrospect. But what about going forward? Well, think about autos. We know that the consumer isn’t going to see their homes going up in value for a goodly while. Nor will there be easy credit for buying cars. So, what would you expect? Why, declining auto sales of course. The next few years are destined to be very tough for the already strapped automakers General Motors, Ford and Chrysler. So even though auto sales have been declining for 11 straight months (which is a 17 years record, and puts sales at a 15 year low [read article here]), and sales are off 26% to 34% versus a year ago for most American manufacturers (read article here) there’s really no reason to expect new car sales to start going up again any time soon. And we can see that GM bonds are now yielding a whopping 21% as people doubt their ability to repay those debts. But also, we can expect the number of auto dealers to decline. And now the news is reporting America’s largest Chevrolet dealer just filed bankruptcy, laying off 3,200 people, as the industry anticpates 600 dealer failures this year (read article here.) Tight consumer credit hurts sales, and also hurts the stocking of inventory on dealer lots.
Picking up on big trends can help us build a picture of the future. That picture doesn’t have to be completely accurate to help us plan. If we plan for the future, we can still succeed.
Back to our auto business. If we don’t buy new cars, we keep our cars longer. That means more maintenance. And more purchases of replacement tires, starters, and all those parts that wear out. It also means people will probably do more auto washing and cleaning to preserve their existing autos. And they are more likely to spend a bit to upgrade the existing car, say upgrading the stereo or the wheels, to brighten up life without the expense of buying a whole new car. And if dealerships are declining, then that maintenance and upgrage work will go elsewhere. So now would be a good time if you are a dealer to improve the maintenance departments to attract new customers, and help them with upgrade sales. And now is a good time for Pep Boys and Auto Zone to do better. The local car wash just might do OK, and if it offers various upgrades to add onto the wash they have the chance to boost the average ticket value of each wash. So while overall auto sales are dipping, this would be a good time to invest in all the support businesses for cars.
Someone once said that in business for every loser theirs a winner. I’m not sure if that is true. But what is true is that if you do your planning by looking squarely into the future, and building scenarios of most likely outcomes, you’ll do a lot better than if you keep planning for the past to continue. And once you have a good set of future scenarios, it can help you to compete a lot more effectively. Dealers that start being a lot nicer back in the maintenance area, and send out mailers to previous customers offering deals on oil changes, transmission changes, radiator tests and replacement tires will compete better than those that just keep running newspaper ads for us to buy the latest new car. Scenarios can help us to not only prepare, but compete a lot more effectively. No matter what our old Success Formula was, we can move to ones that are more profitable if we keep developing those future scenarios and implementing what future markets need.
by Adam Hartung | Sep 25, 2008 | General, In the Rapids, Leadership, Lifecycle, Openness
General Electric (see chart here) today announced earnings will decline (read article here). Its very large GE Capital unit, which produced 45% of last year’s corporate earnings, is seeing its unit earnings hit hard in this financial crisis. With its admission of the expected decline, many analysts are angry and say the senior leadership has no credibility (read article here). They are crying for heads to roll. So, should you sell GE stock if you own it?
First, look at the announcement. In addition to saying earnings are going to decline, the company has said it intends to diminish its financial business and grow its global industrial business. While it is cutting the dividend the financial unit pays to the parent, it is also cutting the debt in the financial unit. And, most importantly, GE is halting its stock buyback. "We have suspended the stock buyback to reduce GE Capital leverage, while still being able to pursue opportunistic acquisitions" is what Chairman Immelt said.
This is great news for investors. This management team has said it is less interested in manipulating earnings per share by buying back stock, and instead wants to make sure it has cash to make acquisitions at a time when many business values are declining. GE is preparing to keep its growth going, primarily outside financial services, by making sure it has cash and continuing its hunt for acquisitions. Meanwhile, its actions allowed the rating agencies to re-affirm GE’s triple A credit rating – making it a company able to raise debt from around the globe as this crisis continues.
This is exactly what you want to see in a Phoenix Principle company. GE is a portfolio of businesses, which it works aggressively to keep growing. Selling things that don’t grow, and buying things that do. It keeps moving people around in the company to challenge them, and thus help both employees and their units grow. It isn’t stuck in its old business, but is ready to keep moving forward. And it is planning to move forward by admitting it intends to make acquisitions if the markets remain troubled and asset values keep falling. Rather than pulling back to protect its core – especially its core financial services unit – GE leadership is taking action to move forward with less emphasis on financial services and a plan to invest in other businesses with better return potential.
If you are an employee, a vendor, a customer or an investor in GE – could you ask for more? With its eyes firmly on the future, a passion for beating competitors, a willingness to Disrupt even during turbulent markets and the willingness to continue creating and maintaining White Space GE will continue to be a long-term survivor with above average performance long term. Preparing to grow, regardless of market conditions, is part of what makes GE stand out – despite its critics.
by Adam Hartung | Sep 24, 2008 | Disruptions, General, In the Rapids, Leadership, Lifecycle, Openness
Yesterday, amidst all the brouhaha over the dissolving of America’s financial system, Google (see chart here) launched a new phone (read article here.) This would have surely been the #1 front-page news, except – again – the Congressional effort to deal with a trillion dollar investment decision in bad loans. So, is this a big deal that was given short shrift, or is it an announcement we can ignore?
There is debate about whether the Google phone is a game changer or not. And that debate cannot be resolved by phone gurus. Quite simply, mobile phones are no longer simply phones. All the new products are built with new operating systems which let them operate various applications making them quasi-personal computers with mobile telephony capability. There are now several players in the game, and to assess the likely winner’s you would be best served to read Geoffrey Moore’s book The Gorilla Game in which he chronicles the requirements for success when launching technology products. So, does this mean we should reserve opinion about the importance of this launch until more is observed about sales and market share generation?
Hardly. I’ve blogged a fair bit about Google lately – and it’s been positive – and once again I think you should be impressed with this launch. It shows Google getting into yet another growing market, and with yet another new technology. Once again Google has chosen not to sit on its laurels in search or ad placement and invest big money in White Space with permission to do what’s necessary to succeed. One thing Google has a lot of right now is money – and instead of hoarding it the company is creating and maintaining White Space which can keep Google in the growth Rapids. I doubt that everything Google does will make money, and I doubt all its products will succeed. But the fact that Google is investing its ample cash in projects inside growing markets which can sustain the growth is the best move the company could take now.
Also, it’s impressive that Google made its launch knowing that it wouldn’t get the top headline. This shows an organization more intent on White Space than headlines. Instead of creating a "splash" about itself the company put out a new product, using new technology, that operates on a new network, with new functionality – and did it during a very uncertain time for most investors and the economy. Obviously, Google is looking forward and sees it must get into the market now and compete to learn how it will succeed. While many other companies which are less cash rich are forced to pull back their horns, or with management that prefers to be conservative because of shifting markets, Google is keeping its eyes squarely on the future and sees that getting in now, during a period of great uncertainty, only increases its odds of success. When markets shift it most benefits the new entrant willing to create marketplace disruptions – and that’s what we see Google doing now.
We all were impressed with how IBM practically monopolized the mainframe computer business. We were impressed with how Wang dominated word processing. And how Digital Equipment dominated engineering mini-computers. We were impressed that Microsoft took total domination of the desktop market, Dell created domination in selling and distributing PCs, and Sun Microsystems garnered huge share in Unix servers. But each of these got into trouble when markets shifted and they weren’t part of the market shift. As they tried to "milk" their market position and disparage upstart competitors, they fell into Defending & Extending their outdated Success Formulas – until they either (a) had a big, dramatic turnaround, or (b) went out of business, or (c) saw their growth slow and their value plummet. What’s impressive is that Google is showing us the willingness to Disrupt what made them great and enter dispirate new markets with new solutions using White Space to develop new Success Formulas around those markets. With this behavior, they are much more likely to demonstrate long-term value creation than the companies listed above.
And for customers who recognize the value in new technology, as well as employees looking for ways to grow, and vendors ready to support the effort, as well as investors, this is a very good sign.
by Adam Hartung | Sep 16, 2008 | Disruptions, In the Rapids, Innovation, Leadership, Openness
There has been a lot of press recently about the terrible situation for retailers. With house prices plunging, incomes stagnating for 6 years, and credit tight we’ve entered a consumer-led receission in the USA. Analysts are giving plenty of reasons for retail companies to do poorly. About all the big boys are seeing declining revenues – and even the behemoth Wal-Mart is barely growing and it’s doing all the price-chopping it can. Walgreens, the nation’s fastest growing retailer, has slowed its store openings. Jewelers are going bankrupt. A single stumble seems to have led clothier Steve & Barry’s into bankruptcy despite a great reputation with college students. In the middle of this, one company is going into the retail business, opening new stores in hotly contested markets like Chicago. L.L. Bean (read story here).
L.L. Bean has been around a long time, selling product via catalogs. Of course as the internet blossomed and web pages replaced catalogs, their sales on–line grew as well. They’ve long made money as a catalog-based retailer. Their distinctive product line of outdoor-oriented gear, coupled with their catalog distribution, has been the L.L. Bean Success Formula. Yet, now in one of the worst retail markets in recent history the company is moving into traditional brick-and-mortar retail. To traditional analysts, this seems nuts. But L.L. Bean is showing all the strengths of a Phoenix Principle organization. Like Virgin, that launched a profitable airline when everyone said airlines were impossible to make money, L.L. Bean is moving now when the traditional retailer’s Success Formulas are most at risk.
- Traditional retailers are suffering. This shows that the industry Success Formula is producing diminishing returns. The industry is primed for change, because Locked-in existing players are trying to "hunker down" and do "more of the same." This provides a great opportunity for a new player with game-changing ideas to enter the market.
- L.L. Bean’s stores are not targeted at existing retailers. They are targeted at what will make retail stores successful in future years. The plan is all around what people will want in the future to shop at retail, not what has worked in the past.
- L.L. Bean is focused on competitors, and how it can beat them. This move is not about trying to Defend & Extend the old L.L. Bean business, it is about taking advantage of weakened competitors at a time of market shift. L.L. Bean isn’t opening these stores in Chicago (and other places far removed from its traditional market of Maine and the Northeastern U.S.) because customers told them to – they are doing it as a way to be more competitive. For a long time the midwest was a difficult competitive market because of Lands End based in Dodgeville, WI. But since being acquired by Sears Lands End has grown considerably weaker, creating an opportunity for L.L. Bean.
- L.L. Bean is disrupting it’s old Success Formula. These stores have nothing to do with the old centralized catalogue sales and distribution tactics. And the stores are industry Disruptive environments that are as different from a Sears, Wal-Mart, Eddie Bauer or Aeropostale as they can be. L.L. Bean isn’t just trying to sell more stuff in new markets, it is creating an entirely new approach to how it sells.
- L.L. Bean is not trying to extend its old Success Formula. It is using White Space to develop a new Success Formula that will allow the company to be far more successful in 2015 than it was in 2005 or 1995 or 1985. By using White Space since launching its first stores, L.L. Bean is experimenting – trying new things – and learning how to be more successful in a shifting retail marketplace.
When markets shift the existing leaders often stumble. By trying to Defend & Extend their old Lock-ins they hope to regain past results. But shifting markets make old approaches create declining returns. The result is an opening for new competitors, with new Success Formulas, to take advantage of the shift. These new competitors, whether brand new, or a company willing to retool like L.L. Bean, use White Space to figure out what works in the new marketplace. So even when you hear how bad things are in any market, and the existing players are talking about cutting back, there’s always room for a winner. If they are willing to undertake Disruptions, and use White Space to learn what creates the new Success Formula.
by Adam Hartung | Sep 8, 2008 | General, In the Rapids, Leadership, Openness
Google (see chart here) is 10 years old. That’s right, it was just 1998 that $100,000 was invested to start up Google (read article here). Today the company is worth almost $150billion, and its two 35 year old founders have stakes valued at approximately $19billion each.
Now that Google is so successful, it’s easy to say "of course." But think about it. In 1998 the leaders in internet search were Microsoft, Lycos and Yahoo! At that time would you have taken the bet that this start-up company would succeed against the much larger and enormously better financed competitors? What’s more, would you have bet that the start-up could build a fortune by placing ads on the internet?
Now let’s put the shoe on the other foot. Imagine you were offered a job in 1998 to work at Google. Would you have been able to project the company could be a $10billion revenue company in 10 years? Would you have been able to look into the future, analyze weaknesses in competitors, and say "this could be the most influential company in technology in 10 years?" Or, would you have been more likely to say "given our humble beginnings, if we can achieve $10million revenue in 5 years we will be extremely successful. After that, if we can grow at 12% per year we will exceed industry average growth and be very pleased"?
There’s an old saying, "it’s not where you start the race, it’s where you finish that counts." Most of us are leary of looking into the future, seeking out competitive weakness and undertaking Disruption to do new things. We are more comfortable doing what we’ve done in the past, setting low expectations we can likely meet and doing all planning based upon our past history. And that approach means that even if you have all the technology, skill, market opportunity and resources of Google you still won’t be Google – because you’ll never achieve that success. You’ll be bounded by your past Success Formula to do no better than you did in the past, and therefore the opportunity will go to someone else.
Now Google is not only selling internet ads, it’s selling TV ads to NBC, CNBC, MSNBC, Oxygen and Dish network (read article here.) Last week Google launched a new internet browser (Chrome) in direct competition with Firefox and Internet Explorer. Just 10 years old, Google isn’t just a search engine company, it’s in several businesses with White Space flourishing in several markets. But this is only possible because
- Google is totally focused on the future. It doesn’t plan from the past. It isn’t focused on its "core" markets, or how to maintain its share in historical businesses. Google plans for a future using scenarios about what is likely to happen – and what "can be."
- Google is obsessed about competitors. It doesn’t just look to defend its old business, but rather stuides all competitors to see what opportunities are created. It doesn’t hesitate to buy companies like DoubleClick and YouTube. And it doesn’t hesitate to take on Locked-in competitors like Microsoft.
- Google is ready to Disrupt itself, and the markets it enters. Google embraces Disruption, rather than avoiding it. Rather than "stick to its knitting" in search it jumps into markets like browsers where it can be Disruptive.
- Google is loaded with White Space. That White Space allows Google to constantly develop new Success Formulas that grow the company at a stratospheric rate.
Every executive in every company has the opportunity to run a Google. The trick is to get out of Lock-in. To move from thinking that the future has to be about old markets, old ways of competing, and about doing more of the same but faster, better and cheaper. To be a Google means getting the business into the Rapids of growth, wherever those Rapids may be. Creating a Google means shedding old notions about "core focus" and using future scenarios to lead you into high growth opportunities – the willingness to Disrupt old patterns to consider new things – and keeping White Space very active to grow into new markets.
After all, that’s what the leaders did at Virgin and Nike – a couple of other companies that have grown beyond everyone’s expectation. So, would you do it if you had the chance? Or would you remain Locked-in to Defending & Extending your past even if it means results are suboptimal?
by Adam Hartung | Sep 2, 2008 | Disruptions, In the Rapids, Innovation, Leadership, Openness
Today Google (see chart here) announced the launch of its new web browser – called Chrome (see Marketwatch article here). At first blush this may seem quite techie, thus uninteresting to most of us. But it is big news for some very important companies – and well worth watching.
Is Chrome better than Internet Explorer from Microsoft (see chart here)? I don’t know, but I don’t really care right now. There can be a lot of technical debate about what browser is best – but we all know that with IT products being a great product isn’t what’s important. If the market were dominated by great products we sure wouldn’t be using applications from Microsoft – nor databases from Oracle – or software packages from SAP. As Geoffrey Moore has written about extensively in his books (Crossing the Chasm, The Gorilla Game, and Dealing with Darwin to name just 3), success in high tech products – like success in most products – has more to do with your ability to manage the product lifecycle and attract customers than how good the product is.
What we should care about is that Google, a company known for its search engine and its ad placement machine just launched a new product into a very large market against the world’s largest software supplier (based on number of individual users). With a product that’s ostensibly free. This is a clear action by Google demonstrating its ability to follow The Phoenix Principle:
- Google is taking a product to market based upon their scenario of the future – not the market today. They see how a better browser makes getting your work done easier and faster.
- Google is focused on the competition, not currenct customers or their own internal machinations. They see a Locked-in, moribund competitor that is unable to move into new solutions.
- Google is willing to be internally Disruptive by entering entirely new markets, using entirely new metrics and with entirely different requirements for success.
- Google is using White Space to figure out how to grow revenue in the application market that everyone who uses the internet needs – a connection page/application we call a browser.
This is a very big deal. It means Google is not at all willing to rest on its laurels. Yes, it pretty much owns the "search" business and it is hugely in front with on-line ad placement. But it’s not just Locked-in to those markets and focused on Defending & Extending them. It’s ready to go into a very different market with a very different requirement for Success. It’s willing to use White Space to learn how to maintain its extra-ordinary growth rate. This is a very big deal. Google has shown it will give its people permission to do very different things, in very different markets, and authorize the resources to push into those markets aggressively. This is a very, very important step for Google that portends quite good things.
Now to the company with 75% market share – Microsoft. You might laugh and think Microsoft has little to fear. That would be like laughing when Alfred Sloan started selling all those different kinds of cars at General Motors when Ford had 75% share with the Model T. Or laughing at Honda when it first brought the Civic to American and GM + Ford + Chrysler had almost 90% of the U.S. auto market. Microsoft is big, but it’s not invulnerable. Microsoft has sat on its laurels. It’s efforts at "search" were a dismal failure. It completely missed the ad placement market. Microsoft has not offered customers an exciting advance they are willing to buy in desktop applications for years. And its last effort to excite customers with a new operating system was so ignored it had to force distributors to take Vistage by refusing to ship its old product – to howls of complaints. Microsoft is big and has lots of money – but so did Ford, GM, Woolworth’s, Xerox and a long list of other companies that once dominated a market only to fall prey to Disruptive competitors while they practiced Defend & Extend management.
What’s worse is the likely impact on Yahoo! (see chart here). Yahoo! was first to make "search" into a business (not the first search engine, but the first to make it a profitable business). But it’s share has consistently eroded as Yahoo! kept trying to do more of what it always did – while Google went out and used White Space to develop Disruptive solutions. While Yahoo! clung to its ad agency roots, Google developed the world’s largest data center to house servers for those billions of searches we all do. Google developed its own servers, and its own facilities located near rivers to cool them all. And Google kept doing things on the cutting edge of internet use to find out what would create more and better on-line advertising generating new revenue for itself. Yahoo! is trying to find a way to survive – while Google is going into whole new business initiatives with White Space Yahoo! hasn’t even considered.
Today’s announcement wasn’t just a product release by Google. Chrome shows us that Google is a company doing all the right things to stay in the Rapids of fast growth. Unlike Microsoft and Dell that Locked-in early and built a business on Defend & Extend tactics which eventually left them without innovation – Google is using White Space to get into markets that attack the heart of its biggest —- and most Locked-in —- competitor. We can expect Microsoft will do nothing – nothing but try to argue that it is biggest so best. Meanwhile, Google is taking advantage of Microsoft’s Lock-in to take customers into new solutions. This is very good news for Google investors, and very bad news for Microsoft and Yahoo! investors. Not because Chrome is a great product, but because it shows Google is a Phoenix Principle company while Microsoft and Yahoo! are Locked-in to D&E practices that are sending them to declining returns and marginal performance.
