by Adam Hartung | Jun 30, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in, Web/Tech
With all due respect to the great guitar playing songwriter Jerry Reed, today Starbucks and Dell continue to look like copies that were once hot – but now couldn't warm a nose in a blizzard.
"Starbucks continues food push with overhauled menu items" is the Advertising Age headline. Starbucks closed hundreds of stores last year, saw sales in stores open a year fall 8%, and profits dropped 77%. But they aren't bringing anything new to their business. They are revamping the food to make it more healthy. There's nothing wrong with introducing healthier food, but how does Chairman Schultze think this will turn around Starbucks? The company's "return to basics" program has made it overly sensitive to retail coffee prices, while robbing the company of its highly desired cache. An enhanced instant coffee did nothing for revenues. And now this overhauled menu doesn't really offer anything new to excite customers. It's still a ton of calories – even if they are healthy calories – offered at a high price.
Starbucks has given rejuvenated life to McDonald's. Nobody expected the McCafe to be a huge success. But Starbucks has played right into McDonald's sites by shutting down most of its "non coffee" operations and repositioning itself not as a destination but as a fast food outlet. McDonald's reminds me of the hunter who spends all day tramping the forest in search of a deer, only to get back to his pick-up and have a big buck walk within 20 yards of his vehicle. When he least expected to get his kill, it walked up on him. And that's what Starbucks has done. It's made McCafe much more viable than it appeared likely, simply because Starbucks chose to move into direct competition with McDonald's rather than continue on the new business programs it created earlier in the decade.
Starbucks has gifted McDonald's by choosing to fight them head-on right at McDonald's strengths – operational consistency and low price. And now Starbucks is showing complete foolishness by entering into traditional advertising – an area where McDonald's is a powerhouse (the inventor of Ronald McDonald is an expert at ad content and spending). Even worse, Starbucks, which eschewed advertising for years, has decided to promote its new food menu by placing ads in (drumroll please) newspapers! At a time when readership is dropping like a stone, and during summer months when seasonal readership is lowest, Starbucks is choosing to promote with the least effective ad medium available today. Even billboards would be a better choice! We have to ask, wouldn't the previous, much savvier, leadership have launched a wickedly intensive web marketing program to lure customers back into the stores? Some viral videos, lots of social media chat – that sort of thing which appeals to their target buyer? Why would anyone choose to fight a giant – like McD's – on their court, using their rules, against their resource strength? That's not savvy competition, it's suicide.
Simultaneously the once high-flying Dell has been in the doldrums for several years. Decades ago Dell built a Success Formula that ignored product developed, placing its energy into supply chain advantages. Competitors have matched those operational advances, and now Dell gives consumers little reason to make you prefer their product. Not to mention forays into service cost reductions like offshore customer support that absolutely turned off customers and sent them back into retail stores.
Now "Dell is working on a pocket web gadget" according to the Wall Street Journal headline. Not a phone, not a netbook, not a laptop the new device is an assemblage of acquired technology into a handheld internet device. How it will be used, and why, is completely unclear. That it will give you internet access seems to be the big selling point – but when you can accomplish that with your iPhone or Pre, or netbook should you choose a larger format, why would anyone want this device?
Dell seems to forget that it has to compete if it wants to succeed. It's products have to offer customers something new, something better. That's what made the iPHone so successful – it gave users a lot more than a traditional phone. And the same is true for Pre. And these devices now have dozens and dozens of applications available – everything from playing video games to ordering pizza at the closest delivery joint to reading MRI screens (if you happen to be a neurologist). Yet, this new Dell device has no new apps, and it's unclear it is in any way superior to your phone or netbook. Dell keeps trying to think it has distribution superiority, and thus can sell anything by forcing it upon customers. Even products that have no clear application. Dell is Locked-in to its old Success Formula, all about operational excellence, but that model has no advantage now that people with new technology – superior technology – can match their operational excellence.
When companies remain Locked-in too long they become obsolete. And it can happen surprisingly fast. Every reader of this blog can remember when Starbucks seemed invincible. And when Dell was the information technology darling. But both companies remain stuck trying to Defend & Extend their Success Formulas after the market has shifted – and their results are most likely going to end up similar to GM.
Don't forget to download my new ebook "The Fall of GM" and send it (or the link) along to your friends and social network pals. http://tinyurl.com/nap8w8
by Adam Hartung | Jun 26, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Swamp, Innovation, Leadership
"Retailers cut back on variety, once the spice of marketing" is the Wall Street Journal.com headline. It seems one of the unintended consequences of this recession will be forced consumer goods innovation!
For years consumer goods companies, and the retailers which push their products, have played a consistent, largely boring, and not too profitable Defend & Extend game. When I was young there was one jar of Kraft Miracle whip on the store shelf. It was one quart. This container was so ubiquitous that it coined the term "mayonnaise jar" – everybody knew what you meant with that term. Now you can find multiple varieties of Miracle Whip (fat free, low fat, etc.), in multiple sizes. This product proliferation passed for innovation for many people. Unfortunately, it has not grown the sales of Miracle Whip faster than growth in the general population.
Do you remember when you'd go to Pizza Hut and they offered "Hawaiian Pizza?" Pizza Hut would concoct some pretty unusual toppings, mixed up in various arrangements, then give them catchy labels. Unfortunately, what passed internally as an exciting new product introduction was recognized by customers as much ado about nothing, and those varieties quietly and quickly left the menu. Like the Miracle Whip example, it expanded the number of choices, but it did not increase the demand for pizza, nor revenues, nor profits.
Expanding varieties is too often seen by marketers as innovation. I remember when Oreos came out with 100 calorie packs, and the CEO said that was an innovation. But did it drive additional Oreo sales? Unfortunately for Nabisco, no. It was plenty easy to count out the number of cookies you want and put in a baggie. Or buy fewer cookies altogether in these new, smaller packages.
These sorts of tricks are the stock-in-trade of Defend & Extend management. Clog up the distribution system with dozens (sometimes hundreds) of varieties of your product. Try to take over lots of shelf space by paying "stocking fees" to the retailer to put all those varieties (package sizes, flavor options, etc.) on his shelf – in effect bribing him to stock the product. But then when a truly new product comes along, something really innovative by a smaller, newer company, the D&E manager uses the stocking fees as a way to make it hard for the new product to even reach the market because the small company can't afford to pay millions of dollars to bump the big guy defending his retail turf. The large number of offerings defends the product's position in retail, while simultaneously extending the product's life to keep sales from declining. But, year after year the cost of creating, launching and placing these new varieties of largely the "same old thing" keeps driving down the net margin. The D&E manager is trying to keep up revenues, but at the expense of profits.
Simultaneously, this kind of behavior keeps the business from launching really new products. The previous CEO at Kraft said in 2006 that the best investment his company could make was advertising Velveeta. His point of view was that protecting Velveeta sales was worth more than launching new products – and at that time the last new product launched by Kraft was 6 years old! Internally, the decision-support system was so geared toward defending the existing business that it made all marginal investments supporting existing brands look highly profitable – while killing the rate of return on new products by discounting potential sales and inflating costs!
This D&E behavior isn't good for any business. Consumer goods or otherwise. And it's interesting to read that now retailers are starting to push back. They are cutting the number of product variations to cut the inventory carrying costs. As I mentioned, if you now have 6 different stock keeping units (SKUs) for Miracle Whip in various sizes, flavors and shapes but no additional sales you more than likely have doubled, tripled or even more the inventory – and simultaneously reduced "turns" – thus making the margin per foot of shelf space, and the inventory ROI, poorer. Even with those "shelf fee" bribes the consumer goods manufacturer paid.
For consumers this is a great thing! Because it frees up shelf space for new products. It frees up buyers to look harder at truly new products, and new suppliers. The retailer has the chance of revitalizing his stores by putting more excitement on the shelves, and giving the consumer something new. This action is a Disruption for the individual retailer – pushing them to compete on products and services, not just having the same old products (in too many varieties) exactly the same as competitors.
This action, happening at WalMart, Walgreens, RiteAid, Kroger and Target according to the article, is an industry Disruption. It impacts the manufacturers like Kraft and P&G by forcing them to bring more truly new products to the market if they want to maintain shelf facings and revenues. It alters the selling proposition for all suppliers, making the "distribution fees" less of an issue and turning those retail buyers back into true merchandisers – rather than just people who review manufacturer supplied planograms before feeding numbers into the automated ordering system. And it changes what the manufacturer's salespeople have to do.
The companies that will do well are those that now implement White Space to take advantage of this Disruption. As you can imagine, it's a huge boon for the smaller, more entrepreneurial companies that may well have long been blocked from the big retailer's stores. It allows them to get creative about pitching their products in an effort to help the retailer compete on product – not just price. And for any existing supplier, they will have to use White Space to get more new products out faster. And get their salesforce to change behavior toward selling new products rather than just defending the old products and facings.
Markets work in amazing ways. Almost never do things happen as one would predict. It's these unintended consequences of markets that makes them so powerful. Not that they are "efficient" so much as they allow for Disruptions and big behavior changes. And that gives the entrepreneurial folks, and the innovators, their opportunities to succeed. For those in consumer goods, right now is a great time to talk to Target, Kohl's, Safeway, et.al. about how they can really change the competition by refocusing on your innovative new products again!
by Adam Hartung | Jun 23, 2009 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
What is a brand worth? Do you spend a lot of time trying to "protect" your brand? A lot of marketing gurus spent the last 20 years talking about creating brands, and saying there's a lot of value in brands. Some companies have been valued based upon the expected future cash flow of sales attributed to a brand. Folks have heard it so often, often they simply assume a recognized name – a brand – must be worth a lot.
But, according to a Strategy + Business magazine article, "The trouble with brands," brand value isn't what it was cracked up to be. Using a boatload of data, this academic tome says that brand
trustworthiness has fallen 50%, brand quality perceptions are down 24%,
and even brand awareness is down 20%. It turns out, people don't think very highly of brands, in fact – they don't think about brands all that much after all.
And according to Fast Company in the article "The new rules of brand competition" the trend has gotten a lot worse. It seems that over time marketers have kept pumping the same message out about their brands, reinforcing the message again and again. But as time evolved, people gained less and less value from the brand. Pretty soon, the brand didn't mean anything any more. According to the Financial Times, in "Brands left to ponder price of loyalty," brand defection is now extremely common. Where consumer goods marketers came to expect 70% of profits from their most loyal customers, those customers are increasingly buying alternative products.
Hurrumph. This is not good news for brand marketers. When a company spends a lot on advertising, it wants to say that spend has a high ROI because it produces more sales at higher prices yielding more margin. Brand marketers knew how to segment users, then appeal to those users by banging away at some message over and over – with the notion that as long as you reinforced yourself to that segment you'd keep that customer.
But these folks ignore the fact that needs, and markets, shift. When markets shift, a brand that once seemed valuable could overnight be worth almost nothing. For example, I grew up thinking Ovaltine was a great chocolate drink. Have you ever heard of Ovaltine? I drank Tang because it went to the moon, and everyone wanted this "high-tech" food with its vitamin C. When was the last time you heard of Tang? It was once cache to be a "Marlboro Man" – rugged, virile, strong, successful, sexy. Now it stands for "cancer boy." Did the marketers screw up? No, the markets shifted. The world changed, products changed, needs changed and these brands which did exactly what they were supposed to do lost their value.
Lots of analysts get this wrong. Billions of dollars of value were trumped up when Eddie Lambert bought Sears out of his re-organized KMart. But neither company fits consumer needs as well as WalMart or Kohl's for the most part, so both are brands of practically no value. People said Craftsmen tools alone were worth more than Mr. Lampert paid for Sears – but that hasn't worked out as the market for tools has been flooded with different brands having lifetime warranties — and as the do-it-yourselfer market has declined precipitiously from the days when people expected to fix their own stuff. So a lot of money has been lost on those who thought KMart, Sears, Craftsman, Kenmore, Martha Stewart as a brand collection was worth significantly more than it's turned out to be. But that's because the market moved, and people found new solutions, not because you don't recognize the brands and what they used to stand for.
Every market shifts. Longevity requires the ability to adapt. But brand marketers tend to be "purists" who want the brand to live forever. No brand can live forever. Soon you won't even find the GE brand on light bulbs. That's if we even have light bulbs as we've known them in 15 years – what with the advent of LED lights that are much lower cost to operate and last multiples of the life of traditional bulbs. GE has to evolve – as it has with jet engines and a myriad of other products – to survive.
Think for a moment about Harley Davidson. Once, owning a Harley implied you were a true rebel. Someone outside the rules of society. That brand position worked well for attracting motorcycle riders 60 years ago. As people aged, many were re-attracted to the "bad boy" image of Harley, and the brand proliferated. A $50 jacket with a Harley Davidson winged logo might sell for $150 – implying the branding was worth $100/jacket!! But now, the average new Harley buyer is over 50 years old! The market has several loyalists, but unfortuanately they are getting older and dying. Within 20 years Harley will be struggling to survive as the market is dominated by riders who are tied to different brands associated with entirely different products.
If you see that your sales are increasingly to a group of "hard core" loyalists, it's time to seriously rethink your future. Your brand has found itself into a "niche" that will continue shrinking. To succeed long-term, everything has to evolve. You have to be willing to Disrupt the old notions, in order to replace them with new. So you either have to be willing to abandon the old brand – or cut its resources to build a new one. For example, Harley could buy Ducati, stop spending on Harley and put money into Ducati to build it into a brand competitive with Japanese manufacturers. This would dramatically Disrupt Harley – but it might save the company from following GM into bankruptcy.
The marketing lore is filled with myths about getting focused on core customers with a targeted brand. It all sounded so appealing. But it turns out that sort of logic paints you into a corner from which you have almost no hope of survival. To be successful you have to be willing to go toward new markets. You have to be willing to Disrupt "what you stand for" in order to become "what the market wants." Think like Virgin, or Nike. Be a brand that applies itself to future market needs – not spending all its resources trying to defend its old position.
Don't forget to download the new ebook "The Fall of GM" to learn more about why it's so critical to let Disruptions and White Space guide your planning rather than Lock-in to old notions.
by Adam Hartung | Jun 22, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Rapids, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Web/Tech
For years business leaders have sought advice which would allow their organizations to become "evergreen." Evergreen businesses constantly renew themselves, remaining healthy and growing constantly without even appearing to turn dormant. Of course, as I often discuss, most companies never achieve this status. Today investors, employees and vendors of Apple should be very pleased. Apple is showing the signs of becoming evergreen.
For the last few years Apple has done quite well. Resurgent from a near collapse as an also-ran producer of niche computers, Apple became much more as it succeeded with the iPod, iTunes and iPhone. But many analysts, business news pundits and investors wanted all the credit to go to CEO Steve Jobs. It's popular to use the "CEO as hero" thinking, and say Steve Jobs singlehandedly saved Apple. But, as talented as Steve Jobs is, we all know that there are a lot of very talented people at Apple and it was Mr. Jobs willingness to Disrupt the old Success Formula and implement White Space which let that talent come out that really turned around Apple. The question remained, however, whether Disruptions and White Space were embedded, or only happening as long as Mr. Jobs ran the show. And largely due to this question, the stock price tumbled and people grew anxious when he took medical leave (chart here).
This weekend we learned that yes, Mr. Jobs has been very sick. The Wall Street Journal today reported "Jobs had liver transplant". With this confirmation, we know that the company has been run by the COO Tim Cook and not a "shadow" Mr. Jobs. Simultaneously, first report on the Silicon Valley/San Jose Business Journal is "Apple Claims 1M iPhone Sales" last weekend in the launch of its new 3G S mobile phone and operating system. This is a huge number by the measure of any company, exceeded analysts expectations by 33-50%, and equals the last weekend launch of a new model – despite the currently horrible economy. This performance indicates that Apple is building a company that can survive Mr. Jobs.
On the other side of the coin, "Walgreen's profit drops as costs hit income" is the Crain's Chicago Business report. Walgreen's is struggling because it's old Success Formula, which relied very heavily on opening several new stores a week, no longer produces the old rates of return. Changes in financing, coupled with saturation, means that Walgreen's has to change its Success Formula to make money a different way, and that has been tough for them to find. The retail market shifted. Although Walgreen's opened White Space projects the last few years, there have been no Disruptions and thus none of the new ideas "stuck." Growth has slowed, profits have fallen and Walgreen's has gone into a Growth Stall. Now all projects are geared at inventory reduction and cost cutting, as described at Marketwatch.com in "Higher Costs Hurt Walgreen's Profits."
Now the company is saying it wants to take out $1B in costs in 2011. No statement about how to regain growth, just a cost reduction — one of the first, and most critical, signs of Defend & Extend Management doing the wrong things when the company hits the Flats. And now management is saying that costs will be higher in 2009/2010 in order to allow it to cut costs in 2011. If you're asking yourself "say what?" you aren't alone. This is pure financial machination. Raise costs today, declare a lower profit, in order to try padding the opportunity to declare a ferocious improvement in future year(s). This has nothing to do with growth, and never helps a company. To the contrary, it's the second most critical sign of D&E Management doing the wrong thing at the most critical time in the company's history. When in the Flats, instead of Disrupting and using White Space to regain growth these actions push the company into the Swamp of low growth and horrible profit performance.
We now can predict performance at Walgreen's pretty accurately. They will do more of the same, trying to do it better, faster and cheaper. They will have little or no revenue growth. They may sell stores and use that to justify a flat to down revenue line. The use of accounting tricks will help management to "engineer" short-term profit reporting. But the business has slid into a Growth Stall from which it has only a 7% chance of ever again growing consistently at a mere 2%. This is exactly the kind of behavior that got GM into bankruptcy – see "The Fall of GM."
The right stuff seems to be happening at Apple. But keep your eyes open, a new iPhone is primarily Extend behavior – not requiring a Disruption or necessarily even White Space. We need to see Apple exhibit more Disruptions and White Space to make us true believers. On the other hand, it's definitely time to throw in the towel on Walgreen's. Management is resorting to financial machinations to engineer profits, and that's always a bad sign. When management attention is on accounting rather than Disruptions and White Space to grow the future is sure to be grim.
by Adam Hartung | Jun 10, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
As I've given presentations around the country the last year I'm frequently asked about the role of leadership in Phoenix Principle companies. All people can bring Phoenix Principle behaviors to their work teams and functional groups. Yet there is no doubt that organizations do much better when the leaders are also committed to Phoenix Principle behaviors.
Unfortunately, all too often, top leaders are more interested in Defend & Extend Management. BusinessWeek's recent article "How to Succeed at Proctor & Gamble" talks about replacing CEO icons such as Charles Schwab, Michael Dell and Jack Welch. Unfortunately, only one of these was a real Phoenix Principle leader – and the others ended up coming back to their organizations when the replacements tried too much D&E behavior – leaving their shareholders with far too low returns and only dreams of rising investment value. Even more unfortunate is the fact that too many management gurus simply love to wax eloquently about leaders of big companies – regardless of their performance. Such as Warren Bennis's description of A.G. Lafley at P&G as "Rushmorian." Those at the top are given praise just because they got to the top. Yet, we've all known leaders who were far from being praise-worthy. Even the mundane can be loved by business reviewers that rely on them for money, access, ad dollars and influence.
There's a simple rule for identifying good leadership. Grow revenues and profits while achieving above average rates of return and positioning the organizations for ongoing double digit growth upon departure. It's not the size of the organization that determines the quality of a leader, it's the results. We too often forget this.
Back to departing P&G CEO, Mr. Lafley. Preparing to retire, he's taken the high ground of claiming to be "Mr. Innovation" for P&G. Experts on innovation classify them into Variations, Derivatives, Platforms or Fundamental. Using this classification scheme (from Praveen Gupta Managing Editor of the International Journal of Innovation Science and author of Business Innovation) we can see that Mr. Lafley was good at driving Variations and Derivatives at P&G. But under his leadership what did P&G do to launch new platforms or fundamental new technologies? While variations and derivatives drive new sales – "flavor of the month" marketing as it's sometimes called – they don't produce high profits because they are easily copied by competitors and offer relatively little new market growth. They don't position a company for long-term growth because all variations and derivatives eventually run their course. They may help retain customers for a while, but they rarely attract new ones. Eventually, market shifts leave them weaker and unable to maintain results due to spending too much time and resource Defending & Extending what worked in the past. Mr. Lafley has done little to Disrupt P&G's decades-old Success Formula or introduce White Space that would make P&G a role model for the new post-Industrial era.
Too often, bigness stands for goodness among those choosing business leaders. For example, GM is replacing departed CEO Rick Wagoner with Ed Whitacre according to the Detroit Free Press in "Former AT&T chief to lead GM." Mr. Whitacre's claim to fame is that as a lifetime AT&T employee, when the company was forced to spin out the regional Bell phone companies he led Southwestern Bell through acquisitions until it recreated AT&T – as a much less innovative company. Mr. Whitacre is a model of the custodial CEO determined to Defend & Extend the old business – in his case spending 20+ years recreating the AT&T judge Green took apart. Where a judge unleashed the telecommunications revolution, Mr. Whitacre simply put back together a company that is no longer a leader in any growth markets. Market leaders today are Apple and Google and those who are delivering value at the confluence of communication regardless of technology.
Today, few under age 30 even want a land-line – and most have no real concept of "long distance". Can the man who put back together the pieces of AT&T, the leader in land-line telephones and old-fashioned "long distance service" be the kind of leader to push GM into the information economy? Does he understand how to create new business models? Or is he the kind of person dedicated to preserving business models created in the 1920s, 30s and 40s? Can the man who let all the innovation of Ma Bell dissipate into new players while recreating an out-of-date business be expected to remake GM into a company that can compete with Kia and Tata Motors?
Any kind of person can become the leader of a company. Businesses are not democracies. The people at the top get there through a combination of factors. There is no litmus test to be a CEO – not even consistent production of good results. But in far too many many cases the historical road to the top has been by being the champion of D&E Management; by caretaking the old Success Formula, never letting anyone attack it. They have avoided Disruptions, ignored new competitors, and risen because they were more interested in "protecting the core" than producing above-average results (often protecting a seriously rotting core). Much to the chagrin of shareholders in many cases.
Now that the world has shifted, we need people leading companies that can modify old Success Formulas to changing market circumstances. Leaders who are able to develop and promote future scenarios that can guide the company to prosperity, not merely extend past practices. Leaders who obsess about competitors to identify market shifts and new opportunities for growth. Leaders who are not afraid to attack old Lock-ins, Disrupting the status quo so the business can evolve. Leaders who cherish White Space and keep multiple market tests operating so the company can move toward what works for meeting emerging client needs. Leaders like Lee Iacocca, Jack Welch, Steve Jobs and John Chambers. They can improve corporate longevity by shifting their organizations with the marketplace, maintaining revenue and profit growth supporting job growth and increased vendor sales.
by Adam Hartung | May 21, 2009 | Current Affairs, General, In the Swamp, Leadership, Lifecycle, Lock-in, Openness
"Target heads toward the Crossroads" is the Marketwatch headline today. Like almost all large retailers, Target has had a tough year. Profits dropped, and Target hit a growth stall. If not careful, the company could fall away into noncompetitiveness, like KMart did. At the same time, some think Target is the only strong competitor to WalMart. Just to rough up the problem, outside investors led by raider Bill Ackman are trying to pressure Target to "restructure" and spin off its real estate into a publicly traded trust. Management isn't helped by a Wall Street Journal report "Proxy firm backs critics in Target vote" recommending shareholders vote to put Mr. Ackman on the Board. At this time, in the Flats, is when management teams are most vulnerable – and more often than not make decisions that doom the company.
It's at this time, when growth has stalled and vultures are swirling around, that management is most likely to turn to Defend & Extend Management. They look backward, and try to implement old practices hoping it will ward off attacks. They stop Disrupting, instead forcing high levels of conformance among employees. They jump into short-term cost cutting actions, which kill off new growth ideas, and shut down White Space projects to conserve cash. Instead of heading toward new markets, they emulate traditional competitors and focus on short-term actions. Unfortunately, these actions throw the company into the Swamp, hurting their ability to compete long term and making them victims of competitors. Look at Motorola, which swung from an intense high into the throws of near-failure when the executive team turned toward D&E management after Carl Icahn attacked the company. Instead of going after market growth, the D&E practices plunged the company into a cash drain leading to cataclysmic drop in sales and market share.
The worst thing Target could do is try to be Wal-Mart. Nobody can beat WalMart at being WalMart. And WalMart has its own troubles, including saturation of its stores as well as declining customer interest in its low-cost format. Recent resurgence, linked to the worst economy in 70 years, does not reflect a change in what customers want from retailers long-term. Rather, it's a short-term blip for a Locked-in Success Formula that has seen declining returns on investment for over a decade. If Target were to try emulating WalMart, in format or approach, it would be disastrous.
Nor is doing what Target always did the right thing to do. The market has shifted. What worked in 2005 cannot be assured of working in 2010. Trying to refind its "core" and do more of the same practices would again be a Defend & Extend approach which will hurt results. Amplifying those D&E practices by taking radical actions, such as spinning out its real estate in a short-term financial machination, would only reduce the variables Target can use to regain growth. Following the recommendations of raider Ackman and his Pershing Square firm will attempt to short-term spike profitability, but at the grave risk of killing the company long-term.
What Target needs to do now, more than ever, is study the market. The retail industry is under a major shift as on-line participants increase capability and share, per-store numbers struggle to maintain, and as underlying real estate values tumble. Customer expectations, from baby boomers to GenY are different than they were in 2001, and all retailers need to adapt to these changes. The retailers that do, with new approaches – perhaps mixed approaches that combine on-line with traditional, and/or combine mega-stores with specialty, etc. – will be the ones that capture share as pent-up consumer demand re-emerges in the future. What scenario of the future looks most likely to attract and retain customers in 2015?
Simultaneously, Target needs to study competitors, to define its positioning that produces best results. The good news is that the biggest competitor (WalMart) is so locked in that it's easy to predict. Target can study WalMart, Kohl's, Gordman's, J.C.Penney and others to identify what actions it can take that will avoid head-to-head battering and instead provide rapid growth. Especially by focusing on on-line competitors, including Netshops.com, much can be learned about how the market is shifting and where Target should go to maximize growth.
Above all, Target needs to take this opportunity to Disrupt old behaviors and convince employees, and shareholders, that Target will pull out all stops to become the leading retailer by 2020. WalMart is so Locked-in that it can easily decline (and if you doubt that, just look at other market leaders and how they did coming out of downturns – like GM and Sears). The right retailer, making the right decisions, can become the next leader. But not by just doing more of the same. It will take a concerted effort to open the doors for trying and doing new things.
And right now Target needs to be throwing up test stores and new concepts – White Space projects – where it can learn what will work for the next great retailing Success Formula. No amount of planning is worth as much as experimentation. The newest ideas in retailing need to be reviewed and tested to see what can work now. Maybe the time has finally arrived for home grocery shopping, for example. Who knows? What we do know is that the company that uses this market transition period to build a new Success Formula aligned with changing customer expectations will be positioned to be the new market leader.
Conventional wisdom would say that Target should cut costs, emulate WalMart, get really cheap with prices, tighten its supply chain, spin out all "non core" assets and focus on returning to practices that made a profit in 2004, 05, 06 and 07. But our studies for The Phoenix Principle showed that those practices almost always doom the competitor. Instead, at this critical lifecycle point, it's more important than ever to focus on GROWTH and return to the Rapids – otherwise you end up in the Swamp, moving along toward the Whirlpool, like Woolworths, S.S. Kresge, TG&Y, Sears, KMart and Sharper Image.
by Adam Hartung | May 7, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
Good public policy and good management don't always align. And the banking crisis is a good example. We now hear "Banks must raise $75billion" if they are to be prepared for ongoing write-downs in a struggling economy. This is after all the billions already loaned to keep them afloat the last year.
But the bankers are claiming they will have no problem raising this money as reported in "The rush to raise Capital." "AIG narrows loss" tells how one of the primary contributors to the banking crisis now thinks it will survive. And as a result of this news, "Bank shares largely higher" is another headline reporting how financial stocks surged today post-announcements.
So regulators are feeling better. They won't have to pony up as much money as they might have. And politicians feel better, hoping that the bank crisis is over. And a lot of businesses feel better, hearing that the banks which they've long worked with, and are important to their operations, won't be going under. Generally, this is all considered good news. Especially for those worried about how a soft economy was teetering on the brink of getting even worse.
But the problem is we've just extended the life of some pretty seriously ill patients that will probably continue their bad practices. The bail out probably saved America, and the world, from an economic calamity that would have pushed millions more into unemployment and exacerbated falling asset values. A global "Great Depression II" would have plunged millions of working poor into horrible circumstances, and dramatically damaged the ability of many blue and white collar workers in developed countries to maintain their homes. It would have been a calamity.
But this all happened because of bad practices on the part of most of these financial institutions. They pushed their Success Formulas beyond their capabilities, causing failure. Only because of the bailout were these organizations, and their unhealthy Success Formulas saved. And that sows the seeds of the next problem. In evolution, when your Success Formula fails due to an environomental shift you are wiped out. To be replaced by a stronger, more adaptable and better suited competitor. Thus, evolution allows those who are best suited to thrive while weeding out the less well suited. But, the bailout just kept a set of very weak competitors alive – disallowing a change to stronger and better competitors.
These bailed out banks will continue forward mostly as they behaved in the past. And thus we can expect them to continue to do poorly at servicing "main street" while trying to create risk pass through products that largely create fees rather than economic growth. These banks that led the economic plunge are now repositioned to be ongoing leaders. Which almost assures a continuing weak economy. Newly "saved" from failure, they will Defend & Extend their old Success Formula in the name of "conservative management" when in fact they will perpetuate the behavior that put money into the wrong places and kept money from where it would be most productive.
Free market economists have long discussed how markets have no "brakes". They move to excess before violently reacting. Like a swing that goes all one direction until violently turning the opposite direction. Leaving those at the top and bottom with very upset stomachs and dramatic vertigo. The only way to avert the excessive tops is market intervention – which is what the government bail-out was. It intervened in a process that would have wiped out most of the largest U.S. banks. But, in the wake of that intervention we're left with, well, those same U.S. banks. And mostly the same leaders.
What's needed now are Disruptions inside these banks which will force a change in their Success Formula. This includes leadership changes, like the ousting of Bank of America's Chairman/CEO. But it takes more than changing one man, and more than one bank. It takes Disruption across the industry which will force it to change. Force it to open White Space in which it redefines the Success Formula to meet the needs of a shifted market – which almost pushed them over the edge – before those same shifts do crush the banks and the economy.
And that is now going to be up to the regulators. The poor Secretary of Treasury is already eyeball deep in complaints about his policies and practices. I'm sure he'd love to stand back and avoid more controversy. But, unless the regulatory apparatus now pushes those leading these banks to behave differently, to Disrupt and implement White Space to redefine their value for a changed marketplace, we can expect a protracted period of bickering and very weak returns for these banks. We can expect them to walk a line of ups and downs, but with returns that overall are neutral to declining. And that they will stand in the way of newer competitors who have a better approach to global banking from taking the lead.
So, if you didn't like government intervention to save the banks – you're really going to hate the government intervention intended to change how they operate. If you are glad the government intervened, then you'll find yourself arguing about why the regulators are just doing what they must do in order to get the banks, and the economy, operating the way it needs to in a shifted, information age.
by Adam Hartung | May 4, 2009 | Current Affairs, Defend & Extend, General, In the Swamp, Innovation, Leadership, Openness
Today Yahoo.com picked up on Mr. Buffett's recent comments, with the home page lead saying "Buffett's Gloomy Advice." The article quotes Buffett as saying newspapers are one business he wouldn't buy at any price. Even though he's a reader, and he owns a big chunk of the Washington Post Company (in addition to the Buffalo, NY daily), he now agrees there are plenty of other places to acquire news – and for advertisers to promote.
I guess the topic is very timely given the Marketwatch.com headline "N.Y. Times hold off on threat to close Boston Globe". Once again, in what might remind us of an airline negotiation, the owner felt it was up to concessions by the workers, via their union, if the newspaper was to remain in business. After squeezing $20million out of the workers, the owners agreed not to proceed with a shutdown – today. But they still have not addressed how a newspaper that is losing $85million/year intends to survive. With ad revenue plunging over 30% in the first quarter, and readership down another 7% in newspapers nationally, union concessions won't save The Boston Globe. It takes something that will generate growth.
And perhaps that innovation was also prominent in today's news. "Amazon expected to lift wraps on large-screen Kindle" was another Marketwatch headline. Figuring some people will only read a magazine or newspaper in a large format, the new Kindle will allow for easier full page browsing. According to the article, the New York Times company has said it will be a partner in providing content for the new Kindle.
Let's hope the New York Times does become a full partner in this project. People want news. And the only way The Boston Globe and New York Times will survive is if they find an alternative go-to-market approach. Printing newspapers, with its obvious costs in paper and distribution, is simply no longer viable. Trying to defend & extend an old business model dedicated to that approach will only bankrupt the company, as it already has bankrupted Tribune Company and several other "media companies." The market has shifted, and D&E practices like cost cutting will not make the organizations viable.
It's pretty obvious that the future is about on-line media distribution. We've already crossed the threshold, and competitors (like Marketwatch.com and HuffingtonPost.com) that live in the on-line world are growing fast plus making profits. What NYT now needs to do is Disrupt its Lock-ins to that old model, and plunge itself into White Space. I'm not sure that an oversized Kindle is the answer; there are a lot of other products that can deliver news digitally. But if that's what it takes to get a major journalistic organization to consider switching from analog, physical product to digital on-line distribution as its primary business I'm all for the advancement. Those who compete in White Space are the ones who learn, adapt, and grow. Being late can be a major disadvantage, because the laggard doesn't have the market knowledge about what works, and why.
This late in the market evolution, the major print media players are all at risk of survival. While no one expects The Chicago Tribune or Los Angeles Times to disappear, the odds are much higher than expected. These businesses are losing a tenuous hold on viability as debt costs eat up cash. Declining readership and ad dollars makes failure an equally plausible outcome for The Washington Post, New York Times and Boston Globe. Instead of Disrupting and using White Space, as News Corp started doing a decade ago (News Corp owns The Wall Street Journal and Marketwatch.com, as well as MySpace.com for example), they have remained stuck in the past. Now if they don't move rapidly to learn how to make digital, on-line profitable they will disappear to competitors already blazing the new market.
by Adam Hartung | May 3, 2009 | Current Affairs, In the Swamp, Leadership, Web/Tech
Warren Buffet held the annual meeting for Berkshire Hathaway this weekend, and upwards of 40,000 people came to hear his opinions. For hours he waxed eloquently, offering opinions on a wide range of topics sure to cover websites, blogs and tweets for a few days. But I was interested in the comment "Buffett, Munger praise Google's 'moat" according to Marketwatch.com's headline. It's pure 1980s industrial thinking, and why you have to be careful about forecasting and investing following Mr. Buffett.
The concept is that a business can be like an old castle, with a moat around it protecting it from competitors. The company can prosper because no competitor can jump the moat, and thus the profits of the business are protected. And today, Buffett and his partner think Google has such a moat. Now, remember, Buffett bought only 100 shares in Microsoft and long eschewed other high tech companies like Apple, Oracle, SAP and Cisco systems. His favorite phrase was to say he didn't understand these businesses. Now, suddenly, the elder Buffett is becoming tech-savvy, he'd have us think, and he loves Google. Or perhaps he's late to the game, and trying to apply outdated concepts.
I too like Google. But not for the reasons Buffett does. There is no doubt Google is far in front in the search business, and coupling that with ad placement gives them a huge market share today producing double digit revenue and profit growth. Big growth and profits is a good thing. But moats have a way of being jumped, or drained, or filled incredibly rapidly these days. And as good as Google is, what makes Google a good company is how it does not rest on its business success. The company keeps branching into other businesses which have the ability to extend company growth even if search runs into some unforeseen problem.
"Moats" are the industrial classicists way of thinking about strategy. Moats were powerful tools a few hundred years ago, but competitors changed tactics and moats lost their value. Even America's moats – the Pacific and Atlantic oceans - have been breeched by attackers from Japan and the middle east. And the same is true for business moats. They were an industrialists tool, based on big investments and high share, but they no longer have the ability to defend a business's profits. Just look at the Buffalo newspaper Buffett owns. "Newspapers face 'unending losses,' Buffett says" as he now admits newspapers (including his) are not going to make profits any more. Their "local market moat" was made obsolete by internet news competitors and ad sites like Craig's list and Vehix.com.
And now even Berkshire Hathaway is facing a growth stall. Nobody would dare predict bad things for the "oracle of Omaha." But reality is that Berkshire stock is at the same value it was 6 years ago as "Berkshire quarterly operating profit falls." Even the amazing financial machinations and sophisticated tools (like derivatives and credit default swaps) almost nobody understands and Berkshire has been famous for have been unable to overcome losses in the 60+ operating units. And even some of these financial tools are losing money – something Buffett historically avoided completely. But he's learning that competitors are making even these products less profitable.
Times have changed. It's no longer the era for the industrialist, and the financial whiz that can extend an industrialists profits. We live in a fast-paced world where adjusting to market shifts is at the core of maintaining ongoing profits. Google's willingness to Disrupt and use White Space to expand makes it a company worth watching. But stay away from those "moat' protected businesses. Not even one of the world's richest men can make money in that game any longer.
by Adam Hartung | Apr 29, 2009 | Books, Current Affairs, Defend & Extend, General, In the Swamp, Leadership, Lock-in, Openness
Today the U.S. Federal Reserve indicated that the worst of America's economic downturn may be over, according to "Fed stands pat, and says worst may be over" at Marketwatch.com. Fed officials seem to think that the rate of decline has slowed. Note, they didn't say the economy is growing. The rate of decline is slowing. They hope this points to a bottoming, and eventually a return to growth.
With interest rates between banks at 0%, and short-term rates for strong companies near that level, there really isn't much more the Fed can do to create growth. It will keep buying Treasury securities and keep pushing banks to loan. But growth requires the private sector. That means businesses – or what reporters call "Main Street."
The government doesn't create growth. It can stimulate growth with low interest rates and money that will stimulate business investment. Growth requires people make products or services, and sell them. Those who are waiting on the government to create a growing economy will never gain anything from their wait, because it's up to them. Only by making and selling things do you get economic growth.
Recent events, closing banks and massive write-offs, are a big Challenge to old ways of doing business. Those who keep applying old practices are struggling to generate profits. The tried-and-true practices of American industrialism just aren't turning out gains like the once did. And they won't. The world has shifted. Entrepreneurs in India, Malaysia and China – places we like to think of as poor and "third world" – are building fortunes in the information economy. American businesses have to shift. If you make posts to install on highway sides, well lots of people can do that and competition is intense. To make money you need to make products that help move more people on the highway faster and safer – some kind of post that perhaps can provide traffic information to web sites and aid people to look for alternate routes. Posts aren't what people want, they want better traffic flow and today that ties to more information about the highway, who's using it, and what's happening on it.
Growth will return when businesspeople move toward supplying the shifted market with what it wants. Like Apple with a solution for digital music that involved players and distribution. Or Amazon with a solution for digitally obtaining books, magazines and newspapers, storing them, presenting them and even reading them to you. These companies, and products, appeal to the changed market – the market that values the music or the words and not the vinyl/tape/CD or the ink-on-paper. The customers that want the information, not necessarily the tangible item we used to use to get the information.
For the economy to grow requires a lot more businesses realize this market shift is permanent, and adjust. During the Great Depression those who refused to shift from agriculture to industrial production found the next 40 years pretty miserable – as rural land prices dropped, commodity prices dropped and the number of people working in agriculture dropped. Agrarianism wasn't bad, it just wasn't profitable. And going forward, industrialism isn't bad – but to grow revenues and profits we have to start thinking about how to deliver what people want – not what we know how to make. You have to deliver what the market wants to grow sales – even if it's different from what you used to make.
Starbucks offered people a lot of different things. And the old CEO tried to capitalize upon that by expanding his brand into liquor, music recording, agency for entertainers, movie production, and a widespread set of products in his stores – including food. But then an even older CEO returned, and he said Starbucks was all about coffee. He launched some new flavors, and he pushed out an instant coffee product. But a year later "Starbucks profit falls 77% on store closure charges" reports Marketwatch.com. His "focus" efforts have cut revenues, and cut profits enormously. He's cut out growth in his effort to "save" the company.
By trying to go backward, Chairman Schultz has seriously damaged the brand and the company. He has closed 570 stores – which were a big part of the brand and perhaps the thing of greatest value. Stores attracted people for a lot more than just coffee. People met at the stores, and buying coffee was just one activity they undertook. So as the stores were shuttered, the brand began to look in serious trouble and people started staying away. The vicious cycle fed on itself, and same store sales are down 8%. No new flavor or packaged frozen coffee bits for take home use is going to turn around this troubled business. It will take a change to giving people what they need – not what Mr. Schultz wants to sell.
With more and more people working from home the "virtual office" for many small businesspeople can still be a local Starbucks. When you can't afford take a client out for a snazzy lunch you can afford to take them for a coffee. When your wasteline can't take ice cream, you can afford a no-cal hot coffee in a great environment. Starbucks never was about the coffee, it was about meeting customer needs in a shifted market. And when the CEO realizes this he has the chance to save the company by taking into the new markets where customers want to go. Not by bringing out new instant coffee granules.
Starbucks is sort of a model of the recession. When you try to do what you always did, and you blame the lousy economy for your troubles, you'll see results worsen. As businesspeople we must realize that the recession was due to a market shift. We went off the proverbial cliff trying to extend the old business – just like Apple almost did by trying to be the Mac and only the Mac. To get the economy growing we have to look to see what people really want, and supply that. And what they want may be somewhat, or a whole lot, different from what we used to give them. But when we start supplying this changed market what it wants then the economy will quit contracting and start growing.
So be more like Steve Jobs, and less like Charles Schultz. Quit trying to go backward and regain some past glory. Instead, look into the future to figure out what people want and that competitiors aren't giving them. Be willing to Disrupt your business in order to take Disruptive solutons to the market. And get your ideas into White Space where you can develop them into profitable businesses. Don't wait for someone else to turn the economy around – just to find out then it's too late for you to compete.
