by Adam Hartung | Jan 25, 2009 | Defend & Extend, In the Swamp, Leadership, Science
Two weeks ago I blogged about R&D layoffs at Pfizer (chart here), and warned that all signs were indicating Pfizer was nearing really big trouble because it had missed the boat on new technologies as it road out its patent protection looking for new ways to extend its outdated Success Formula.
Now we hear rumors that Pfizer is planning a mega- acquisition by purchasing Wyeth (chart here) for some $65B (read article here). That's about 3 times revenue for a company growing at less than 10%/year. This acquisition will most likely keep Pfizer alive – but it's benefits for shareholders will probably be nonexistent – and probably a negative. And the impact on employees is almost sure to be a net loss.
Pfizer missed the move to "biologics" – which is the term for the new forms of disease control products that use genetics, bio-engineering and nano-technology as their basis rather than a heavy reliance on chemistry and pharmacology. As a result, its new product pipeline has not met company growth needs. So now that Pfizer is buying a company with significantly biologic solutions, Pfizer leadership is sure to argue that it is filling its pipleline gap with the new solutions and all will be good going forward.
But the reality is that there are much cheaper ways for Pfizer to get into biologics than spending $65billion – a big chunk of it cash – on a huge acquistion. With banks stopped and investors realing, there are dozens of projects in universities and small companies that are begging for funding. These range from invention stage, to well into clinical trials. If Pfizer wanted to become a successful company it would
- Tell investors and customers its scenario for the future, with insights to how the company sees growth and the investments it needs to make
- Telling investors and employees the competitors that are most important to watch, and how they plan to deal with those competitors
- Disrupting its old Success Formula. Leadership would make sure all employees and management are stopped, and recognize the company needs to make a serious change if it is to catch up with market shifts and regain viability
- It would invest in multiple solution areas and multiple projects, and the allow them to operate independently as White Space where Pfizer could learn how to modify its Success Formula in order to regain growth and success in the future.
This clearly is not what is happening at Pfizer. Instead, the company is planning to take a big cash hoard, which if it doesn't want to invest in White Space it could return to investors, and spend it on a huge acquisition. We all know that almost all big acquisitions do not achieve desired goals, and that the buying investors get the short end of the stick as the selling investors achieve a premium. Why? Because the buying leaders, like those at Pfizer, are without a solution and looking for the acquisition to cover over past sins and make them look smart and powerful. So, driven largely by ego, they overpay to get a company as if that makes them the "winner."
But what happens? We can expect that Pfizer will find out it has to do something drastic to make the overpayment potentially work, and staff cuts will quickly ensue. Probably across-the-board employee cuts in the name of "synergy", but which weakens the acquired company. Then, as it absorbs Wyeth, Pfizer will push to force its old Success Formula onto Wyeth – after all, Pfizer is the "winner". But Pfizer needed Wyeth, not vice-versa. As it cuts cost, it cuts into the value they ostensibly paid for. Many of the best at Wyeth will go elsewhere to continue competing as they know produces better results. The value of the acquisition will go down as Pfizer "integrates" the acquisition, rather than raise it.
But in a year, Pfizer will declare victory, no matter what. Pfizer's revenue has been flat for at least 4 years (stuck in the Swamp) at about $48B. Wyeth's revenue has been growing at about 10%/year and is about $22B. So in a year, Pfizer can say "Revenues are now $65B, an increase of 30%". Of course, the reality would be that revenues were down 7%. Of course they will brag about their integration project, and brag about various cost cuts implemented to streamline "execution." Pfizer leadership will say they made the right move, even if all they did was use up a cash hoard in order to delay changing the company. That, by the way, is what I call "financial machination". If you can't dazzle the investor with brilliance, make a big enough acquisition so you can baffle them with bulls***.
If you're a Wyeth investor, take the money and run. You don't want to stick around for a takeover destined to lower total value and reduce the excitement of new R&D programs and medical solutions. Go find alternative companies that need cash, and help them move forward with their new solutions. If you're a Pfizer investor, don't be fooled. If the analysts cheer the takeover, and the stock pops, it's unlikely you'll get a better time to sell. The leadership has demonstrated the last 5 years, as growth has been nonexistent and the equity value has steadily declined, that they don't know how to regain growth. This acquisition is not changing the leadership, managers nor Success Formula of Pfizer that has long been producing lower returns. This acquisition is the latest in Defend & Extend moves to protect the outdated Success Formula. If this gives you an opportunity to get out – take it! Within 2 years the "new" Pfizer will be a lot more like the old Pfizer than Wyeth.
by Adam Hartung | Jan 22, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
Microsoft announced today it intends to lay off 5,000 workers (read article here). This action, included in its announcement that Microsoft is going to miss its earnings estimate, spooked the market and is blamed for a one-day market dip (read here). The company's equity value, meanwhile, dropped to an 11-year low – out of its 33 year life (see chart here). Of course, the blame was placed on the weak economy.
But we all know that Microsoft has been struggling. The Vista launch was a disaster. A joke. Techies resoundingly ignored the product – as did their employers. Because Vista was so weak, Microsoft is looking to launch yet another operating system – just 2 years after Vista was launched. Incredible, given that Vista was more than 2 years late being launched! Additionally, in an effort to increase interest in Windows 7, the new product, Microsoft has dramatically increased the availability of beta versions for review (read here).
Microsoft was once the only game in town. But over the last few years, Linux has made inroads. Maybe not too much on the desktop or laptop, but definitely in the server world. The hard core users of network machines have been finding the cappbilities of Linux superior to Windows, and the cost attractive. Additionally, netbooks, PDAs and mobile phones are gaining share on laptops every day. Customers are finding new solutions that utilize network applications from companies such as Google are increasingly attractive. By laying off 5,000, Microsoft is not addressing its future needs – to remain highly competitive in operating systems and applications against new competitors. It is retrenching. This doesn't make Microsoft stronger. Rather, it makes Microsoft an even weaker target for those who have the company in their sites.
Why should anyone be excited about a company that is willing to cut 7.5% of its workforce while it is losing market share? Sure, the company is still dominant in many segments. But once the same could be said for Digital Equipment (DEC), Wang, Lanier, Compaq, Silicon Graphics, Sun Microsystems, Cray and AT&T. All fell victims to market shifts making them irrelevant. Not overnight – but over time irrelevant, nonetheless.
It's hard to imagine, today, a world without Microsoft domination. After all, this was a company sued by the government for monopolistic practices. Yet, we know that even market domination does not protect a company from market shifts. Microsoft's layoffs demonstrate a company planning from the past – it's former dominance – rather than planning for the future. Many industry leaders are already seeing a technology future far less dependent upon Microsoft. Shifting software solutions as well as changing uses of platforms (largely the declining importance of desktop and laptop Wintel machines) is making Microsoft less important.
Trying to Defend & Extend its past glory is not serving Microsoft well. Once, any changes in its operating system was front page news. Now, a new release struggles to get attention. Microsoft is at great risk – and its layoffs will weaken the company at a time when it cannot afford to be weakened. When Microsoft most needs to be obsessing about competitor's emerging strengths, and using Disruptions to open White Space where it can put employees to work on new solutions, Microsoft is cutting back and making itself more vulnerable to competitors now surrounding on all fronts. This should be a big concern for not only those being laid off, but those remaining as employees and those investors who have already seen a huge decline in company value.
by Adam Hartung | Jan 14, 2009 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership
Yesterday Yahoo! announced it was replacing its old CEO with Carol Bartz, former CEO at Autodesk. Interestingly, most analysts aren't very excited – because they don't think Ms. Bartz brings the right experience to the challenge (read article on analyst reaction here.) The complaint is that Ms. Bartz is not steeped in consumer goods or advertising experience, so she's not the right person for the significant challenges facing Yahoo!
Yahoo! does not need "more of the same." Yahoo! needs to adapt to the technology requirements necessary to succeed in on-line ad placement. Google is way, way out front in internet advertising sales, and there's not a single executive at Google with experience in ad sales or consumer goods! Google has changed the game in advertising largely because it has not been Locked-in to old notions about advertising, and has instead created new competitive approaches leaving old players in the dust. And largely because its executives have eschewed historical advertising lore in favor of creating new solutions.
Yahoo! doesn't need someone with advertising experience. Yahoo! needs someone that will Disrupt the organization and change its Success Formula. And for this, Ms. Bartz may well be exactly the right person. While she led Autocad the company which changed the world of CAD/CAM (Computer-aided-design/computer-aided-manufacturing software), and in the process brought down a large GE division (Calma) and in the end crippled DEC (Digital Equipment Corp.) which was extremely dependent on CAD/CAM workstation sales. Autocad was supposedly a "toy" running on cheap PCs, but it became the software used by many engineers that was a fraction of competitor's cost and operated on machines a fraction of those needed to run competitor software.
In the process, Ms. Bartz became known as "one tough cookie." A CEO who understood that competitors gave nothing easily, and it takes a very tough smaller competitor to unseat market leaders. Year after year she led a company that brought forward new products which challenged competitors – all better financed, with larger market share and long lists of large, successful customers. And after 15 years or so Autocad emerged as the premier competitor. Isn't that the experience most needed by Yahoo!?
Meanwhile, one of the old leaders in ad sales – Chicago Tribune – is now changing its format from broadsheet to tabloid (read article here). For those not steeped in newspapers, broadsheets (like Wall Street Journal or USAToday) have long been considered "quality" journals, while tabloid format (like a magazine) has been considered a lower quality product. Although this switch is a cost saver, and any implication on journalistic quality is largely symbolic, the reality is that Tribune Corporation has slashed its journalistic staff in Chicago, L.A. (L.A. Times) and other markets to a shadow ghost of the past. In just a few years, a leading news organization has become almost irrelevant – and left two of America's largest cities with far too little journalistic oversight. Now it's trying to save itself into success (read article here).
Yahoo! is changing its CEO, and appears to be putting in place someone ready to Disrupt and install White Space. Tribune Corporation has slashed cost, slashed cost, slashed cost, increased its debt, and turned itself into a shell of what it used to be. Now the company is taking actions to lower paper cost – in an effort to again save a few more pennies. After watching its local classified advertisers go to CraigsList.com, and its display ad customers go to Google, its new leader, Sam Zell, remains unwilling to Disrupt and invest in White Space to become an effective internet news organization. Today even HuffingtonPost.com is able to offer more news on more topics faster than any news properties at Tribune Corporation to an avid internet news readership.
Following the Tribune lead, Gannett – publisher of USAToday – has announced it intends to force everyone in the company to work for one week for no pay (read article here). Apparently not even color pictures and feel-good journalism can attract advertisers. Probably because not even hotel guests care any more about getting a newspaper. Not when they log on to the wireless internet upon awakening to check e-mail and news alerts before they even open the room door to go to breakfast. Gannett will have no more success trying to save its business by forcing employees to work for free than Tribune has had with its cost cuts. Ignoring market shifts is not successfully met by trying to do more of the same cheaper.
What Gannett, Tribune Corporation and other news organizations need is their own Carol Bartz. Someone who may not be steeped in all the tradition and experience of the industry – but knows how to Disrupt the status quo and use White Space to launch new products and move toward products customers want.
by Adam Hartung | Jan 13, 2009 | Defend & Extend, In the Swamp, Leadership, Lock-in
Today one of the world's leading pharmaceutical companies announced it was cutting R&D staff (read article here). This is a very big deal because pharmaceutical companies rely on new drugs (new innovations) to extend their Success Formulas. American drug companies rely on big R&D investments, followed by big FDA approval investments. These big investments are seen as "entry barriers" that smaller companies cannot overcome, and thus provide high profits to the big drug companies. That's the core of their Success Formulas – which have been huge profit producers for more than 4 decades.
So what does it say when Pfizer lays off R&D workers? Clearly, there's less faith in the company developing the new products which will pay off. Thus, the old "entry barrier" is clearly not as valuable as it once was. But do you think we're on the brink of no new medical solutions?
Hardly. Today, genetic drug programs and other solutions are being developed and evaluated at greater numbers than ever. Only, you don't need a multi-billion dollar R&D center to develop these solutions. With the explosive knowledge expansion in bio-engineering and nano-technology breakthroughs are happening in universities, university spin-offs and start-ups of former pharmaceutical engineers. The old approach to disease treatment is reaching diminishing returns, while new approaches (namely genetic drug therapies and mechanical approaches such as nano-tech) are making rapid progress. The old "S" curve is nearing its peak, while the emerging "S" curve – that started in the 1980s with Genentech – is coming of age and entering the fast upward slope of the new "S" curve.
But unfortunately, Pfizer, Merck, Bristol Meyers and most other historical drug companies have missed this shift. They kept investing in the "traditional" (substitite "old") approach even as new approaches showed growing promise. They kept hiring M.D.s, pharmaceutical Ph.Ds, chemists and biologists. Meanwhile, bio-engineers and nano-engineers were making faster progress with new approaches. Of course initially regulators were skeptical of these new approaches, forcing additional testing — and reinforcing sustaining the old Success Formulas in the traditional "drug" companies. But it was clear to those on the leading edge of medicine that these new approaches were offering all new baselines for improvement, and possibly cures.
Now, Pfizer is (and its dominant competitors, to be sure) are in a tough spot. They hung on to the old Success Formula a really, really long time. In fact, almost 3 decades after alternative solutions began showing promise. Each year, the drugs they had protected by patents (thus proprietary) were coming closer to commercial replication and lower profitability. But each year, they redoubled their efforts in the traditional approach. Now, debt is hard to come by – and traditional solutions are even harder. But they are woefully short on the ability to offer solutions using the latest and greatest technology.
Unlike most companies, drug companies make most of their money from patented products. That means they make huge profits while there is no competition – but see dramatic (80%+) price erosion within days of losing patent protection. Thus, more than most companies, they can literally "peer over the edge" into the abyss of decline.
Pfizer just admitted it is a boat on the upper Niagra, in Canada, looking over the falls. It stayed way too long on its leisurely approach, and did noy prepare itself for the next step. On the other side are aggressive new competitors with new technology, new solutions and vastly superior results. But Pfizer has not prepared to be part of that new marketplace. So they are cutting specialized scientists in an effort to cut costs and protect profits. A bit like throwing the elderly overboard as you see your boat approaching the falls in an effort to slow your approach to the brink.
To survive long-term busineses have to evolve to new technologies. They have to overcome their dedication to old technologies and solutions in order to invest in new approaches. The have to invest in White Space which brings these new answers to the forefront, and attracts the traditionalists to move into the new market space. But unfortunately Pfizer has delayed these investments far too long. Cost cutting cannot save a Pfizer (or Merck, Bristol-Meyers, or Ely Lilly, etc.). When technology shifts, like it did from typewriters to PCs, the move happens fast and the fortunes of major players can shift dramatically (anyone remember Smith Corolla?). Pfizer is admitting it's unlikely to make the technology shift, and investors better pay close attention to the other industry leaders.
There's a new cowboy in town, he's showing he's one heck of a good shot, and it's time to pay close attention. The old sheriff may be closer to unemployment than he thinks.
by Adam Hartung | Jan 11, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lifecycle
Do you remember when Jim Cramer of Mad Money fame told his viewers to buy Sears Holdings because "his good friend" Ed Lampert, hedge fund manager, was going to make them all rich? That was in back in 2005 and 2006. For many months analysts, investors, vendors and customers watched what was happening at Sears, wondering what Mr. Lampert was going to do. In the end, he followed a very traditional turn-around strategy, slashing employment, benefits, pay and inventory – and Sears became a much smaller business. But the value of having friends hosting TV shows was clear. Sears went from $30 to nearly $200/share on the strength of Cramer's chronic recommendation. As it became clear Sears was getting smaller with no benefit to investors, and no strategy to grow, the value crashed back to $30/share in 2008 (see chart here).
Lately, some shareholders are bidding Sears value up again. Largely entirely due to additional cost cuts, store closings and inventory sell-downs, Sears profits exceeded expectations (read article here). At the same time, senior leaders admit Sears has "a long way to go catching up to competitors that have been more consistent in merchandising and driving traffic to their stores." Creating profits by financial engineering and asset sales has not made Sears a more competitive retailer, and not likely to grow. Investors will be well served to ignore Jim Cramer, and recognize the fundamental decline Sears has undergone – and is continuing.
This same week, Walgreen (chart here) announced it was cutting 1,000 management jobs (read article here). As I've previously blogged, Walgreen has to figure out how to grow revenues in its existing stores – not just open new stores. The old Success Formula has run out of gas, and Walgreen needs a new one. But we don't see any plans for how it intends to open White Space and find that new Success Formula. Instead, only cost cuts have emerged, intended to improve profits if not revenue growth. Not a good sign.
And Best Buy (chart here)is finding that even as its #1 competitor, Circuit City, slowly goes bankrupt it can't grow revenues or profits (read article here.) Many were hopeful that the failure of Circuit City would create an opportunity for Best Buy. But faster than Circuit City can shut stores, new competitors are filling the gap. Not only are general merchandisers, like Wal-Mart, trying to sell similar products – but independents (like Abt and Grant's in Chicago) are fighting to bring in customers with product selection and better pricing. Last month, a basic refrigerator at Grant's was half the price of a basic unit at Best Buy, and the selection of high-end products was more than twice as large at Grant's and 4 times larger at Abt.
Retailing has been hit with significant challenges from market shifts the last few months. Critically, low cost and easily available credit that financed not only customer purchases but lots of inventory is now gone. Cost and supply chain efficiency will not sustain a retailer any longer. Nor will simply opening lots of new stores, financed by low cost mortgage debt. But none of these 3 leaders have Disrupted their old Success Formulas. Instead, each keeps trying to fiddle with minor changes, hoping their size and past legacy will somehow drive new revenue and profit growth. Rather than Disrupt, all 3 keep trying to Defend & Extend the old Success Formulas with cost cutting measures.
When big market shifts happen rarely are the old winners able to maintain their leadership position. Why not? Because they react by trying to do more of the same. These Defend & Extend actions – usually cost cutting and efforts at efficiency and execution – only serve to push the business further into the Swamp, and closer to the Whirlpool. In Sears case, the company is rapidly becoming irrelevant as a retailer. Honestly, what retail analyst closely monitors sales and profits at Sears any longer? Sears is closer to the Whirlpool than most would like to admit. Walgreen and Best Buy aren't nearly as close to irrelevancy, but we can see that the are stuck in the Swamp. Lacking Disruptions and White Space to develop a new Success Formula, we can only expect mediocre (or worse) performance out of them.
So who is the frequent winner from market shifts? New competitors more closely aligned with new market conditions. We don't yet know who the biggest winners will be. Perhaps it will be on-line players. Perhaps it will be an emerging retailer that today has only a handful of stores (like Abt or Grant's). Some kind of hybrid customer distribution? Some new sort of merchandiser? New competitors will do some things very differently than the old leaders, and in so doing offer better value that more closely aligns new market needs. Look not at large, traditional names. Instead, look on the fringe at competitors you may not know well, but that are continuing to grow even as times are tough.
As we move into 2009, we must keep our eyes closely on changing market conditions. As old leaders stumble, we can expect recovery only if we see Disruptions and White Space. And this becomes a wonderful opportunity for new competitors, perhaps not well known today, to emerge with new Success Formulas poised for growth. If so, a new wave of Creative Destruction will change retailing – just as Woolworth's (now gone in both the U.K. as well as the U.S.) once did a long time ago.
by Adam Hartung | Jan 8, 2009 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
"You never get a second chance to make a first impression." I'm not sure who said that first, but it's appropriate for the speech given by Steve Ballmer, Microsoft's head, at the current Consumer Electronics Show.
Almost 2 years ago, after almost 2 years of delay, Windows launched its new operating system named Vista. In the past, such announcements caused great excitement as customers looked forward to upgraded capability. But when Vista came out, it was like the old joke "he threw a party, and nobody came." Customers ignored the release, preferring to keep keep using Microsoft XP. New PC buyers even requested that vendors supply their computers with XP instead of Vista. And competitor Apple had an advertising field day making fun of the complaints PC customers had about Vista as Apple promoted its Macintosh. Microsoft simply didn't offer customers the necessary innovation to make Vista interesting.
Now Microsoft (chart here) has announced it intends to launch Windows 7 (read article here). What struck me most about the announcement was its lack of interest. On Marketwatch.com, the article wasn't even on the first page – you have to scroll down to find it. The equivalent of "not making it above the fold" in old newspaper lingo. Worse, Microsoft's announcement didn't even get top billing regarding the CES show – as its announcement took second fiddle to the article lead about Palm's announcement of a new device and operating system.
Clearly, reporters are savvy to what's important in information techology these days. And efforts to Defend & Extend the PC platform is not where the excitement is. Customers are quickly moving from the PC to handheld devices and remote applications. Interest about what you can do on your handheld is now eclipsing what you can do on a bigger, heavier PC. It's clear to most people, even if not to Microsoft leadership, that Defending & Extending the PC platform is suffering diminishing returns.
Simultaneously, folks woke up today and realized that "not failing" is not the same as succeeding.
As retailers went through the worst holiday season in possibly forever, some folks kept talking about how good Wal-Mart (chart here) was doing. In reality, at best Wal-Mart was possibly holding even or slightly growing. Wal-mart wasn't failing, like Circuit City, Bed Bath & Beyond, Linens & Things and Sharper Image – but it wasn't doing well. Sales at Wal-Mart have been stagnant for years. Now, even Wal-Mart has admitted its sales for December and the fourth quarter were below forecast (read article here). So the stock dropped 7.5%
Really. What did folks expect? Wal-Mart hasn't done anything new to attract customers in well over a decade. The ASSUMPTION analysts kept making was that because Wal-Mart was synonymous with cheap, in a bad recession Wal-mart would do well. But consumers showed that there's more to being a good retailer than being cheap. And gift giving is about more than giving any gift. People still want a good shopping experience, even when unemployed, and the concrete floors and cheap merchandise at Wal-Mart doesn't make them feel any better. Many decided it was better to go on-line looking for values, where overhead is even lower than at Wal-Mart, and where merchandise quality was top rate and wide brand selection was available.
Both Microsoft and Wal-Mart were great companies. They made huge differences as leaders in their industries. But both are now trying to Defend & Extend out of date Success Formulas. And even in a recession – maybe especially in a recession – that does not excite people. Customers want innovation, not just more of the same, but finally working right or at a cheaper price. And when dimes get tight, innovation speaks even louder. Customers want to know how innovation can create greater satisfaction – not just how the same old thing can be — cheap. Until Microsoft and Wal-Mart disrupt their Lock-ins and open White Space there is no reason to be optimistic about their futures.
by Adam Hartung | Jan 5, 2009 | Current Affairs, Defend & Extend, Disruptions, General, In the Swamp, Leadership
The New York Times Company is in a heap of trouble (see chart here). Long the #1 daily newspaper in the USA, advertising revenues fell 21% versus a year ago in November – a feat similar to its revenue decline in December, 2007. NYT is in a growth stall – and shows no signs of making a turnaround. The decline in ad revenue and subscriptions is horrific. The company has recently slashed its dividend 74%, and is taking out a $225million loan against the value of its headquarters location raising cash to keep its newspaper operations going. The company is running television ads in most major markets – like Chicago and LA – to seek out new subscribers. And now the newspaper is placing ads on its page 1 – an act that is a big deal to people in the newspaper business. (Read about New York Times front page ads here.)
So by taking these actions, is the New York Times Company preparing itself for change? After all, the problem with newspapers is that increasingly people want their news via the internet – not a paper. So even though the management at "the Times" is distressed over the actions they have taken, investors should be asking if these actions are likely to turn around the company. Value fell 67% in 2008 – and is down practically 90% for the last 5 years.
Long term successful companies Disrupt their Lock-ins – those behaviors, decision-making practices and policies that keep the company doing what it always did. As businesses grow, developing their Success Formulas, they figure out ways to Lock-in that Success Formula so it repeats. While the market is growing, and the Success Formula is meeting customer needs, these Lock-ins help the business focus on execution and grow with the market. Lock-ins are great, helping people do more, better, faster.
That is, until markets shift. When external markets shift – because of new technology, new services, new competitors or other factors – the Success Formula loses its advantage. The solution to market shifts isn't to continue optimizing the Success Formula. Returns are declining because the Success Formula is becoming obsolete. The solution is to migrate the business to a new Success Formula which supports market needs and regain growth. And that migration happens after the old Success Formula is Disrupted – through attacks on the Lock-ins – demonstrating to everyone that the company is serious about advancing to meet new market needs.
Unfortunately, far too many companies claim they are Disrupting – and preparing for the future – when in fact they are merely disturbing the Success Formula. Layoffs, financial adjustments, asset sales and outsourcing may be painful, but they don't attack the old Lock-ins nor alter the Success Formula. People are often dramatically disturbed by the changes, but the Success Formula is unaffected. When this happens, the business keeps deteriorating despite the actions.
And that's what's happening at the New York Times Company. Leadership has not taken the actions necessary to demonstrate to customers, employees, vendors or investors that they have to change. They have not Disrupted. To be a world leading news organization now requires deep expertise and success on the internet – yet NYT is in no way a major player on the web. And they have shown no signs of investing there in a major turnaround effort. NYT has not Disrupted its operations to set the stage for new White Space where a powerful new Success Formula can be developed (similar to the major programs like MySpace.com at News Corp., for example). To the contrary, the actions taken by the New York Times Company are directed at trying to preserve an outdated past. Advertising on page 1 is almost unimportant to the vast majority of readers – and completely unimportant to internet news mavens. It's not even newsworthy.
Like Tribune Corporation (owner of The Chicago Tribune and the Los Angeles Times as well as other papers), New York Times Company is focused on the wrong things. And as a result, is just as likely to end up in bankruptcy. Even Tribune management invested in Careers.com, Cars.com and Food Network along the way – each of which show demonstrably more promise for growth than any of the newspaper companies. But because management won't Disrupt – won't attack old Lock-ins – these companies keep hoping for a return to the days when newspapers were central to life. And that isn't going to happen. The world has moved onward. So, like Tribune, New York Times will eventually run out of resources and find itself in bankruptcy as well.
Unwillingness to Disrupt is a key indicator of a company likely to fail. Over time, all markets change. New competitors create new products that serve customers differently. Old Success Formulas see their returns evaporate as customers move to the new market solutions. And these companies end up, like Polaroid, being companies with a great past – but no future.
by Adam Hartung | Jan 4, 2009 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
2009 starts in earnest for businesses this week. And for many leaders and managers, the focus will be about "what should I do now?" Things were tough in 2008, and many are wondering if 2009 will be even worse. So the tendency is to look at how things have been done, talk to existing customers, and see if there's a way to keep doing things but possibly with fewer resources. Many businesses are looking for some new way to Defend & Extend the old business – even as leaders realize the returns are declining.
And that just might make you a target for competitors – thus worsening your situation.
Think about what's gone on in Detroit. GM, Ford and Chrysler have kept focusing on what they should do. In the process, they've paid precious little attention to competitors. As a result, they've kept slipping share year after year, while profits have disintegrated. Now, each American company keeps focusing on its own problems, and trying to find a way to deal with them. Meanwhile, as the Wall Street Journal is reporting (link to article here), competitors such as VW and BMW – at the least – are targeting the U.S. Big 3 automakers.
Recognizing how weak these U.S. companies have begun, the German manufacturers are taking aim. The other German manufacturers, as well as Japanese, Korean and Indian are doing the same, we can be sure. And why not? In business, the best time to attack your competitor is when they are ignoring you and focusing on themselves. All the layoffs, reorganizations, pay cuts, plant shut-downs and other internal actions give the company a false sense of "doing something" to solve their problems, when in fact it makes them a target for more market-aware competitors. By focusing internally, even if talking to existing customers, these companies make themselves targets for those who understand their Success Formulas and have developed ways to attack it.
Woolworth's was a leader in American retailing for decades – until they were displaced by more aggressive retailers they chose to ignore. But after going bankrupt in the U.S., the chain lived on in the U.K. until this week – where after 99 years the chain will close on Tuesday (see video about Woolworth's failure here). Woolworth's spent its energy trying to figure out what it should do in a weak market environment, and it missed more aggressive competitors who moved faster to liquidate inventory at lower prices and keep customers coming in the store as sales declined. Yet, Sears and its KMart subsidiary keep trying to find ways to "resurrect" their out-of-date business – oblivious to more aggressive competitors such as Kohl's that are rapidly making Sears obsolete. How long will Sears survive ignoring the aggressive actions of competitors that would like to drive it out of business?
It's tempting, especially in a tough economy, to look inward. Phrases like "cut the fat" and "get lean" sound very appealing. It makes managers think solving problems is all about improving execution of the old Success Formula. But it's the Success Formula itself that needs addressing – not execution! When markets shift, it's competitors that make the Success Formula value decline. It's competitors that create the market evolution obsoleting your business. Competitors generate the "Creative Destruction" which pushes down results.
Competitors are what makes for tough business conditions. Instead of talking to ourselves, and customers that know us only for what we've been in the past, we should be a lot more focused on competitors and what they are doing. The competitors that act quickly to introduce new products, new technologies, new services and new customer programs are the ones that will steal share in these tough times. It's competitors that deserve a lot more of our attention – because they are the ones who are causing our market share to decline, our prices to stagnate and our profits to drop.
Phoenix Principle companies obsess about competitors. They eschew spending lots of planning time on what they used to do, and what the old plans were. Instead, they spend time talking about actions taken by competitors – and then figuring out how those competitors accomplish those actions. Competitors show us new technologies to introduce, new features and variations desired by customers, and new ways to improve sales and profits. As the chairman of Intel, Andrew Grove, once said about competitors "only the paranoid survive."
No one wants to get chewed up in this recession. But focusing internally makes you a target – like GM, Ford, Chrysler, Woolworth's U.K. and Sears have become. While they obsess internally, competitors are taking innovation to market. Those who want to not only survive, but thrive, in 2009 will be the ones who look at competitors to understand the actions they take, and to move competitively to thwart those actions. As they understand competitors, they will launch actions intended to make competitors' lives miserable – thus stealing share from them. Winning in 2009 is about being a tough competitor, not waiting for someone to bail you out.
Success rarely comes from doing more of the same – even if better, faster or a touch cheaper. Success comes from developing and launching new offerings that steal sales from competitors. To hold onto your share, you have to fight off competitors. To grow, you have to outdo competitors. And in 2009, with things as tough as they are, those companies who will avoid having a target on their backs will be the ones who focus on competitors, rather than themselves.
by Adam Hartung | Dec 8, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
So we now hear that Congress will loan $15billion to GM, Ford and Chrysler intended to keep them going concerns until at least March. We've been told that there are requirements on the loans that will better the industry. But honestly, there's nothing new being proposed that makes any difference, nor the proper teeth in Congress's proposed bill. (Read about the bill here.)
The bill limits executive bonuses and severance packages. But why does it let management (and the Boards of Directors) keep their jobs? It is clear that these leaders, and their management teams, led these companies into desperate circumstances. They put their bondholders, equity investors and employees all at risk. They passed the "brink" and got to the point of requiring government assistance to stop a cataclysmic disaster. So why are these people left in their jobs? How can anyone expect a really changed industry if the people who sold off assets for 2 decades trying to Defend & Extend a thoroughly out of date and broken Success Formula are given the money to invest?
Oh, we can expect a "car czar" who is supposed to oversee these loans and assure a the industry invests appropriately for change. Who's the right guy for this job (don't forget – I applied!)? We now read that the lawyer who oversaw the handout of money to survivors of 9/11/01 victims. This is, of course, the right qualifications to evaluate business plans, investment rates and innnovation programs for an industry. He's shown he can hand out money – but where has he shown he knows anything about re-engineering a very broken, large company? Where does he have credentials for un-knotting the Lock-in that keeps these companies dysfunctional? And how is he supposed to stand up to management teams that claim to have superior knowledge about auto company management – despite driving these companies into the proverbial financial ground.
The union leadership apparently wants Board seats in exchange for concessions. What difference will that make? Do union leaders know how to turn around companies where they encouraged Lock-in that cost them thousands of jobs? Are they trying to reach back to the kind of union practices that kept coal stokers on trains long after electric automotives were introduced? Defending & Extending out of date union practices won't fix these companies either. What these union leaders need to be asking for is government promises to secure the unfunded pension obligations, and creating a government program to preserve heath care costs that are likely to be stripped in an effort to lower variable costs. There is no bailout that can cover these costs indefinitely – and that is where labor restructuring needs to focus.
As investors, Americans deserve better than leftover thinking for their investment. More of the old management won't fix the problems. What's required is White Space to make significant changes:
- Auto design has to change from backward integration and standardization for manufacturing to forward-thinking which brings customers
- Distribution has to allow customers more opportunites to buy than the old-fashioned, and tedious, dealer structure which puts off almost all customers (and makes buying an unpleasant event). Customers deserve the right to buy direct if they like, and from dealers if they enjoy what dealers offer.
- Manufacturing has to change from "scale" to "build to order". Flexibility has to overtake 80 year old industrial design practices which have made the products inflexible and too expensive.
- Pension reform is essential. The overhead costs of pensions makes these companies unviable. This will require government intervention.
- Health care reform is essential. Perhaps Michigan should follow the Oregon example (and Massachusetts), and be a leader in developing programs to have state-assisted insurance coverage for everyone. Perhaps this should be an experiment in changing from employer paid health coverage, which offshore competitors do not have to shoulder, to self-paid coverage with guaranteed protection.
These are complex problems. They defy simple solutions. They require White Space. Cut Saturn free (again, like when it was founded) to experiment with new solutions. Give other nameplates the indepence to experiment with other possibilities. Monitor performance, see what works, and migrate toward what succeeds.
Now is the time to implement Disruptions and try something new. When the airline industry was grounded in 2001 there was a tremendous opportunity to restructure from unprofitable hub-and-spoke systems with outdated practices to new approaches using White Space. But neither government, nor the industry, took advantage of the stoppage to really try something new. Everyone was in a rush to start operating again, with practically no change. A huge opportunity was lost. And that sounds like the direction we're headed with the desperately uncompetitive auto industry.
We should not make that mistake again. Now is the time to Disrupt these companies. Fire the executive teams and the Boards. They've never been shy about firing employees or vendors. Put new management in place that understands how to manage innovation – rather than Lock-in. Get people in the jobs who don't want to Defend & Extend what's broken – but instead want to make changes and learn what will make these companies world class once again. And put in place competent oversight that can make sure change happens.
by Adam Hartung | Dec 7, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
A year ago Sam Zell was telling Chicago that he knew how to make money in newspapers. He was certain, absolutely certain, that Tribune Company newspapers – including The Chicago Tribune and The Los Angeles Times – would soon be returned to higher readership, higher ad rates and greater profits. Now, Tribune Company is preparing for bankruptcy (read article here.)
Sam Zell did a horrible job of scenario planning. He didn't look into the future and develop scenarios about what was likely to happen in news. Instead, he simply assumed that readers would return if he made a few format and editorial changes, the economy would strengthen and he could depend on advertisers returning as well. He expected a fast, big payback for his investment. Just like he'd done in real estate all those years.
Sam Zell had a very Locked-in Success Formula. He had spent a lifetime buying property, usually properties already in locations demanded. All he had to do was fix up the property and let growing demand for the scarce resource – his building in a demanded location – drive up the value. He didn't stick around to make money off rent. He didn't run a business that made a product and sold it. He bought properties, dressed them up and sold them at a profit. To him, Tribune Company was a property that was being ignored. All he had to do was fix it up a bit, wait a bit, and sell it to someone for more than he paid.
Oops. That Success Formula doesn't work when customers are walking away from the property to pursue a better one. News seekers in droves are going to the internet for their news. They no longer want to browse a newspaper – understanding that takes time, and it gives only a single source. The internet gives them fast answers to their queries from multiple sources. And advertisers are going where the readers are going – to the internet as well. The cost for a printed medium is high, and the results are hard to prove. Whereas internet ads can be tracked for number of page views, number of click-throughs and even sales. The readers are more, and the follow-up is superior. Advertisers have found it easy to forget about newspaper ads, especially in a soft marketplace.
Meanwhile, the Tribune Company Success Formula was firmly stuck in the 1990s. From sales people to editors, denial about shifting reader needs was everywhere. Even though each news company – from newspaper to radio and TV – had great access to reporters and first touch at many news stories, they did not realize that readers were looking for that news on the web first. Each newspaper and station was Locked-in to pushing the news through its format, ignoring the enormous audience opportunity they had in their local markets by using cross-media approaches, including the web. There was no one approaching customers with multi-format advertising opportunities. Nor was the company investing heavily into web sites or portals that could attract large numbers of on-line readers. The on-line environments were under-invested, and selling ads was completely fractured. There was limited, at best, sales efforts to get advertisers onto the weak websites running news from each individual business unit.
What Tribune Company needed was not only scenario planning that identified the range of opportunities for ad sales – but a sincerely intense analysis of on-line competitors. Instead of bragging that the company had leading newspapers in major cities, the leadership should have recognized its fast declining share of total news coverage – due to shifts in how people acquire their news. By focusing internally, cutting costs and trying techniques like new formats, Sam Zell missed the opportunity to really study competitors and figure out how to transform Tribune into a competitive news company – like, say, News Corp.
And while he was busy firing people and making changes on the periphery, Sam Zell was unwilling to really Disrupt Tribune Corporation. He didn't change the business model – the Success Formula. He whacked the chicken coop, scaring employees, readers and advertisers alike as he talked about firing people until he made money. But he never caused his leadership team to really stop and talk about the future of news. They were too busy looking for people to lay off or protecting their own jobs — while Sam was trying to find buyers for the Cubs, Wrigley Field and the Tribune Tower as a potential condo project.
And Sam's Success Formula had no space for White Space. Sam didn't see any reason to try new things – like having salespeople sell internet ads as well as print ads. Or trying to drive traffic to the Tribune or L.A. Times web sites. As a property "flipper" extra-ordinary, Mr. Zell was not interested in developing a new business model. So none was developed – nor any energy spent trying to create one.
Now, America's second and third largest cities are at risk of losing their primary local newspapers. The suppliers are seeing their customer shrink, and possibly their accounts receivable jeopardized. Advertisers are wondering how they reach their local customers. And employees are looking for new jobs. Meanwhile, citizens are wondering who will be out interviewing the mayors, governors and congresspeople of their fine states. Who will be supplying the news?
The cost to Sam Zell Defending & Extending both his Success Formula and that at Tribune Company is enormous. The bond holders – most certainly pension funds and bond mutual funds - will take a horrible hit. The employees and employees of suppliers pay as well. And the citizens, dependent upon a robust news community will also suffer. It's too bad Mr. Zell didn't talk less, and listen more – implementing White Space to make a leading news company that would impress his customers across the U.S.A. I guess he'll have a lot of time to read Mr. Murdoch's newspapers (like the Wall Street Journal), watch Mr. Murdoch's Fox television stations and look at Fox's web site (have a MySpace page yet Sam?) after Mr. Zell's equity value gets wiped out in bankruptcy. Surely the creditors will ask for a new leader – who faces a much more difficult challenge now that the resources have been gutted by Mr. Zell.
