by Adam Hartung | Dec 4, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Innovation, Leadership
Well the heads of GM, Ford and Chrysler are back in Washington asking Congress for cash. According to Senator Dodd it's a sure thing they'll get it (read article here). And accordinto the the Government Accountability Office even if Congress doesn't approve bailout money, Treasury or the Federal Reserve can provide assistance from the TARP fund (read article here). So, it looks like something will happen.
This time the auto companies are saying they intend to "reinvent" themselves with the money. Uh-huh. And exactly who's going to lead this re-invention? Why the same leaders that got into this problem. Now, do we believe that? A lot of people in Congress have their doubts – seeing as how the bankers didn't seem to change much after being told they would get bailed out. So these Congressional folks are saying they want the auto leaders to report back on their plans to change – and of course GM's head said he'd be happy for the oversight. "It would be very helpful for us, whether it's a board or an individual, to have someone to work with on this, to submit our proposals and then for that person to say,'OK, don't agree with that. You've got to change this," said GM CEO Richard Wagoner. (Read quote and more here.)
So Senator Dodd and Speaker Pelosi – for the good of America – I volunteer for the job. I'll review GM, Ford and Chrysler's plans for innovation and report back on the likelihood of them revitalizing the industry. Now that I've put that on the table – I'll just wait for your phone call or email – you can reach me right here through this blog if you like (see the "contact me" area).
Oh, you don't think I'm the guy Mr. Wagoner had in mind? Why not? Do you suppose he was looking for some "industry guru" who is already sympathetic to his claims that the problems are not of management's making – but rather due to economic circumstantces? Do you think Mr. Wagoner prefers someone who is more traditional, on corporate boards that have been agreeable to CEOs for years – accepting of their tough jobs and approving their extreme paychecks? Do you suppose he doesn't want somebody who has expertise in innovation at all, but rather someone who wants to slowly seek change via one small, incremental step at a time, because that's the way big companies do things? Perhaps someone with government experience, used to the pace of change in government agencies? Or perhaps a lawyer who will be sure all actions are within current legal boundaries – whether they actually create benefit or not?
I do think GM and Ford can be saved. But I don't think current management will do it. They are so Locked-in, so used to the "boundaries" of convention, that there is no way they can create companies competitive with Honda, Toyota and Kia. The first thing any oversight agency should do is change the leadership teams, attack the industry Lock-ins and establish White Space to build a new company. Maybe look at Tessla – the electric car company auto execs love to laugh at — but that hasn't asked for any money from Congress as it's built its sold-out sports car using laptop batteries – for some new management. Or ask John DeLorean to quit dealing drugs long enough give up a few ideas (Ok, that is going to far). But surely, with all those talented graduates at the University of Michigan and Northwestern there has to be some people ready to actually do things differently.
GM needs more than oversight. It needs change. Big change. Let's hope Congress takes Mr. Wagoner's words to heart and finds somebody who knows something about innovation to watch over the billions they give these companies.
by Adam Hartung | Nov 25, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, Leadership
Are you encouraged by the Federal Reserve's actions to purchase $100B debt from Freddie Mac, Fannie Mae and Ginnie Mae? Government leaders say this is necessary to "get the markets moving again" (read article here).
Unfortunately, this action is really no different than if the government purchased $100B of SUVs from GM, Ford and Chrysler to "get the auto market moving again." Or, if they purchased $100B of coffee from struggling Starbucks, whose per store sales are predicted to fall all through 2009 (read article here) to "get the coffee shop market moving again." Or if they purchased $100B of homes, now that prices have fallen over 17% in the last year and sales are down at least that much (read article here) in order to "get the real estate market moving again". None of these actions will help the banks, or the auto companies, or Starbucks or homebuilders be more competitive. At best, any of these (including the Fed's planned action) is a stop-gap effort attempting to protect the status quo – in the middle of dramatic market change.
When markets shift, the impact is often delayed by ongoing efforts to Defend & Extend the status quo. Eventually, however, the market shift is unavoidable – and in what seems a very sudden shift change is very dramatic. The market moves from one equilibrium to another. And it is at this shift point (what's called a punctuated equilibrium) that the weaknesses in old competitors become highly visible. Like Citigroup, GM, etc. At the same time, the opportunities for new solutions become visible as well.
When violent market shifts happen, efforts to return to the old status quo never work. Look no further than Japan's economy in the 1990s – which suffered a recession for more than a decade as the country's leaders refused to adjust to the changed competitiveness of Japan in the global economy. Today, 15 years after Japan's recession began, that economy has still not recovered on a consistent growth plan because the leaders keep spending resources trying to protect old business practices which do not work in today's global economy. Consequently, Japan keeps falling further behind China, India and other more competitive economies - and the companies in those economies. Is this the direction we should lead America today?
Future success depends upon changing to meet dynamic market requirements. So far, none of the TARP activities, or the spending by the Treasury or Federal Reserve, are meeting this need. While Congress denies aid to everyone else, a situation likely to change, the spending on financial assets is not creating any new jobs, nor helping the advancement of any innovations in technology, or business practices. Increasingly, however, people are beginning to realize that attempts to shore up these old industry practices are not preparing the American economy, and its companies, for global competition.
What's needed is leadership that will use funding to improve competitiveness – not attempt to preserve the past. Spending funds on unnecessary business trips, unnecessary perquisites, bonuses and dividends does not increase the likelihood of having a vibrant competitive set of industry players in 2010. What does work is installing leaders willing to develop new Success Formulas which are more competitive – by intensely focusing on competitors, Disrupting current practices and using White Space to innovate. If Congress is going to make citizens stakeholders in these businesses, it is within their purview to demand Disruptions – or create them – so the recipients move forward rather than waste money in a vainglorious effort to find the past.
by Adam Hartung | Nov 20, 2008 | Current Affairs, Defend & Extend, Disruptions, General, In the Swamp, Leadership, Lock-in
The auto execs have not made their case in Washington D.C. Speaker Nancy Pelosi is saying Congress has not yet seen a plan in which they can invest taxpayer money. Almost half of Americans don't think a bailout should be undertaken (read article here).
For those of us who've been around a while, reflections on the last time an auto company asked for help are inevitable. It was 29 years ago, from September into December of 1979, that Lee Iacocca (former Ford executive) and the UAW asked Congress to provide $1.5billion in loan guarantees (not a loan – not cash – just a government guarantee) in order to save Chrysler from bankruptcy. The economy was bad, but nothing like the banking crisis we're in now, and a recalcitrant Congress was not happy. Nonetheless, they prevailed and Democrat Jimmy Carter signed guarantee approval in January, 1978. (Read about the Chrysler loan guarantee here.)
By all accounts then, and certainly later, Lee Iacocca was nothing like Rick Waggoner (GM CEO) or Alan Mulally (Ford CEO). Iacocca had been fired from Ford because he told management they were going the wrong direction. He was a person willing to dissent, to Disrupt, and he'd shown it at Ford before ever coming to Chrysler. Additionally, as a new leader at Chrysler, he was willing to demonstrate changes were afoot by proposing from the beginning to place the head of the UAW on the Chrysler Board of Directors. After decades of labor wrangling, this was a significantly Disruptive act never before considered – and showed a leader willing to do things very differently. Mr. Iacocca even promised to take no salary his first year – he'd only get paid if his plan worked allowing him to earn a bonus according to predefined metrics. (Imagine that – an executive with real skin in the game.)
Iacocca was never a fellow to do what was "easy" or "natural". A feisty fellow with Italian roots, he spoke his mind. When Ford was making boring cars, and considered the Edsel "every man's car" (the Edsel was an enormous failure), Mr. Iacocca conceived of the Mustang — a car that was small, sporty and affordable. Something otherwise not on the American market scene. That car, more than anything else, saved Ford in the 1960s. Even today, Ford is hanging its future and much of its brand image on the 45 year old Mustang.
When he got to Chrysler, Iacocca kept that focus on the future. At a time when automakers were struggling to figure out a profitable way to develop cars that fit American needs he brought out the mini-van – a practical vehicle never before seen. As the economy improved he felt a convertible would be a good idea. He asked his head of engineering how long it would take to make a convertible for him to test – and the exec told Mr. Iacocca 3 years. CEO Iacocca told his engineer he didn't understand – Iacocca wanted him to pull a car off the line, take a saw and cut the top off. That should take about 4 hours. The action was taken, and Mr. Iacocca took the topless sedan for a ride around the block. In less than an hour he was convinced bringing back convertibles would be a huge boost to Chrysler profits.
Mr. Iacocca didn't look to his customers for ideas, he looked at future needs and competitors. Mr. Iacocca studied the cars, and manufacturing processes, from Europe and Japan. By obsessing on everything they did he found ways to make better cars that were more desirable and less costly. At a time when the Japanese Yen was a screaming buy compared to the dollar he changed processes to permenantly lower car costs – not relying on layoffs or more traditional cost cutting – making his company much more competitive than Ford or GM.
Mr. Iacocca never was slow to Disrupt those around him, or the market. As discussed, he was ready to launch new car concepts quickly, and go to the union with changes in work rules and compensation schemes. He created White Space everywhere from car design to manufacturing process groups to union discussions in order to find ways to make his company competitive with offshore players – and the most preferred of the American auto companies.
Ledership makes a difference. Congress has asked Messrs. Waggoner and Mulally to sell off the private jets, cut executive pay and produce a plan that shows the future will not be like the past. And that's fair. But it's not at all clear these leaders are of the Iacocca (or Jobs) way of thinking. If they keep trying to preserve what used to be normal, things aren't likely break their way from those in charge of giving a bailout. Mr. Iacocca is now retired, and far removed from the demands and dilemmas of the current auto manufacturers. But there are other managers out there – other leaders with the ability to focus on the future, obsess about competitors, Disrupt and implement White Space to turn around these troubled companies. I sure hope someone puts them in the right place to persuade Congress fast – before a couple million people lose their jobs and this recession turns into a Depression!
by Adam Hartung | Nov 17, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
It was only about 6 months ago that Microsoft was offering over $30/share for Yahoo! That deal didn't happen. And Yahoo! (see chart here) fell to under $ 11/share . Now Microsoft is saying "no thanks" despite the lower value – and Yahoo is changing it's CEO (read article here). Should Microsoft have purchased Yahoo!? Should Yang be fired?
No, and Yes. Yahoo created what is probably the fastest growing business on the planet today – internet advertising. And Search + ad sales has not only grown fast, it has been highly profitable. Look no further than Google. That one company so dominates a high growth sector is – well – incredible. Why aren't there more competitors being more effective? Yahoo! should be growing like a weed in a hot and wet garden.
And that's why it shouldn't be purchased by Microsoft. Microsoft is thoroughly Locked-in to its old Success Formula all about the PC. Money alone doesn't make a good company. Cash reserves do not assure future growth. And when you watch Microsoft you can see a company that doesn't really have a plan to grow. Microsoft is far from close to the fastest changes and growth happening in technology today – such as wireless application devices – and search. Just buying a company in either sector won't help if it is smothered by the Lock-ins surrounding Microsoft. Microsoft has been without Disruption since Bill Gates shook up things and launched Internet Explorer. And there's been no White Space as Microsoft drolled along creating updates to Windows and Microsoft Office.
At the same time, Mr. Yang has been unable to create the Disruptions and White Space that would allow Yahoo! to compete with Google. Recently, he's even been trying to license Google technology to affirm a lifelong competitive position as no better than #2. But there is no "iYahoo" phone in development – nor any other new business coming out of Yahoo! For a high tech company, with rapidly changing competitors in a dynamic marketplace, to have so few White Space projects is the kiss of death – and has been the death of Yahoo!'s stock price. So Yahoo! desperately needs a new CEO. Someone willing to apply John Chambers or Steve Jobs style business practices to get Yahoo! competing more effectively and growing again – not trying to Defend & Extend the original Success Formula which the market has moved beyond.
I just wish the Board members at GM, Ford and Chrysler would follow the Yahoo! lead. They need to change the leaders in those companies faster than Yahoo! did. If we could get different leaders guiding these auto companies, and different managers carrying out Disruptions and White Space, we could dramatically hasten the return to ecnomic growth for America.
by Adam Hartung | Nov 13, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
For years we've heard how important it is to listen to you customers. Many books have been written on the importance of listening to customers and giving them what they want. Unfortunately, and this ay sound like heresy, listening to customers can be more problematic than helpful. It's better to use scenario planning, compiling info from a range of resources, than let customers lead your planning.
Look no further than the current problems at GM, Ford and Chrysler. While they may have done many things poorly, one thing they did slavishly was listen to customers. Throughout this decade American customers have told them"we want bigger cars, with bigger engines, with more power." The #1 selling vehicle in the USA for several years was the Ford F Series pick-up, a gas user. For all 3 manufacturers their large SUVs were not only big sellers, but huge profit producers. Customers were willing to pay big dollars for the steel, V-8 engines and luxuries that went with 12 miles per gallon in the city. When asked what they wanted, buyers cried for "more." So Chrysler relaunched the hemi engine – a high horsepower and gas sucking beast. When launched, they sold out hemis – even in station wagons! But this close listening to customers meant the companies were NOT thinking about potential market shifts that could cause customers to shift quickly away from what the Big 3 were making. $150/barrel oil caught them flat-footed, unprepared, with loads of inventory and weak balance sheets. A sitting duck for the recession and debt crisis.
We see this phenomenon in many markets. IBM invented the personal computer, then exited the business 4 years later because their customers – data center managers – had no use for PCs and didn't buy any. Apple launched the Newton – the first PDA – but dropped it like a hot potato when customers told them they were more interested in enhanced Macintosh computers. Harley Davidson's 50 year old customer base keeps saying they only want big V-Twin roaring motorcycles – so Harley has ignored the faster growing and more profitable crotch rocket and scooter cycle markets (not to mention quadrunners, waverunners and snowmobiles.) Harley sales are down over 30% this year.
And we can see emerging trends that point to problem companies who listened too long to customers. Sony, EMI and other traditional music companies missed the digital/MP3 music wave because their retailers wanted to keep making CDs. They kept listening to Blockbuster Music until it disappeared. Major movie studios have missed the move to digital/MP4 film distribution as they keep listening to customers (like Wal-Mart, Target and Best Buy) that want DVDs to sell. Sam Zell spent hundreds of millions of dollars buying the newspaper-dominated Tribune Company, famously saying how he reads 4 newspapers a day, only to find out that people younger than 30 never read newspapers – and never will. When projecting future subscriber numbers, and ad sales, he talked to older folks who read newspapers and didn't recognize a major, permanent market shift in the market. Circuit City catered to their in-store customer, but now is finally waking up to the reality that on-line retailers can kill its profit with lower overhead, less inventory, faster turns and lower cost. Where once on-line shopping was only for the young, everybody is now going to the lower prices. And we now have evidence that for people under 35, they see no value in a traditional stock brokerage (read article here) – meaning bad things portend for companies like Merrill Lynch that keep thinking their over-40 customer base with $2million in liquid assets is the group to listen to. In all these instances, their "core" customers were not telling them where the market was heading, thus letting them drive right off a profit cliff. Heads up to travel agents (yes, a few still exist) and insurance agents out there!
Your customers Lock-in to your Lock-ins. They like what you offer. When you ask them what they want, you'll hear "more, better, faster, cheaper." Nothing insightful there. The customers you need to listen to are those who left you – those who never signed on to you – and those using competitors you've conveniently organized out of your "core segment." They can help you see where markets are headed, and where your Lock-in to old products, services and practices leaves you vulnerable. Otherwise, like GM, Ford, Lehman Brothers, Bear Sterns, Sears, Circuit City and Best Buy you'll be planning from the past – and when market shifts happen – KA-POW!
To be successful you have to use scenario planning that keeps you prepared for future markets. You have to understand not only current competitors, but future competitors. And you have to anticipate what customers will want in the future, not just what they can tell you about their needs today. So be careful about listening to your customers, they are very likely to lead you right into the abyss. Just ask Mr. Waggoner at GM and Mr. Ford, Jr.
by Adam Hartung | Nov 11, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Starbucks (see chart here)announced earnings – well sort of (read article here). Accounting rules are the only thing determining whether Starbucks had earnings or losses. Let's say the company broke even – because we don't know for sure given the financial machinations. Starbucks was on a growth tear for a decade, and became a brand synonymous with upward mobility. Company value is now down 75% in just 2 years. Revenues are down, and projected to continue declining into 2010. Earnings have evaporated and company leaders say the only way to create them in the future is continued draconian cost cutting. Company management would like to lay blame for these horrid results on the crappy economy. But is that why Starbucks has taken this fall?
Management has to take responsibility for these results – and it's the leadership in place now. Starbucks was a model of growth. While the company was expanding its shops the previous CEO looked into the future and developed a series of new businesses to augment the original business:
- He started adding food – both cold and hot – to increase sales within the stores
- He pushed Starbucks into food service (United Airlines, among others)
- He pushed Starbucks into grocery stores with prepacked beans
- He pushed Starbucks into liquor stores
- He began promoting CD sales and exploring MP3 distribution
- He produced music – including the #1 CD in 2005 (Ray Charles Greatest Hits)
- He began producing movies (Akeelah and the Bee)
- He opened an agency for artists (signing Paul McCartney of Beetle's fame)
These actions all opened White Space for expanding Starbucks when, inevitably, either stores reached saturation or the growing lust for coffee and tea declined. But he was replaced by Howard Schulz, considered the founding CEO by most. Schulz demonstrated true "hedgehog" behavior (to coin a term used by Jim Collins in "Good to Great") by rapidly exiting of most of these businesses. Mr. Schulz felt Starbucks should concentrate on its "roots" – on coffee. His approach to improving Starbucks was to "focus" on what used to work. And to cut costs until profits met his goal.
But now we can see the disastrous results of his strategy. Stores are closing, and revenues in open stores are going down causing total revenues to decline. And revenues are falling faster than costs, evaporating profits. Where Starbucks was once a model employer, he is cutting benefits to employees and shows little (if any) interest in the famous barrista experimentation that led to innovations like "Frappucino" which helped add billions to total revenue. In just a very few months Starbucks has gone from a company willing to Disrupt its Success Formula and use White Space to grow – into a company exclusively trying to Defend & Extend a strategy from 15 years ago.
But in the last 15 years, the marketplace has shifted dramatically. Quality coffee, including specialties like espresso and latte not formerly common in America, have become commonplace as competitors from Caribou Coffee to Panera Bread, Dunkin Donuts and McDonalds have entered the business. Prices for good coffee have declined, and customers now have other places they can mingle, network or sit and read besides Starbucks. And increasingly you can obtain a good coffee right where you eat breakfast, lunch or dinner. The need to pay a "Starbucks premium" has evaporated – like Starbucks' profits. The new CEO, by following the Jim Collins approach, has ignored the dramatic market shifts which make Starbucks coffee shops a far less profitable business than they were just 5 years ago. He's more likely to end up like Circuit City than the growth company Starbucks used to be.
As mentioned before in this blog, research for "Create Marketplace Disruption" disclosed that only 7% of the time do companies that hit a growth stall ever grow again at 2% or higher. Why such dismal performance? Because the growth stall shows management has missed important market shifts! Focusing internally on profit improvement – especially with cost cutting or "back to basics" actions – only allows competitors to keep improving their position while the former leader retrenches. While the competitors are charging forward, the hedgehog company is burrowing into the dirt, allowing himself to get run over.
Markets never run in reverse. Once someone develops a winning Success Formula competitors emerge. They copy the leader down to the detail, and even come up with their own advantages (including lower price.) Some develop a better solution. And when market shift happens, the leader finds profits decline. To maintain revenue and profit growth requires leaders use White Space to explore new businesses that can evolve and enhance the Success Formula. That was the road Starbucks was on. Until Mr. Schultz took over the reigns. And now, his "Collins-esque" approach to business is driving Starbucks right into the ground(s).
by Adam Hartung | Nov 6, 2008 | In the Rapids, In the Swamp, In the Whirlpool, Leadership
Companies get into trouble when they stop developing scenarios and plan to succeed by merely Defending & Extending what they’ve always done. In the last few weeks we saw Bear Stearns and Lehman Brothers disappear because they did not prepare for market shifts. Merrill Lynch almost followed them, and may still if Bank of America (chart here) decides to change the name (now that Merrill is becoming a wholly owned subsidiary of BofA).
Companies get into trouble when they stop developing scenarios and plan to succeed by merely Defending & Extending what they’ve always done. In the last few weeks we saw Bear Stearns and Lehman Brothers disappear because they did not prepare for market shifts. Merrill Lynch almost followed them, and may still if Bank of America (chart here) decides to change the name (now that Merrill is becoming a wholly owned subsidiary of BofA). Another example popped up today when we learned the Las Vegas Sands (chart here) is on the brink of failure (read article here). As Sands management ran up the debt, it failed to consider scenarios which could have caused people to not gamble – like a recession! When you aren’t looking at the range of possible shifts, it’s easy to be blindsided. In the last year, the Sands stock price has declined from $120/share to $8. That’s an amazing $40billion loss of value! And all because it forgot to plan for market shifts.
On the other hand, let’s look at Apple (see chart here). Apple is highly dependent upon computer chips for all its devices, from the Mac to the iPhone. Originally the company was built on microprocessors from Motorola. But that changed years ago as the company adopted chips from IBM. Now Apple is using chips from Intel. In its phone products, Apple once used IBM chips but now licenses its chips designs from ARM holdings and modifies them for its own use. And recently Apple hired the former IBM chip head to a new position managing device hardware engineering (read article here).
Wow, Apple looks to be all over the board. Some accuse Apple of being a lousy partner with is chip suppliers. Or accuse CEO Jobs of being a control freak who is trying to get into the chip business. But think again:
- Apple is highly dependent on chips. If they guess wrong on the chips, and over-commit, they could end up suddenly behind competitors and in big trouble.
- How is Apple to know if its vendors will remain on top of the technology curve? If the partner slips, Apple could slip with it.
- Competitors are all around Apple with new products, including Google with its new phone and Motorola with its new commitment to the same software Google is using. They are trying different technology solutions with the hope of eclipsing Apple.
What we see is Apple looking forward, and seeing a range of potential scenarios. Any of these vendors could be dominant, or could be a flop. Additionally, Apple itself has some ideas about what could create market leading product that might eclipse the vendors. What we see is a company that is keeping its options open. Apple is using scenario planning to identify a range of potential outcomes, and it is trying its best to keep itself positioned to win regardless of which outcome occurs. It is obsessing about competitors, and keeping itself flexible to move quickly with market shifts should a competitor take an action which could jump it into the lead.
Making big bets is NOT the job of management. That’s a fool’s folley. Good leaders use scenario planning to identify a wide range of options, and work hard to keep their options open to win regardless of which scenario develops. You have to marvel at how clever CEO Steve Jobs is to position Apple for future success, and how good it is for investors that he would add someone to his top staff who can help keep all options open. This is a very good sign for Apple investors, employees and customers that Apple will remain a strong, viable competitor into the future – even as the shifts of technology threaten to whipsaw the market.
by Adam Hartung | Oct 30, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
The business press, whether print or on-line, is full of stories about lay-offs. Motorola (chart here) to cut another 3,000 jobs in its flailing handset business (article here). American Express (chart here) to cut 7,000 jobs (article here). Over the last few weeks, other announcements included 3,200 job cuts at Goldman Sachs (chart here), 5,000 at Whirlpool (chart here) and 1,000 at Yahoo! (chart here).
Given the regularity with which leaders have implemented layoffs since the 1980s, investors have come to expect these actions. Many see it as the necessary action of tough managers making sure their costs don't unnecessarily balloon. And political officials, as well as investors and employees, have started thinking that layoffs don't necessarily have much negative long-term meaning. People assume these are just short-term actions to save a quarterly P&L by a highly bonused CEO. The jobs will eventually come back.
Guess again.
Most layoffs indicate a serious problem with the company. Long gone are the days when layoffs meant people went home for a major plant retooling. Now, layoffs are a permanent end of the job. For the employer and the employee. Layoffs indicate the company is facing a market problem for which it has no fix. Without a fix, management is laying off people because the revenues are not intended to come back. Thus, the company is sliding into the Swamp – or possibly the Whirlpool – from which it is unlikely to ever again be a good place to work, a good place to supply as a vendor or a good place to invest for higher future cash flow. Layoffs are one of the clearest indicators of a company implementing Defend & Extend Management attempting to protect an outdated Success Formula. Future actions are likely to be asset sales, outsourcing functions, reduced marketing, advertising & R&D, changes in accounting to accelerate write-offs in hopes of boosting future profits — and overall weak performance.
Layoffs are closely connected with growth stalls. Growth stalls happen when year over year there are 2 successive quarters of lower revenues and/or profits, or 2 consecutive declines in revenues and/or profits. And, as I detail in my book, when this happens, 55% of companies will have future growth of -2% or worse. 38% will have no growth, bouncing between -2% and +2%. Only 7% will ever again consistently grow at 2% or more. That's right, only 7%.
When you hear about these layoffs, don't be fooled. These aren't clever managers with a keen eye for how to keep companies growing. Layoffs are the clearest indicator of a company in trouble. It's growth is stalled, and management has no plan to regain that growth. So it is retrenching. And when retrenching, it will consume its cash in poorly designed programs to Defend & Extend its outdated Success Formula leaving nothing for investors, employees or suppliers. The world becomes an ugly place for people working in companies unable to sustain growth. People try to find foxholes, and stay near them, to avoid being the next laid off as conditions continue deteriorating. Just look at what's happened to employment and cash flow at GM, Ford and Chrysler the last 40 years. Ever since Japanese competitors stalled their growth, "there's been no joy in Mudville."
Given how many companies are now pushing layoffs, and how many more are projecting them, this has to be very, very concerning for Americans. Clearly, many financial institutions, manufacturers, IT services and technology companies appear unlikely to survive. Meanwhile, we see wave after wave of new employees being brought on in companies located in China, India, South America and Eastern Europe. For every job lost in Detroit, Tata Motors is adding 2 in India. For every technologist out of work in silicon valley, Lenovo adds 2 in China. For every IT services person laid off at HP's EDS subsidiary, Infosys adds 2 in Bangalore. It's no wonder these companies don't regain growth, they are losing to competitors who are more effective at meeting customer needs. There really is no evidence these companies will start growing again – as long as they use layoffs and other D&E (Defend & Extend) actions to try propping up an old Success Formula.
Sure, times are tough. But why die a long, lingering death? Instead of layoffs, why not put these people to work in White Space projects designed to turn around the organization? Instead of trying to save their way to prosperity – an oxymoron – why not take action? In most of these companies, lack of scenario planning and competitor focus leaves them unprepared to rapidly adjust to these market changes. But worse, Lock-in and an unwillingness to Disrupt means management simply finds it easier to lay off people than even try doing new things. And that is unfortunate, because the historical record tells us that these companies will inevitably find themselves minimized in the market – and eventually gone. Just think about Polaroid, Montgomery Wards, Brach's Candy company, DEC, Wang, Lanier, Allegheny Coal, Bear Sterns and Lehman Brothers.
by Adam Hartung | Oct 28, 2008 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lifecycle, Lock-in
Wal-Mart (see chart here) has not been doing badly the last couple of quarters. Of course, it hasn't done great either. And if we look back the last 8 years – well there's not been much to get excited about. Wal-Mart Locked-in on its low price Success Formula 40 years ago and hasn't swayed since. Today as incomes go down and fear is huge about jobs and investments people are looking for low prices so they are returning to Wal-Mart. But those sales aren't coming easily, because Target, Kohls and other retailers are battling to get recognized for value while simultaneously offering benefits consumers demonstrated they enjoyed before economy went kaput. It's not at all clear that the small uptick in sales at Wal-Mart is anything more than a short-term blip in a very flat environment for Wal-Mart.
It's unclear that there's much growth. This week Wal-Mart admitted it was finding fewer opportunities to open new stores as saturation of its low-price approach appears imminent in the USA (read article here). Instead of opening new stores capital expenditures are going to decline by 1/3, and dollars are being shifted to store remodeling rather than new store opening. This implies a far more defensive tactic set, reacting to inroads made by competitors, rather than an understanding of how to regain the growth Wal-Mart had in the previous decades.
So now Wal-Mart is saying it will turn investments toward emerging markets (read article here). Sure. Wal-Mart wrote off huge investments and exited failed efforts in Germany and France, It's efforts to expand in Canada and the U.K. have been marginal. In Japan it only avoided a huge write-off and failure by making an acquisition. And its China project has gone nowhere, despite much opening hoopla 5 years ago. So why should we expect them to do better with a second attack into China, possibly going into India and Mexico?
The Wal-Mart Success Formula worked in the USA and drove incredible growth, but it is unclear that shoppers in developing countries get much benefit from a strategy largely based on buying goods from low-cost underdeveloped countries and importing them to the USA for mass-market buyers in low-cost penny-pinching store environments. What's the benefit to Wal-Mart's approach in Mexico or India? In India and China customers must pay high duties on imported goods, and low-cost retail exchanges already exist across the country for domestic products. Additionally, lacking a robust infrastructure (meaning a big car and good roadway to carry home mass quantities of stuff bought in large containers) it's unclear that Wal-Mart's approach is even viable. If you have to carry goods home on a bicycle, why would you want to go to a big central store? Isn't buying regularly what you need better? Wal-Mart has made no case that it's Success Formula is at all viable outside the USA, and especially in emerging countries.
Compare the Wal-Mart approach to Google (see chart here). In the last year Google has moved beyond mere search into other high-growth businesses such as mobile telephones. And today Google announced it is going to legally offer books and other copyrighted material to customers in some ways unique – but competing with Amazon's e-book (Kindle) business (read article here). Google keeps entering new high-growth markets with new demands from new customers. And in each market Google enters with new products intended to be better than what's out there today.
Wal-Mart keeps trying to find a way to Defend & Extend its old, tired Success Formula. Wal-Mart is huge, but its growth has slowed. Competitors have entered all around it, and every year they are chipping away at Wal-Mart by offering different solutions to customers. The competitors are getting better and better at matching the old Wal-Mart advantages, while offering their own new advantages. And we can see Wal-Mart is now being defensive in its histiorical markets while naive in trying to export its old Success Formula to markets that don't show any need for it. Wal-Mart is mired in the Swamp, struggling to fight off competitors while its growth is disappearing and its returns are under attack. On the other hand, Google keeps throwing itself back into the Rapids of growth in new businesses that offer new revenues and increased profits. And it enters those markets with new solutions that have the opportunity of changing competition. Google doesn't have to have everything work right for it to find growth through its White Space projects and continue expanding its value for customers, suppliers, employees and investors.
by Adam Hartung | Oct 20, 2008 | In the Swamp, In the Whirlpool, Leadership, Lock-in
With the economy soft, and sales harder to come by, more companies are thinking about what changes they can make to be more competitive. But what we’re seeing now is the emergence of competitors that Disrupted when times were good, and the decline of those who chose to Defend & Extend old Success Formulas in order to maximize profits back then.
Let’s take a look at Sun Microsystems (see chart here.) Trading today at $5.25/share, Sun was a darling of the internet boom – peaking at about $250/share in 2000. But $5.25/share (adjusted for splits) is about what Sun was worth in the mid-1990s. At that time Sun was a big winner as internet usage exploded and the telecom companies – as well as industry participants from tech to manufacturers – could not get enough Unix servers. Everyone was predicting that the need for servers was never going to decline, and Sun was "#1 with a rocket", to use an old radio term for a big hit song.
In 1995 Sun held a management retreat for all its managers and higher in Monterey, CA. Scott McNealy, the chairman and CEO, asked the audience "if you could buy Apple, would you do it?" The audience reacted with a positive roar! These managers all saw the benefit of having a low-price workstation line to augment their expensive servers. Further, Unix was notoriously difficult to use and the hope of bringing a better GUI interface was very appealing. They saw that if they could help the sales of Macs it would be a great way to slow the Wintel (Microsoft Windows plus Intel microprocessor) PC platform – which was the biggest competitor to Unix. And Apple had lots of applications in media and the office that eluded the very techie Sun products. These managers, directors and V.P.s had all thought about an Apple + Sun merger, and they saw the opportunities.
Mr. McNealy looked at the raucous, hopeful crowd and said, "you think you could fix that mess? With all we have to do to keep up with market growth, you don’t see buying Apple as a major diversion?" The air was sucked out of the room. Obviously, Apple was troubled. But there was real hope for growth in new and unpredictable ways from combining the two companies, their positive brands, their great technologies and their creative roots. But Mr. McNealy went on to tell the audience that the executive team had thought about the acquisition, and just couldn’t see doing it. It would be too disruptive.
That management retreat had as its keynote speaker Gary Hamel, author of Competing for the Future. Mr. Hamel gave a great presentation about how his research showed great companies figured out their core – their core strength – and then reinforced that strength. The rest of the retreat was spent with the management personnel in various break-out sessions defining the "core" at Sun Microsystems and then identifying how Sun could reinforce that core.
Of course, it only took 5 years for the internet bubble to burst. The telecoms were some of the first victims, with their value plummeting. Demand for servers fell off a proverbial cliff. Meanwhile, Unix servers from IBM and others had increased in performance and capability – giving the once high-flying Sun a competitive kick in the pants. Worse, the power of Wintel servers had continued to increase, making the price difference between a Unix server and a Wintel server much less acceptable. IT Department customers were beginning to shift to PC servers in order to lower cost. And Sun, with its focus on servers, had no desktop product to sell – no competitor to the PC – nor any software products to sell. The internet market was rapidly shifting toward Cisco and those who sold robust network gear. Sun was watching its market disappear right out from under it – and happening in weeks.
Now it’s unclear what the future holds for Sun Microsystems (read article here). Sales have not recovered. Losses have been mounting. Sun’s dealing with hundreds of millions of dollars in restructuring costs (again), and some of its businesses are now worth so little that the company is probably going to be forced to write off millions (maybe billions) in goodwill on the books. If it has to write off too much good will, Sun could end up declaring bankruptcy.
The time for Disruption at Sun was when business was good – in 1995 and 1996. Had they bought Apple, who knows what combination might have happened. At the time, Cisco (see chart here) was growing quite handily. But Cisco built into its ethos the notion that the company would obsolete its own products. This desire, to never ride too far out the product curve and instead cannibalize their own sales before competitors did, has allowed Cisco to keep growing revenues and profits. Instead of "focusing on its core" Cisco keeps looking for the competitors (companies and products) that could make Cisco obsolete – and using those competitors to help Cisco drive growth.
Even with Disruptions, many competitors will not survive this recession. Not because the managers are lazy or sloppy. But because they will become victims of better competitors who built Success Formulas more aligned with future market needs. Those who Disrupted in 2005 and 2006, who positioned themselves for globalization and rapid market shifts, will do relatively better in 2009 than those who chose to Defend & Extend what they used to do. The best time to Disrupt and create White Space is when things are good – because that prepares you to win big when markets shift and times get tough.
