by Adam Hartung | Apr 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Last night ABC’s Nightline program featured an article on Starbucks (see print version here). This is not the first time Nightline has discussed Starbucks. The program previously chided management about it’s competition with McDonald’s (see video on YouTube here) saying Starbuck’s coffee wasn’t any better than the fast food giant. Nightline’s recent feature was that Starbucks needs to "regain its focus" under the return of early CEO Howard Schulz. Something he was happy to support. Even Marketwatch kicked-in its review of the "retro-strategy" being taken to rejuvenate the company by launching a new coffee blend (read article here).
Wrong. Do we need a lot more Starbucks? At 15,000 units, one could easily argue that it’s sensible to expect less growth. And, as in all markets, competitors are figuring out how to duplicate Starbucks original idea – from other "shops" such as Caribou Coffee to mass chains like McDonald’s and Dunkin’ Donuts. ALL Success Formulas have a half-life. ALL Success Formulas grow tired, and lose their ability to maintain above average growth and profits. And that is happening now to Starbucks. Starbucks did the right things to grow like crazy as an early pioneer in its largest business. But doing more of the same – possibly better, faster or cheaper – is not going to get Starbucks back on the growth path. That’s just Defend & Extend activity which is already demonstrating declining marginal value.
Mr. Schulz was obviously the right guy to get things growing 20 years ago at Starbucks. Out of the Wellspring he took the coffee shop idea into the Rapids. He built systems that helped Starbucks Lock-in on all the things that could help the company grow. Imagine the skill it took to consistently open 6 new units a day!!! He was the right guy in the right place and he helped create an empire.
But that’s not what Starbucks needs today. For at least 3 to 5 years it has been obvious there would be a limit to the growth in Starbucks traditional business. Starbucks has been tailing off the Rapids, and heading into the Flats. And now it is rapidly falling into the Swamp of low growth. It was obvious the demand for shops was going to become saturated, and competitors were bound to get sharper and better. So the last CEO Disrupted Starbucks – saying the company was not just a coffee company. He got into music production, movie production, performer management, liquor production and consumer goods. He also started expanding the stores to offer sandwiches and many other products besides coffee. He actively promoted and funded White Space to find new revenue opportunities. And that is what Starbucks needs more than anything – more sources of revenue.
Starbucks is blessed with a name that does not mean anything. Starbucks doesn’t have to think of itself as a coffee company. Think about Nike – which didn’t have to be a shoe company. Only by moving beyond shoes did Nike become the megapower brand it is today. For Starbucks to now make an about-face and try to find the future in its past is lunacy. That’s trying to catch last night’s dream. The competitive market which supported rapid coffee shop growth is gone, and a new one is in its place. Focusing energy on a slugfest with its competitors will only result in price wars, lower margins, declining growth, store closings, laid off workers and lower returns for shareholders (who already know this and have knocked 50% off the company value in the last year – see chart here.)
The appeal of "back to basics" is so strong. We’ve seen too many executives fall prey to the call. It seems so logical to think that if we "focus" on "core competencies" we will somehow return to previous greatness. But that simply isn’t true. Watch old prizefighting clips, and it is amazing. Rocky Marciano looks like an out of shape thug compared to the athleticism of Joe Forman or Muhamed Ali – who look like they need another year in the weight gym compared to Mike Tyson and today’s belt competitors. Each wave of winners creates yet another round of competitors who are different – and that changes the game. Doing more may have worked for Rocky Balboa – but he had the help of a dozen script writers to make his dream come true. In the real world, we cannot capture the old glory but rather have to find new places and ways to compete as our markets become crowded from those seeking our success.
Starbucks is in for some really big trouble – worse than already seen – if Mr. Schulz stays in place and continues with his plans. For investors, its highly unlikely to be a pleasant ride. Starbucks can succeed if it realizes that its future growth is not about the coffee. It’s about finding ways to change other markets the way it changed the last one. And that means avoiding focus on past successes and instead using White Space to develop a new Success Formula that can grow and prosper – achieving past results but in new ways.
by Adam Hartung | Apr 2, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Top oil industry executives were on Capital Hill yesterday being questioned about their profits (highest ever) and the tax breaks they receive for exploration and production. (Read AP report here under headline "Oil executives defend huge profits".) Let’s not be naive. As officers of their corporations, they have an obligation to maximize the value of their companies – otherwise they could be sued by investors. No matter their personal opinions, they have to defend their profits and their product prices. So reading that they did so should not be unexpected.
It’s not the headline that’s interesting, however. It’s how they reacted to questions about the future. After all, reported profits are the past. What does the industry see in the future, and how is it preparing for it?
Does anyone doubt that crude oil is being consumed faster than it is being produced? We’ve known that since – 1940! The 1970’s "oil price shock" certainly taught all of us that petroleum is a finite resource, and we’re using it up. It’s not whether we will run out of crude – but when. So the interesting question is, when will that happen and what are our biggest "energy" companies doing to prepare for it?
Unfortunately, this isn’t a big topic for these behemoths. Typical of the industry leaders, when the Chairman of BP America was asked what he wanted for America’s future he replied "We need access to all kind of energy supply" with the writer noting "adding that 85% of U.S. coastal waters are off limits to drilling." In other words, more of the same! Drilling more holes, possibly in environmentallyl dangerous locations, does not solve the real problem – world petroleum consumption keeps growing while the pools of oil underground are being used up.
Don’t get me wrong, I grew up in the Oklahoma oil patch. I had lots of relatives that poked holes in the ground, sold oil leases, and worked in oil companies. The industry was very good for my home state, creating jobs and raising the standard of living. But that was then. What we need to address is the future. What are these companies doing to replace these massive revenues as oil gets harder and more costly to find? What are their future scenarios, and how are they proposing to help create a wonderful future? Together, according to the article, the major oil companies spent $3.5b on other options besides oil last year (solar, wind, biodiesel). Their tax breaks – $18billion. Their profits last year $123b!
These companies are incredibly Locked-in. They aren’t energy companies, they are oil companies. Right now, they are making lots. But look at history, and they have sure had their down years (or, rather, decades). These companies are the sort that make good money 5 out of every 20 years. Oil companies have never been a great, consistent, long-term sort of investment. Right now, they are making a lot of money. Shouldn’t they be taking action to make the future better than the past? Wouldn’t it be good for investors, employees and customers if they invested in something besides more oil wells to improve their consistency and growth prospects? Wouldn’t all parties enjoy these companies developing a path to long-term success, even as the oil supplies diminish? As stewards of investor value for the long-term, don’t they need to have a resolution for growth besides merely higher prices? Don’t they need to find ways to actually make more energy and add real growth to their business?
Lock-in is allowing these companies to invest in a marginally declining value proposition. More holes, and more risk. They keep doing what they know how to do, what they’ve always done. What’s needed is White Space where the best minds could really work hard on new alternatives. These companies need to give real Permission to develop a new Success Formula – not just window dressing. The amounts they are investing are small not only compared to profits, but compared to the alternative investments they make in deep water drilling or inhosptible location projects. These oil projects as well cost in the billions of dollars. So the companies aren’t truly resourcing White Space either.
We all know the oil will run out. As investors, we should be looking for leaders that are seeking new ways to compete. New solutions. It will be the new solutions that create long-term above average rates of return. But these leaders didn’t exhibit much interest in anything but Lock-in and more of the same. And that’s too bad for the industry – and all of us customers as well.
by Adam Hartung | Mar 27, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
We all find ourselves watching the news, or reading a newspaper, then shaking our head and saying "Why’d they do that?" When it all seems so obvious, why do leaders take action that seems counter to their goals?
Take the recent case at Wal-Mart (see chart here). A 52 year old employee gets hit by a truck and brain damaged. Wal-Mart’s insurance pays out $470,000 in health care costs. Yea! Great PR story for how WalMart sticks by employees that sign up for health insurance. But that wasn’t the story printed in the newspaper. When the family, at their own expense, sued the trucking company for lost future wages, pain and suffering and future care needs – winning $417,000 after expenses. But, that still wasn’t the story getting attention. No, what got a lot of attention was when Wal-Mart sued the now invalid and institutionalized former employee to get back its $470,000, won, and admitted it was taking the money away from her! (Read account of story on CNN.com here.)
Let’s just skip over whether Wal-Mart was right or wrong – legally or ethically. More practically, how much does Wal-Mart spend on Advertising and PR every year? Let’s see, $360B revenue at just 1% would be over $3B. So Wal-Mart wants customers to think well of the company and shop there.
As a result of the company’s lawsuit it gets back $470K – that’s .013% of its ad/PR budget. About enough to buy a couple of major market TV ads. Meanwhile, the airwaves (and blogsphere) get flooded with the story and its negative sounding impacts. MSNBC on its Countdown show labels Walmart "the worst person in the world" (see video here.) CNN puts the video onto its hourly loop for everyone to see (see video here). Anderson Cooper makes it a feature discussion on his television show. Even the L.A. Times writes a negative opinion about it in the newspaper (read here.) What would all of that PR cost WalMart to acquire for a positive story? Millions if not tens of millions of dollars. But it could have avoided all that cost for a mere $470,000.
Today WalMart is far from being a beloved company. There are those who like Wal-Mart, but there are those who don’t. For shareholders and employees, converting those that don’t like Wal-Mart into someone who does is beneficial, as it can raise sales, margins, future expectations for performance and even the stock price. As a simple business decision, why would anyone at WalMart decide to go after $470,000 when the risks are so enormous? Why not let this one go? Why do that (make the decision to sue this woman)?
Unfortunately, Locked-in organizations have no choice. When the Lock-in becomes too great, no options really present themselves. There is no room for creative thinking – even if that thinking were intended to help reach the goal. Behavior is no longer goal driven, but instead becomes executing the Locked-in Success Formula no matter what the potential outcomes. Just read this quote from Wal-Mart’s spokesperson (taken from the above referenced CNN article) "Wal-Mart’s plan is bound by very specific rules… We wish it could be more flexible in Mrs. Shank’s case since her circumstances are clearly extraordinary, but this is done out of fairness to all associates who contribute to, and benefit from, the plan." No room for flexibility, no matter the impact or outcome.
If every employee donated $.40 it would recover all the money Wal-Mart apparently saved by suing the damaged woman. But did Wal-Mart ask its employees if they would rather donate $.40 or sue her? Did anyone at Wal-Mart say "you know, this could cost us $10million in damaging PR – maybe it would be more valuable to our employees if we skipped this lawsuit." Obviously not.
When you wonder "Why did they do that?" remember this story of Wal-Mart. Locked-in organizations completely lose sight of their objective when making decisions that serve to Defend & Extend the Lock-in. And once decisions are made, the Status Quo police and all the rest of the organization jump to its defense — rather than think through what was going on. All any executive had to say was "oops, I think we blew this one. Let’s tell that to the press, drop the suit, and give this woman a $20,000 bonus while offering her husband a job in janitorial" and the bad press would have been diffused – possibly leading to a positive spin. But that’s not how Locked-in organizations behave – and that’s Why They Did That.
by Adam Hartung | Mar 22, 2008 | Defend & Extend, Disruptions, In the Swamp, In the Whirlpool, Innovation, Leadership, Lifecycle
A couple of weeks ago I blogged that the Chief Innovation Officer for Tribune Company – Lee Abrams – was unlikely to make much difference because he wasn’t given any White Space. He didn’t have permission nor resources to develop a new Success Formula – and as a result he would be allowed only to make minor adjustments around the existing Success Formula edges – a program which is way too little, too late for nosediving Tribune.
Recently Mr. Abrams was interviewed (read interview here), and the reported discussion leads me to be no more optimistic than I was before. While I grant Mr. Abrams with a lot of experience, good ideas and desire, he’s still without White Space and that means organizational Lock-in, and the Status Quo Police, will keep his efforts from yielding much improved results.
I was pleased to read that Mr. Abrams recognizes the difference in requirements between his success in radio and his challenges with Tribune. As he indicated, when he applied innovation to radio "what radio needed was discipline. It was all over the place and we disciplined it." That made a lot of sense for 1970s radio. Top 40 had ignited a huge growth wave, and the radio industry was in the Rapids. In the Rapids, businesses need to develop a Success Formula and become good at executing it so they can keep growing fast. Good business practices in the Rapids are all about Locking-In on the Success Formula and replicating faster than anyone else so you can grow the most and build the greatest resource base.
But after growth stalls it’s a whole different game. Once tipped into the Flats or Swamp successful innovation is about finding your way back into the Rapids. And Mr. Abrams seems to know that. When he took his new job at XM Radio a few years ago he had employees bring in memorabilia from traditional radio stations and he burned them! Similar to how he had a Chicago DJ bring disco records to the ball park and blow them up with explosives to mark the shift away from Disco programming! These actions were symbolic Disruptions – making people see that the past needed to be forgotten in search of a more successful future. Disruption is the first step to opening the mind, and organization, for a better future. Then it takes White Space, given Permission to truly develop a new Success Formula and resources to see the efforts through.
But Mr. Abrams isn’t blowing up any artifacts at Tribune. He sounds much more subdued as he looks to use the six smaller Tribune newspapers as "labs" to test things. He even says he "can’t do anything too radical right away." He’s not talking about necessary Disruptions. He’s talking about attempting some sort of evolutionary change within a horribly Locked-in and resource-starved company more focused on making debt payments than anything else.
Those 6 newspapers aren’t labs. The management in them is intent on making budget this year so they don’t have to cut more heads from the traditional business. Those managers are focused on saving their traditional business traditional ways. Mr. Abrams has no White Space there to develop a new Success Formula. Those papers have no spare resources, manpower or money, to spend on White Space projects. They want immediate cost savings or immediate revenue enhancements with no additional investment – and that means working around the edges for minor improvements that don’t run afoul of existing Success Formula Lock-in! If they see Mr. Zell offer resources to Mr. Abrams those newspaper leaders will be screaming bloody murder to Mr. Zell to give them the resources and they can be much more productive with them than any ideas being offered by Mr. Abrams. They won’t reject Mr. Abrams, but they will contend that they can do more short-term with the resources than he can! It will be tough for Mr. Zell to ignore those newspaper heads – after he’s cut their budgets for practically every line item!
Tribune desperately needs Disruption and White Space. I hope Mr. Zell finds it possible to really support his new Chief Innovation Officer by implementing some Disruptions. Things need to change in the newspapers, TV stations and radio stations FAST. The new leaders need to quickly Disrupt, so people realize change is expected. And White Space, with permission to do new things – radical things – as well as resources committed to their success is required. Give Mr. Abrams the tools to develop a new Success Formula and he might. But right now – he’s trying to hook a hose to the kitchen sink while rearranging the furniture in a house on fire.
by Adam Hartung | Mar 16, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
I was in Junior High when I learned about isotopes. By measuring the amount of radium in an object you could measure its age. Thus, knowing the speed at which radium degenerated gave us a "half life" of the isotopes – and with that we could judge the age of things like rocks and bones and other very interesting items.
Businesses don’t have isotopes, but their Success Formulas definitely have a half-life. New ideas develop into new Success Formulas which earn above average rates of return while growing. But, unfortunately, competitors can rapidly copy your Success Formula and the value drops amazingly fast, surprisingly far. And while the Success Formula remains, the returns don’t justify reinvestment and growth slows. Lock-in keeps the business running the old Success Formula even after its value has started declining. Great companies can fall victim to their own good management if they let the Success Formula age.
Target (see chart here) is just in the beginnings of this phase. Make no doubt about it, Target has been very well run. By introducing new ideas to discount retailing, Target took on Wal-Mart very successfully. Target grew, and it made good money growing. It was innovative, and it made innovation in housewares and clothing – at a low price – a new Success Formula within an industry long focused merely on price. Kudos to its great success, and its ability to slow the giant WalMart.
But being innovative and cheap – what’s called "cheap chic" – has been easily copied (read more here on Target and its competitors.) Lots of other very well run retailers, such as J.C. Penney’s and Kohl’s, have brought out their own innovative merchandise. Now Target is running hard-up against these companies, slowing growth and profits. Target has made product innovation it’s own Defend & Extend. Today, doing more handbags, lamps, dresses and shoes that knock off very expensive designers has become their Success Formula to which they have behaviorally, structurally and with their cost model Locked-in. It may sound surprising, but what is hurting Target today is focusing on making more of these innovations – because that is the Success Formula they are trying to Defend by Extending into more products, and their competitors are successfully copying. And there simply isn’t the same profit in that game there was a decade ago.
Some analysts are noting this, and ranking Target’s equity a "sell". I don’t blame them. Target has become internally focused on "execution" of its Success Formula. It doesn’t appear to have any White Space looking for the next retailing wave that will have above average profits. Target is squeezed between the low-cost (and completely Locked-in, do it until they die) WalMart and copycats. Unless Target quickly Disrupts, recognizing its Lock-in, and gets some White Space going the next round of handbags and red TV ads isn’t likely to do much for revenues or profits.
All Success Formulas, even great ones, have a half-life. The length of time they can earn above average returns is not dictated by the company. Rather, returns are dictated by competitors with their abilty to copy and even one-up the original good idea. And of course substitutes (like all those pesky on-line retailers that keep popping up stealing Target sales) come into the market slowing growth and hampering margins. That’s why everyone has to constantly maintain Disruptions and White Space. Otherwise, they keep optimizing their orginal good idea too long – and become too Locked-in – until even their own innovation skills become passe. You’ll never known you stayed too late at the dance until you look around and notice the band breaking set. It’s far better to keep open the White Space looking for the next party so you don’t get stuck – and watch your profits get mopped up.
by Adam Hartung | Mar 13, 2008 | Disruptions, In the Swamp, Innovation, Leadership
Sometimes the headline can sound so good. But then the article gives no reason to believe the headline.
Take the recent case of Tribune Company deciding to hire a new Chief Innovation Officer (read article here). The headline says Tribune is hitching onto a star from the radio industry to help innovate out of its huge media mess. Of course its primary business, newspapers, is declining in readers and revenues. And its television properties have declining viewership as customers shift to more targeted programming. And its radio stations with their all-talk format have been duplicated and specialized to the point that the early Chicago innovator is barely noticable and easily forgetable in the competitive fog. So innovation is badly needed at Tribune, and we all should be glad that the cost-chopping Mr. Zell is finally seeing the light!
Mr. Lee Abrams is very talented person with a lot of historical success. I’ll grant him that he may well be perfect for this job. But he’s going to fail. Why can I say that?
- Firstly, because there have been no internal Disruptions at Tribune since the budget slashing began 6 years ago and accelerated under the change of ownership. The talk is all about finding some way to Defend & Extend the old businesses. Even the article indicates the company is hoping Mr. Abrams will find some golden D&E practice that will keep the newspaper competitive in the face of mounting internet competition.
- Secondly because Mr. Abrams was not given White Space. He has not been given Permission to do whatever he wants to find a new future – even if that means getting out of newspaper production faster, or dropping out of cable TV for more internet plays. And equally important he has not been given the Resources to create anything substantially new. Face it, Tribune is a multi-billion dollar business. For innovation to matter Mr. Abrams will need billions to invest. If the way to make a fortune in the future Media industry is to create or buy the next YouTube or Facebook or Yahoo! where’s he supposed to get the money for that? Tribune is using all its free cash to pay for those hugely expensive junk bonds that financed going public. Unless Tribune sells not only the Cubs but also WGN and some other properties, then stops trying to shore up great, but dated, Chicago Tribune and L.A. Times newspapers, there simply isn’t anywhere near the money needed for innovation to make any marked difference on this company.
- This comes way, way too late as a marginal effort. Almost all the Tribune assets are in no-growth businesses. And Tribune is huge. To make a difference, it will require an enormously big shift. A very dramatic change. Not just a big cost cutting. Not just a change in advertiser strategy. Tribune can’t wait on a bunch of small projects to bear out over the next 4 or 5 years. We’re talking about needing a wholesale restructuring of the business to get out of things that are quickly losing value and making giant bets in new things. And that is very risky. This project comes very, very late in the lifecycle at Tribune. The company can see the Whirlpool on the horizon. By letting the Re-invention Gap get so large between what Tribune does and what the future markets want it has created a very risky transition requirement – and under the best of circumstances we simply have to remain skeptical.
I’d like nothing more than to read about a big internal Disruption at the Tribune. Like replacing the CEO with an executive from Google. Or a program to convert 30% of its newspaper advertising customers to the internet over 24 months – thus starting a big transition from paper to digital news media. Compare the Tribune portfolio to News Corp. and you can get a sense of the kind of Disruption needed to get Tribune into a growth mode. Sell off substantial assets NOW. There are many buyers that want to get their hands on the L.A. Times and Chicago Tribune and Cubs. Do it NOW while the greater fools are out there ready to buy. Before readership drops another 15% and ad revenues fall another 25% and the Cubs potentially end up in the cellar (who knows, we’d all love them to win the World Series – but do you build a corporate transition plan on that?). Then give Mr. Abrams that money, and announce he has permission to do whatever it takes to create a new Success Formula. I’d love to read that headline and article. But so far, really….
by Adam Hartung | Mar 12, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Back on October 18, 2006 I blogged about Motorola (see chart here) hiring a new marketing chief, Kenneth "Casey" Keller. I was pleased because in his career he had demonstrated an ability to create White Space and launch new products even in stodgy old H.J. Heinz. Of course then I was an advocate of Motorola.
I guess we shouldn’t be surprised to now learn the new Motorola CEO has let his top marketer go (read article here). Not even 2 years on the job. Motorola’s wrong turn in the mobile phone business surprised me – and a lot of other people. And why would Motorola want a Disruptive White Space kind of marketing leader when the company is backpedaling as fast as it can to old ways?
After opening the company to lots of Disruptions, former CEO Mr. Zander decided to milk the Razr letting new products slow precipitously. While Disruptions and White Space continued in the other Motorola businesses, the mobile phone division drifted quickly back into old habits – Locking-in on technology, Locking-in on distribution, Locking-in on engineering, Locking-in on old product development and launch processes. So the competition caught up, and Motorola’s profits fell out of bed.
Conventional Wisdom got Motorola into trouble. Conventional wisdom says it’s good to extend product life and milk products. Conventional Wisdom says being #1 in market share is good – which Razr clearly was. Conventional Wisdom says it’s lower cost if you Lock-in on a single technology and engineer its use into all applications. Conventional Wisdom says to listen to your distributors, which Motorola did as it cut prices dramatically to drive volume. Conventional Wisdom says to reduce joint projects if you’re #1, which Motorola did by dropping its joint product development program with Apple after launching Rokr (opening the door for iPhone launch.)
Once the profit problems hit Motorola, more Conventional Wisdom. Stop all possible projects to preserve cash. Focus on trying to find a replacement product for the one you milked to death. Redirect resources toward your biggest business, even if it’s losing money and market share. Get everyone on board to doing the same thing, and let go those who dissent. Kill all projects not clearly tied to trying to "save" the old, crippled business. Focus on the problem business, even if there are other emerging business opportunities showing great promise (like set-top boxes, new applications of commercial 2-way radios and installing corporate wireless networks.)
Firing the marketing chief shows Motorola is using conventional wisdome to try fixing its dire situation. More than ever, Motorola needs Disruptions and White Space. Motorola needs to find an outside the box solution. The company needs different kinds of thinkers, and new projects that can return growth to the company — which probably will not be in mobile handsets any time soon. Conventional Wisdom will likely lead Motorola where Conventional Wisdom usually does – down the road of Sears, Marshall Fields, Montgomery Wards, Brach’s Candies and other long-lost once great Chicago companies.
by Adam Hartung | Mar 10, 2008 | Defend & Extend, General, In the Swamp, Leadership
When was the last time you bought something at an ACE hardware store? How large was your purchase?
I grew up in a town of 3,000 people. In the 1960s we had 2 – yes 2 – lumberyards in the town. We also had a hardware store. Now, those are long gone. People drive 20 miles to a larger city, where they can buy from Home Depot and Loews. Obviously, times have changed. But out there exists ACE hardware, a company dedicated to supplying small hardware stores as franchisees. Unfortunately, it is extremely tough to figure out how to create a viable value proposition when your competition buys products at the lowest possible cost, operates a world-class distrubtion system and employees small armies of experts working part time in the plumbing, electrical and other departments.
So what does ACE do? Why, restate earnings!! (read article here) Completely ignoring the competitive situation that is, at best, gloomy, the company restates prior year revenues and earnings for ’04, ’05 and ’06. Of course, in future years the CEO will conveniently find it unnecessary to remind us that earnings for previous years were lowered as he compares current results to the past. And through this financial machination he will attempt to prolong a Success Formula that is so out-of-date it’s surprising the company is still alive!
The very next week CW announces viewership. If you aren’t familiar, CW was formed when two U.S. networks – UPN and WB – decided they needed to merge to become more competitive. Facing an onslaught of new competition niching up the cable TV market, and an avalanche of new competitors on the internet, these two networks could see that future results looked grim. So they merged in order to consolidate viewership for their strongest programs. What happened? Well, before merger the two had 890,000 + 850,000 viewers in the desirable 18-34 demographic. Now? Viewership is a whopping 750,000!!!! (Read about CW here.) Is that what management calls "synergy"? Of course, one of the biggest players in this game is the Tribune Company, which recently went private under the leadership of real estate investor Sam Zell. Apparently the news is getting any better in TV while newspaper readership continues dwindling in Tribune’s major markets like Chicago and Los Angeles.
The point? Leadership has a vested interest in making their business appear good, whether it is or not. CEOs will regularly talk about how they are doing well, and taking good decisions for investors. Why, the CEO at ACE just said that despite having to restate 3 years worth of financials the investigation found "no fraud, no missing money and no missing inventory." Sometimes, management can "spin" better than a presidential candidate when trying to make themselves look good. It’s up to employees, vendors and investors to pay very, very close attention. Financial machinations appear around us everywhere, and spurrious mergers and acquisitions often hide the poorest competitors. In the end, without a strong program of Disruptions and very active White Space businesses are at risk of failure. And the longer they delay recognizing the risks, hiding risks through various machinations, the weaker these businesses become.
by Adam Hartung | Mar 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
If you read material printed on paper (and not just stuff on your computer screen), you’ve had contact with R.R. Donnelley and Sons (see chart here.) This was one of the industrial era’s venerable companies. In the time of Lincoln, books were somewhat rare and very precious. But in the industrial era improvements in printing technology allowed printing to become everyday – commonplance. And the world’s largest printer became R.R. Donnelley. So everything from phonebooks (do you remember phonebooks?) to books to magazines to financial reports and a lot more were printed, and continue to be printed, by R.R. Donnelley.
But, you’ve probably noticed that the world shifted. We don’t read as many newspapers, magazines and books – printed items – as we used to. The web changed things. We now do company research on-line, rather than through paper-based company reports. We want analyst reports on stocks, markets, new products, technology and everything else sent via pdf download rather than a booklet. There is still a place for printed material, but every year we see the shift toward digital distribution continue picking up steam. And that is bad news if you’re business is printing. A reinvention gap is being created between businesses focused on printing, and markets consuming information from analog but increasingly digital sources.
Alas, R.R. Donnelley saw this trend and made big acquisitions in 2005 and 2006 (Astron and Office Tiger, to name a couple) to move the company into business process outsourcing (BPO). These services were, and are, growing very, very fast as companies move all kinds of back office operations from payroll to accounts receivable, HR, payables, document design, etc. into someone else’s hands. GE created and spun off a company with more than $1B revenues (and as much market value captured by GE) named GenPact to compete in this business (Genpact chart here, and info on GE Genpact ownership here). Moving into BPO was a great way for R.R. Donnelley to migrate toward the new information economy.
But, R.R. Donnelley implemented its transition all wrong. Now the company is losing money, and undertaking massive writedowns (see Marketwatch news release here.) Instead of these acquisitions closing R.R. Donnelley’s reinvention gap, the company has fallen into a growth stall – and is farther from the Rapids than before! R.R. Donnelley is stuck in the Swamp – and headed for the Whirlpool if it can’t find some growth markets to patch up its leaky boat.
R.R. Donnelley did not put its BPO acquisitions in White Space and allow them to flourish. Instead, after acquisition R.R. Donnelley leadership tried to apply company practices to these acquisitions. They tried forcing these acquisitions into alignment with old-economy management techniques currently used by R.R. Donnelley. This resulted in acquired management, those that had built revenues and profits in the new markets, quickly deciding to leave – and leaving R.R. Donnelley with floundering ventures no longer as competitive.
Since then, R.R. Donnelley has continued making acquisitions. But not in growth businesses. Most recently management agreed to acquire a company that prints newspaper inserts! Imagine that, traditional printing in the declining newspaper market! R.R. Donnelley’s current CEO is committed to old Lock–ins and efforts to try Defending & Extending the expiring Success Formula. He’s blaming the problems on his predecessor – who led the charge toward innovation, while saying – in the midst of announcing losses and write-downs – "We are pleased with our performance in 2007"! (Read this quote plus more about R.R. Donnelley’s business reported in The Chicago Tribune here.)
Investors should run, not walk, to their computers and place orders for selling positions in R.R. Donnelley. Even though the value has declined by 50%, to levels not seen for 4 years, this company is very unlikely to ever have the glory it had when running printing presses was as profitable as making railroad cars, American automobiles and selling products at Sears.
by Adam Hartung | Mar 6, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you’ve read this blog the last 2 years you know I’m no fan of Mr. Lambert and the company he runs – Sears Holdings (see chart here). I have a vested interest in watching this story, because the day KMart announced it was buying Sears I was quoted on the front page of the business section of The Chicago Tribune saying that I gave the merged company no chance of success.
Since then I’ve been right. Sears and KMart sales have declined, sales per store have declined, Sears and KMart have lost market share as retailers, and the proprietary brands (such as Craftsman, DieHard and Kenmore) have lost share. Dividends for shareholders have been nonexistent and assets have declined in market value. Thousands of employees have lost their jobs, and many vendors have lower revenue and margins. So far, there are no winners as a result of this misguided venture by Mr. Lambert.
Prior to acquisition Sears was a very troubled company. It was no longer a retail leader, and it was using all possible tricks to Defend & Extend its outdated Success Formula – to minimal avail. Then along came Mr. Lambert – himself quite Locked-in to his own outdated, industrial era Success Formula. His plans to "milk" Sears and Kmart of value to feed his hedge fund has not worked out as he would have liked (to put it mildly).
When Mr. Lambert bought Sears there was value that could have been unlocked by Disrupting and using White Space. He should have moved very fast to sell off the large real estate holdings in a red-hot real estate market. Given the disastrous situation at Sears, he should have moved fast to shut down lots of stores not competitive with vastly better operators Wal-Mart, Kohl’s, Target and J.C. Penney’s. The well known brands mentioned above could have been rapidly sold to other retailers, possibly making lucrative deals with one of the major companies. And he could have converted Sears to a much greater on-line retail company, building on the strong skills at subsidiary Lands End (while building on long ago company history in catalog retailing.)
But Mr. Lambert didn’t Disrupt, and he didn’t open White Space to quickly change Sears and Kmart. Now…… his actions are far too little and far, far too late since the likelihood Sears Holdings will ever be worth much is pretty dim. Given the sales declines, and facing a major recession, the value has slipped away and how investors will ever capture it is completely unclear. Especially as Mr. Lambert promises more of the same as he intends to cut expenses further and purchase less inventory for upcoming shopping seasons. Those tactics haven’t been working, and nothing magical is going to make them work soon.
Mr. Lambert is now blaming the horrible condition of Sears on economic conditions – "Despite the perception during the first two years that we were not focused on growing our business, we were planning to do just that in 2007…. we did not foresee the severe economic turbulence ahead." (read article on current Sears conditions, and the source of this quote, here) Give me, investors, vendors and employees a break! This is simply making an excuse for the future while refusing to acknowledge the value destroying decisions previously made! Sears has gone down, not up, ever since this acquisition was made – and that can be blamed fully on Mr. Lambert. It was his job to prepare Sears for the future, not blame the future economy for his failures. If we were back when Sears was first founded, it’s safe to say town leaders would be tar and feathering Mr. Lambert and running him out of town on a rail — but then, of course, Mr. Lambert doesn’t live in Sears’ hometown of Chicago – he’s ensconced in New York where he doesn’t feel the pain his demonstratively lousy business decisions have created.
Postscript – readers should keep in mind that it’s been only about one decade – on mere short 10 year period – since Sears was one of the 30 Dow Jones Industrial Average companies. We should all remember how very fast companies that remain Locked-in to outdated Success Formulas can move from the Flats to the Whirlpool. Sears’ fall has been swift. Don’t ever think the past can protect you into the future – let Sears remind you just how fast failulre can sweep over any business, no matter how large and previously successful!
