by Adam Hartung | Aug 15, 2006 | General, In the Swamp, Lifecycle, Lock-in
Today WalMart announced that for the first time in a decade it’s quarterly earnings actually declined. The stock is down again, remaining a very poorly performing equity investment since the company peaked back around 2000. Since then, investors have not been rewarded for staying with the Locked-In strategy of the world’s largest retailer.
Did you see it coming? You should have. For over a year this blog has been pointing out that Wal-Mart is horribly Locked-in to its old ways, and unwilling to use White Space to create a new Success Formula. Although it’s impossible to predict the day when things will demonstrably go south, it isn’t hard to predict the trend if you pay attention to White Space – or lack thereof.
When announcing these poor results, Wal-Mart blamed high gasoline prices. Let’s see, for 3 years now we’ve had high gas prices, and Wal-Mart has blamed petroleum costs for its problems. You’d think by now, if management was as good as it claims, the company would have adjusted to the reality that gasoline is most likely to remain expensive. At the very least, they should have executed contingency plans to react to such a market Challenge. Instead, they plod forward with the same Success Formula, fail to meet expectations, then blame circumstances that they long ago should have planned for and dealt with.
Worse, Wal-Mart leadership blamed this specific quarterly failure on selling off WHITE SPACE projects in Germany and Korea. Wal-Mart is a company that desperately needs to find a new future. To overcome its Lock-in. Yet, once again, we see they have decided to exit markets where they should be learning and growing. If they can’t succeed the Wal-Mart way, then they leave. If there was ever a big, bright red flag that says this company is in trouble, missing earnings forecast while exiting White Space and blaming the cost of White Space for their earnings problems – while ignoring market challenges like high oil prices – has got to be it.
This should be a clarion call to avoid this company as an investment, as an employer, and as your primary customer – unless you want to suffer prolonged poor performance. If they miss forecasts again next quarter they will officially enter a growth stall, and that will put them in the category of having less than a 10% chance of ever maintaining growth of a meager 2%. The chances of a turnaround are nil, simply due to demonstrated Lock-in, and the odds of a growth stall just jumped dramatically.
by Adam Hartung | Aug 9, 2006 | Defend & Extend, General, In the Rapids, In the Swamp, Innovation, Leadership, Lock-in, Openness
Once again we have the opportunity to view the tale of two companies. Both troubled, yet capable of success if they do the right things.
Motorola was struggling a few years ago. Then, a new leader came on board and started Disrupting the old Success Formula. Simultaneously, he opened up White Space all around the company. Sales went up, and so did innovation. While everyone knows about the success of RAZR, Motorola also built its business in digital video recorders and networks. Now, today, we learn that Motorola has further grown its success, winning a $3billion deal to build out a wireless data network for Sprint/Nextel. (See full article here.)
Sara Lee found itself also struggling a few years ago. They also hired a new leader. But this leader chose to disturb the organization without really changing the Success Formula – focusing on cost cutting and selling businesses without creating any new White Space. Now, today, we find out that the leader is conceding she won’t meet her margin goals (even as the business shrinks more than 50%), and isn’t really sure when the company will be growing again. (See full article here.)
Motorola is up over 30% in market value. Sara Lee is down more than 30% in market value. Those who read this blog know that I was a very early fan of Motorola’s turnaround, and recommended it as an investment. They also know I’ve been a longstanding pessimist of Sara Lee. Why? It’s as simple as White Space. At Motorola you could observe a leader attacking the Lock-in and implementing White Space. At Sara Lee there was no attack on company, or industry, Lock-in to old formulas and there was absolutely no White Space.
A successful turnaround absolutely requires fast action to Disrupt and implement White Space. It is the single best predictor of whether a company will overcome its growth stall, or not. Any time you need to decide whether to invest in, join, or supply a troubled company follow one simple rule – Follow the White Space.
by Adam Hartung | Jul 22, 2006 | Disruptions, General, In the Swamp, Innovation, Leadership, Openness
Everyone wants an evergreen company – one that is constantly growing and self-renewing, generating more revenues and profits year over year. One such company is Illinois Tool Works. Have you heard of it? Do you know what they do?
One of the most important things ITW does is avoid Lock-in. ITW has no fixation with core markets, core customers, core products nor core competencies. In fact, the company is a collection of over 600 small businesses around the world, in a wide range of businesses. They don’t seek imagined synergy and push for consolidations and mergers, instead allowing each business to each maximally develop their customer opportunities and markets. Headquarters does not dictate the strategy or markets for these businesses. ITW doesn’t even try to limit its businesses to being in similar markets, functions, technologies or product lines.
What ITW does is consistently grow, and consistently make more money. For 90 years. Revenues grow at about 10%/year, earnings at about 15%/year and earnings per share about 14%/year.
How? Like I said, the company first and foremost avoids Lock-in. Leadership isn’t trying to follow fad definitions of new markets, or catch the latest wave of analyst hot buttons. They disrupt themselves by constantly looking into new markets, new technologies and new product opportunities. They don’t focus their acquisitions on cutting products or quickly generating more money with cost reduction, instead relying upon customers to help define how they can improve market performance leading to financial performance. By not seeking "optimization" of their acquisitions (like Tyco), they remain constantly in a disruptive state of enquiry. And each and every business is allowed to operate in its own White Space – free of dictates from a hierarchy or home office about how to succeed. Results are what matter at ITW – not slavish response to structural or behavioral Lock-ins.
And the company lauds innovation. Innovators are sought out, and rewarded. ITW is one of American’s largest patent filers, and patent holders, and it works hard to maintain that position – even if you’ve never heard of them. They want White Space projects in their businesses, and they reward the efforts as well as the results.
ITW defies all the rules of best management practice. They don’t optimize. They don’t "focus on the core." Instead they live without Lock-in, constantly innovate and Disrupt, and allow White Space to flourish all over the company. And for that they achieve innovation on the scale of an IBM, and returns like an old-fashioned (Jack Welch era) GE. And the result is an Evergreen Company that grows beyond average and makes above average rates of return.
by Adam Hartung | Jul 16, 2006 | Disruptions, In the Swamp, Leadership, Lock-in
There has been much written lately about Carlos Ghosn. Some are thinking that with Kirk Kerkorian’s urging, this fellow is likely to be the next head of GM. Of course, there’s a lot required for this to happen, but would it make any difference?
Mr. Ghosn is considered an auto industry turnaround expert. How? Does he ride in with a program to slash costs by cutting marketing and R&D and killing new products – vis-a-vis Chainsaw Al Dunlap of Scott Paper infamy? Does he randomly implement across the board cost cutting? Hardly.
At Nissan, he quickly disrupted the company by killing off the Japanese keiretsu system of long-term relationships.. This opened the door for a dramatic series of actions which threw the company into White Space. For example, new competitive bidding teams were created for sourcing, and a wave of innovation programs were started. In one year, the company went from a loss to a record profit. That has been followed with 6 years of record profits.
Never one to stop disrupting, Mr. Ghosn recently took the dramatic action of moving Nissan’s U.S. headquarters from Southern California – the legacy location of headquarters for all Japanese auto companies – to Nashville, TN, much closer to the company’s plants. While this has upset a lot of industry watchers, there is no doubt he has used the move to change the leadership and the processes of Nissan U.S.A.
If he follows the same plans at GM, Mr. Ghosn could be a tremendously beneficial change for America’s largest car company. Like Ed Zander when he arrived at Motorola, Ghosn is likely to Disrupt the status quo, and implement White Space. Being a master disruptor is one of the most valuable traits of a good leader. Especially one needing to turnaround a behemoth. Just look at the Disruptions implemented by Lou Gerstner at IBM, which saved the company from the brink of disaster.
Given the incapability of GMs leadership to attack its Lock-in and create White Space for generating future opportunities, there is no doubt change is needed. Given his record, Mr. Ghosn would make dramatic change in GM by attacking its Lock-in and implementing White Space. And that would be good for everyone. If Mr. Ghosn gets the top job at this venerable company, give investing in GM another long hard look.
(Link here for more information on Mr. Ghosn courtesy of the Chicago Tribune.)
by Adam Hartung | Jul 8, 2006 | Disruptions, General, In the Swamp, Leadership, Lifecycle
General Motors has seen its stock value grow almost 40% in the last 3 months. Why? Many analysts and investors believe that GM management has been Disrupted, and is moving into White Space for new solutions to its problems.
Is it for real? Well, first the Disruption. Kirk Kerkorian bought almost 10% of GM and then put his representative on the Board. As outsiders, they have been screaming for change in how management leads the company. And it has started making a difference, as GM has started doing several things differently.
GM has changed some of its approaches to workers. Its recent employee buyout was 30,000 oversubscribed indicating a successful tactic for both the company and labor. And, GM is working with Delphi (its largest parts supplier) and the union to create a unique solution to the bankrupt company’s problems. Lastly, GM leadership is now entering talks with Renault and Nissan to possibly create a new merged company.
Successful White Space requires (1) permission to discover new solutions outside the historical Lock-in. This seems to be happening in some of these fledgling projects. Successful White Space also requires (2) committed resources in advance to develop the new Success Formula. That we have not yet seen. While there is progress being made to sell GMAC and raise additional cash, we haven’t yet seen the commitment to actually invest in White Space and create a more competitive future. Until we see management internally Disrupt itself, following Mr. Kerkorian’s lead, we won’t likely see real investment or commitment to creating a new Success Formula.
If the outcome of negotiations with unions, and other companies, is just more cost reduction in support of the old Success Formula then Mr. Kerkorian’s Disruptions will be for nought. Combining GM, Renault and Nissan just to achieve additional "scale" will do no more to create value than combining KMart and Sears. What’s required is the creation of a new company that is more attuned to customers, designs cars better, gets them to market faster and creates more profit on smaller unit volume. And that will require lots of White Space projects with wide permission to change and extensive resources.
by Adam Hartung | Jun 28, 2006 | Disruptions, In the Swamp, Innovation, Leadership, Lock-in
Readers of this BLOG know I have been no fan of Roger Deromedi and Kraft. So, you probably think I’m delighted with his ouster this week by Altria (effective parent of Kraft). Actually, I’m unconvinced whether it will matter.
There is no doubt that Kraft was locked-into a Defend & Extend strategy which was producing declining results. The stock price had declined 30% since 2002, and the CEO had no plans for growth. Deromedi laid off 14,000 people and closed 40 factories in 2.5 years. His plans could be summed up in his own quote "strong execution of our strategies will deliver improved results in 2006 and beyond." Just like it had done in 2004 and 2005 – right. Obsessing about execution is one critical telltale signal of a failing, locked-in strategy. There was no plan for growth, sooner or later, as he kept selling brands and investing more money in no-growth categories like cheese. The Chairman of Kraft, currently the CEO of Altria, finally realized that there was no interest in an independent no-growth Kraft, so he’d better make some changes or the spin-out of Kraft was never going to be completed.
But, what’s needed at Kraft is a Disruption to the Lock-in, and replacing the CEO is more of a Disturbance than a Disruption. Changing the CEO doesn’t inherently change anything beyond the sign on the door. And the new CEO, for all the praise now heaped upon her, is a 20-year returning veteran of Kraft. She spent barely 1 year running Frito-Lay, so despite her $2.5million compensation, she wasn’t there long enough for us to know what difference she made, or might have made.
We do know that she left the job running Kraft North America, which was a $30B revenue business to later run Frito-Lay, only a $10B business. That indicates she was no fan of Deromedi when she split, nor most likely of his then co-CEO Betsy Holden. Nonetheless, her career was a pretty straightforward development up the management ranks of what has long been a low-innovation enterprise. But is she ready to create some growth engines inside this behemoth? Does she know how?
Top marketing gurus around Chicago have weighed in, calling for the first steps to include changing the culture toward product innovation from brand extensions, and using portfolio planning to milk some brands for cash while investing in growth with other brands and a refocusing on innovation and new product launches.
What is required, as I said earlier, is a Disruption. Kraft must stop viewing itself as being self-satisfied, and realize there are external Challenges to its brands and its business. Older Americans are changing their diets to live longer, and younger Americans no longer look to these old brands when thinking of meals. A great past does not assure a great future – just look at Brach’s candy company (bankrupt), ConAgra or Sara Lee (themselves drastically downsizing). The new CEOs first step must be to avoid reassuring the people of Kraft, and rather to hlep them see that these Challenges are placing Kraft – soon to be an independent company – at risk of having a viable future. There is no growth in Kraft, and without it the company is doomed to a very unhappy competitive reality.
And she must Disrupt Kraft. The mechanisms which keep Kraft acting like Kraft. She needs to attack Kraft’s critical metrics, its hiring practices, its centralized decision-making processes, its arrogant approach to retailers and end-users, its focus on "do no harm" brand tactics, its rewarding of "farmers" and punishment of "explorers" in the workforce, its deep hierarchy that vets out ideas which don’t look like guaranteed wins (and thus little more than extensions of old businesses), and its obsession with cost reductions. Of course, not all of these should be attacked at once. But, she must attack them. She must identify the Status Quo Police and reduce their numbers while gutting their influence – be they in finance, HR, or marketing. She must create a pattern interrupt in Kraft; she must Disrupt the old Success Formula.
And, she must put in place White Space. Something completely lacking at Kraft. We need to see her create project teams which have explicit permission to behave differently, outside the old Lock-ins. And she must show us that she is dedicating resources, in advance, to these teams so they have the wherewithal to actually create new Success Formulas for the company.
We must keep our eyes on Kraft. When Mr. Zander joined the cross-town company Motorola he too faced a seriously Locked-in organization. Yet, within only 6 months he effectively Disrupted Motorola and put in place White Space projects that almost immediately began changing the fortunes of the company. Let’s hope Ms. Rosenfeld does the same – so Kraft can once again take its place among the leading consumer goods companies of the world.
by Adam Hartung | Jun 23, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
As readers of this BLOG, you know that I find McDonald’s a risky company that is horribly Locked-in to its old Success Formula. So, I wasn’t surprised when I recently read about McDonald’s latest plan to grow.
McDonald’s is planning to pump up sales by opening a series of drive-through units in China (see Chicago Tribune article.) Sounds like a decent idea you say? Well, let’s see, only 10% of all food in China is eaten out (and 90% of that comes from full service restaurants.) People in China don’t view their cars as eating places, and they still prefer to sit together and eat. The largest western food chain in China is KFC (remember that the next time someone says Asian bird flu is a detraction to their sales), with about 3x the number of units McDonald’s has.
But McDonald’s is ready to predict great success. Why? Well, firstly 74% of people in the U.S. get their McDonald’s from a drive-through, so surely the Chinese will do the same thing – right? (Lock-in #1, people want drive-throughs). Secondly, they have found a company willing to be their partner, the state-owned gasoline retailer, so that insures success – right? (Lock-in #2, McDonald’s is a franchising company so it loves partners that will roll out units for it.) McDonald’s has to be appealing to the skyrocketing Chinese middle class, who are buying cars like won-ton noodles, right? (Lock-in #3, the McDonald’s brand is appealing to middle-class consumers globally.)
McDonald’s has passed on a number of growth opportunities. Remember the hot growing Chipotle’s chain that McDonald’s shipped out the door? Remember the McCafe concept that was to challenge Starbucks but that can’t get beyond 30 units opened? The fact is that McDonald’s will only attempt growth ventures which fit inside its Lock-in. Will the Chinese venture work? The odds look long given the approach McDonald’s is taking. Only when viewed through the lens of McDonald’s Lock-in does this venture look like something to brag about.
Cut cost, extend product lines and go to new markets – that’s the same strategy Krispy Kreme said would turn around their lagging fortunes. That was before they went bankrupt. There’s nothing insightful about that strategy, and it’s not likely to put the fizz from its soda into McDonald’s stock price either. It’s a Defend & Extend strategy, when what McDonald’s needs is more White Space, the ability to listen to changing market needs, and some really new ideas for growth.
by Adam Hartung | Jun 10, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
DJIA member, and industry leading pharmaceutical company Pfizer has had a rough go of it the last 4 years. While revenues are up from 2001, they were flat in 2005 signaling a growth stall. This had been predicted since 2001, as earnings have been highly erratic over these years. Company value peaked in the late 1990s, and since then investors have lost half their value.
The Challenge at Pfizer is the same malady affecting several other big pharma companies. Their strategy to rely on blockbuster drugs, those that address widespread human conditions (such as male impotence), has left them see-sawing between enormous investments and difficulties getting approvals for sale through the FDA – as well as losses from rushing drugs to market that have later been found not as safe as promised. While there are lots of other opportunities for these companies to grow, many of them keep trying to find the next "blockbuster" and their growth is erratic.
Pfizer’s latest reaction has been to sell their consumer goods business. Even though the business has been growing at a strong 10%/year, and has an 18% operating profit, management has said the business is "non core" and thus they want to sell it. Not many consumers who need Benadryl, Zantac, Rolaids, BenGay and Rogaine think of these products as "non core," but for some reason Pfizer now does.
Management’s real objective is to generate additional cash in an effort to Defend & Extend its poorly producing old Success Formula. Rather than Disrupting their old, and struggling, Success Formula, Pfizer would rather sell a great, growing, profitable business in an effort to make another stand for what the company has always done – even if there is no reason to believe it will be more successful in the future.
Pfizer has $52B in revenue. Their proceeds from the sale will be $14B. That’s before taxes – which could be half the proceeds. But rather than trying to grow this business even faster, they are ready to sell it to Glaxo SmithKline or Johnson & Johnson. Both of these companies are huge as well, but both of them know how to recognize a pearl in the oyster bed. They are ready to grow what Pfizer won’t.
Normally, the investors in selling businesses come out the winner. But in this case, the buyers are the winners. They are getting great brands in a great business with opportunities to increase their growth rates simply because the current owner is too Locked-in to its "blockbuster" addiction to unleash the value in its own assets.
This is too bad for Pfizer’s shareholders. They get a relatively small amount of cash and they give up a potentially high growth business. And all because leadership is focused on its short-term problems, rather than the long-term Challenges to its Success Formula. And thus Pfizer leadership is Defending & Extending a struggling model, hoping to regain past glory, instead of using Disruptions and White Space to create new value.
by Adam Hartung | Jun 5, 2006 | Defend & Extend, Disruptions, In the Swamp, In the Whirlpool, Leadership, Lock-in
I talk a lot about the deadly impact of growth stalls. Whenever companies suffer two consecutive flat or declining quarters, or a year-over-year decline, I call that a growth stall. And the results are deadly, with fewer than 10% of these companies ever achieving sustained growth of 2% again.
I’m often asked if two quarters, or year to year comparisons, aren’t too short. After all, I preach on the importance of White Space and using transformations for long-term good health. Aren’t I supporting the short-term thinking that gets leaders into trouble?
My answer is no. Leaders and managers must be impatient for results. The world moves quickly, and it takes precious little time for a company to falter and fail. Take for example Sun Microsystems. This was a high-growth tech company for 20 years and a big winner in the internet boom of the 1990s. But now the company has seen 4 consecutive years of declining revenue. It’s value has been lackluster that entire time as well. And now it has announced it is planning to cut another 4-5,000 jobs in an effort to find profitability.
Investors and managers can’t wait 4 years for improved results. In fact, they shouldn’t wait at all. If a company can’t grow, it will atrophy and eventually falter. The purpose of Disruptions is to constantly challenge Lock-In to old Success Formulas, and the purpose of White Space is to identify new opportunities that can create long-lived growth. The problem is that too many companies try to milk the Lock-in, and they wait too long before they Disrupt and seek White Space. They confuse short-term optimization of an old Success Formula with the requirement to continuously identify and develop growth opportunities ad infinitum.
When it was doing incredibly well, Sun Microsystem decided the right strategic action was to "identify its core strengths" upon the recommendation of Gary Hamel. Scott McNealy said the company’s future was "selling iron" (his macho-speak for selling computer server hardware.) As a result, Sun never moved into networking gear, like Cisco, or network software like Google. Also, Sun was pushing boxes so hard it missed the Challenge Linux placed on its own Unix software. Sun was a hot player in the center of the action, but by "sticking to its core" it wasn’t prepared when the marketplace determined it had sufficient server capacity and good a good software alternative. It’s market started collapsing. And Sun wasn’t prepared to move to the next market opportunity. The first two declining quarters led to nearly 20 declining quarters.
The best time to Disrupt and fund White Space is when your business is doing well. It is then that you can clearly evaluate new Success Formulas without the crisis of declining revenue making you "bet the company" on limited options – and do so quickly. By the time you see two consecutive bad quarters, or year-over-year revenue declines, the business is already stuck in the Swamp and well on its way into the Whirlpool. It might not look that bad, but it already has almost no hope of ever growing again.
by Adam Hartung | May 31, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Last week a phase ended when the top execs at Enron were found guilty of crimes related to the downfall of Enron. The are likely to spend the rest of their lives in prison for "white collar crimes." Unfortunately, those crimes cost investors, employees and suppliers billions of dollars. No longer is "white collar crime" considered something easily forgotten.
It was a year ago that I blogged about the fall of Bernie Ebbers at Worldcom (see Dieing for Results). At that time I mentioned that executives can easily find themselves committed to Defending & Extending old Success Formulas – leading them to be sure they’ve done nothing wrong despite the havoc they’ve visited upon so many. The downfall of executives Lay and Skilling give an exclamation point to that blog. They maintain their innocence because they continue to believe that their Success Formulas cannot be wrong.
More troubling than Enron last week was the $400million fining of Fannie Mae. An organization created by congress in the 1930s to help supply mortgages for all Americans was found guilty of acting "arrogantly and unethically" by creating an environment "where the ends justified the means." Top management "manipulated financial reports to win ill-gotten bonuses in the hundreds of millions of dollars." (see report and full text in the Chicago Tribune.)
Have business leaders all turned unethical? Since 1990, the number of classes on business ethics has skyrocketed, and the number of articles on the same topic has grown geometrically. It’s doubtful that any of these leaders think of themselves as unethical – especially as they spend millions defending themselves. And they go on television proclaiming their innocence.
Rather, its an issue of personal Lock-In to old ideas of executive Success Formulas. Executives see themselves as working hard to do what will increase the value of their companies, and themselves. They all protest "I’ve broken no laws" as investigators, prosecutors and reporters tell of how their poor decisions cost billions while sometimes personally enriching themselves. It is their Lock-in to the old notions of what an executive can do that makes them convinced they are not responsible for the damage they’ve wrought.
We all have personal Success Formulas and personal Lock-ins. As leaders, these personal views often spill out into the organizations we manage. If we are unable to see Challenges to our personal views, we are unable to Disrupt ourselves and use White Space to develop new Success Formulas. For leaders, especially in large organizations, this can be very expensive Lock-in to the thousands of investors, employees and suppliers who depend on the company’s future ability to succeed.
