by Adam Hartung | May 31, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
This week one of America’s great media companies jumped nearly 10% in value. The Tribune Company – owner of the Chicago Tribune, Los Angeles Times, WGN superstation, the Chicago Cubs and other great assets – announced a significant stock buyback. After falling nearly 40% over the last year, the stock made jump up. Does this signal a good time to own this venerable company?
The Tribune Company announced that it was going to borrow a lot of money, and use the proceeds to buy back its stock. It will sell some assets, but not most of them. There is no plan for a significant restructuring. Nor a big change in the business. The company said its value is understated, so it is going to borrow money, crash its debt rating, and use the money to hopefully resurrect its moribund valuation.
Will this address the issues which has caused the 40% devaluation? Let’s see, large display advertising customers, such as auto and movie studios, have moved 20 to 40% of their newspaper advertising to Google and other on-line sources. Classified ad customers are finding good service at much lower rates at CraigsList.com and Autotrader.com. In entrenched markets like Baltimore, where the Tribune operates the Baltimore Sun, the well financed Examiner paper is entering the market stealing advertisers.
The Tribune’s actions are an example of Defend & Extend Management. Management knows that the low valuation makes them a target for corporate raiders. So they load up on debt in order to keep the outsiders from trying a takeover. Meanwhile, the company strategy is to change very little. And that is unfortunate, since the marketplace has significantly shifted since the Tribune became an industry leader. Such Defend & Extend tactics will not create value for investors, and shows a much greater probability of significantly weakening a company already under attack from "new media" Challengers.
What would be good to see would be more White Space at the Tribune. Rather than a disturbance, which may well lead to complacency, a real internal Disturbance demonstrating that the company recognizes serious change is needed. And White Space that is funded, and given permission to develop a new Success Formula for the company. Since we don’t see those things, it’s unlikely the company will sustain its recent valuation improvement.
by Adam Hartung | May 24, 2006 | In the Swamp, Leadership, Lifecycle, Lock-in
I love to watch soccer. A very popular sport around the world, it’s popularity is gaining every year in the U.S. Part of the game’s allure is how players will work, and work, and work to move the ball around the field for many minutes – always looking for an opportunity, a crack in the defenses – and then its POUNCE – GO, GO, GO – and if they execute within seconds its a score. And in soccer, often a single goal makes all the difference between winning and losing.
This happens in business as well. There can be extended periods of competition without enormous change. But then, a crack develops, and its time to POUNCE – GO, GO, GO.
The time is now for manufacturers of home appliances. After months of haggling with the government, Whirlpool has acquired Maytag. And the company strategy? Why, to gain synergistic cost benefits by closing the old home office, various plants and laying off thousands. In other words, Whirlpool has publicly committed to a Defend & Extend strategy, which it plans to execute for the next several months. And, since its earnings aren’t what they’d like, they have no choice but to stay committed to this strategy.
So, what should GE (and other appliance manufacturers) do? POUNCE. All of this D&E behavior, including pushing to common systems and focusing on old assets, is creating an enormous opportunity to change the game. Whirlpool will be working hard, but it will be strategically complacent. For the company to succeed it relies on competitors to sit still and let them create the future as a projection of their past. Thus, now is the absolute best time for the competitors to not behave that way. Now is the time to bring out new products, to implement new pricing schemes for retailers and consumers, to increase the ante in advertising and promotion. Anything that will Challenge the old marketplace and evolve it to a new level of competition.
When Whirlpool is least able to do anything about it.
Being Locked-in makes you a competitive target. Once you commit to an old Success Formula, your competition can use it against you. Prepared companies will have White Space projects operating that they can blow into the market and tear the heart right out of your ability to compete. Now is a very risky time for Whirlpool. It’s a great time for their competitors.
by Adam Hartung | May 24, 2006 | Defend & Extend, In the Swamp, Leadership, Lock-in
According to an old Greek legend, thunder was the sound of giants falling in battles in the sky. There’s been plenty of thunder in the tech world lately. Dell Computer, not even a decade ago considered one of the most admired American companies, has seen its market value decline by more than 40% since last summer. Over the same period, Intel has fallen by almost the same amount.
Both of these companies have the same problem – they focused on optimizing their strategies too long, and they have missed important market shifts. They let their Lock-in to an old Success Formula keep them from installing White Space to keep them evergreen.
Dell has long said it has the best supply chain in its industry. It prided itself that it could take an order, make the machine, ship it and get the cash before it had to pay its vendors. Companies globally marveled at this optimized machine, and sought insight to copy it. But, now competitors have learned to copy Dell – and Dell has not developed any new markets that will allow it to continue its growth in revenues and profits. Earnings are down, and there’s no obvious plan for a turnaround. The company CEO has said that he plans to invest more in the same old business model, hoping results will turn around.
Meanwhile, "Intel Inside" – the famous tag line, isn’t on as many boxes as it used to be. Long suffering, and much smaller rival AMD has been winning over customers from Intel. Although this is largely in high-end multiprocessor servers (rather than desktop or laptop PCs), and AMD still only has about 20% of this market, people are legitimately concerned that Intel may really suffer, as once predicted by its famous CEO Andy Grove when he said that "Only the Paranoid Survive." Even stalwart Dell, long a 100% Intel user, has switched to AMD of late.
Both companies point to just how easy it is for even very successful companies to succomb to Lock-in on their old Success Formula. How easy it is to overlook market Challenges as they focus internally on optimization. And, how they can begin Defending & Extending the old Success Formula rather than seeking Disruptions to it and maintaining aggressive use of White Space to spur innovation and maintain growth.
Just like Wal-Mart, any company can become too focused on its Success Formula – even those in high-tech. History has shown that when this happens, the future risk is incredible. Remember Compaq, DEC, Wang, Unisys – and even what happened to IBM in the 1980s? Dell and Intel must react to their market Challenges quickly, because if they stall the losses this far are just a start to what could be an even more painful decline.
by Adam Hartung | May 16, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you want your business to be a success, attracting employees and investors alike, there’s a simple solution. You need to both grow and earn an above average rate of return. It’s the ability to both grow and make money that is attractive. But for too many executives they see these as a trade-off. And they give up growth in the pursuit of profits.
Do you remember the advertising jingle "Nobody Doesn’t Like Sara Lee"? Well lately, a lot of people have taken to not liking Sara Lee. The company has lost about half its value since the late 1990s, and it is currently valued about where it was in the mid-1990s. Since installing a new CEO and turnaround team about a year ago the company’s investors have not be encouraged.
The new leadership has chosen to implement an aggressive asset sales campaign. Rather than Disrupt the failing business by attacking Lock-in and creating White Space to innovate new solutions, they chose to try and sell their problems to someone else. They also began closing plants as they blamed poor results on industry overcapacity. The result has been disappointing prices for these assets, as others refuse to pay high for troubled brands and businesses. The executives chose to stick with their old Success Formula, despite the poor results, claiming the payoff would be in the future.
The asset sales have continued, but the results have still not materialized. Earnings have dropped 78%, and analysts such as Morningstar are saying that Sara Lee is struggling to capture any benefits from its restructuring. Nonetheless, the new management team is convinced it can follow classic industry practices, such as changing its ad campaign on Jimmy Dean Sausage, in its jouney to find improved results. The executive team is adamant that they must stick to their original plan.
So revenues are down, employment is down, valuation is down – and earnings are down. All in the quest for a quick improvement in profits. And there is no growth, as Sara Lee is making itself significantly smaller. Profits vs. Growth is destroying Sara Lee. What they will have to do is realize that what’s needed is a Disruption, an attack on the industry Lock-ins that are driving this failing program, and implementing White Space where they can find a new solution – if they want people to once again like Sara Lee.
by Adam Hartung | Apr 28, 2006 | Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
Believe it or not, in 1985 Apple sold more personal computers than all the Microsoft-based machines combined. Hard to imagine that 20 years later. By the mid-1990s almost everyone in TechLand considered Apple a non-player. Apple had become a small, niche company with limited customers using their machines for only particular applications – usually graphic intensive. Microsoft had "checked" Apple by the mid-90’s, and the vast majority of investors had considered the game over.
However, today Microsoft revealed a serious stumble. They have announced (see article) that costs are up, and profits are not going to meet expectations. Not this year nor next year. Microsoft investors have gotten nothing (other than a one-time $3 dividend) for holding their investment for the last several years. The company’s stock price reached current levels way back in 1998. Microsoft has stalled, while Apple is in the throes of a great renaissance. Apple’s value is up 2x to 3x over the same timeframe.
Not many companies do what Apple did – coming back from the brink of failure. But those that do rely upon the techniques Apple used. An internal Disruption used to face up to market Challenges, followed by installing White Space which is used to identify and develop new opportunities.
Lots of companies do what Microsoft is doing. During the heyday, high growth environment for PCs, from the 1980s through the 1990s, Microsoft developed a Success Formula. As it grew, Microsoft Locked-in that Success Formula with its culture, its structure and its costs. Microsoft optimized itself around the market conditions (the environment) that helped it succeed and grow while its first market was in rapid expansion.
Now, the markets are changing. This is creating new Challenges. Apple is using Disruptions and White Space to react to these Challenges and create enhanced value (for employees, suppliers, customers and investors). Microsoft is busy trying to Defend & Extend its past Success Formula. It’s trying to use its old skills to take on emerging new Challengers Google and Yahoo!. Microsoft is stalled, and if it doesn’t follow Apple’s lead, Microsoft could end up in with even more serious problems.
Any company can stall. All it takes is Lock-in to an old Success Formula. Then, a market shift can open the door for new competitors. The answer is to Disrupt yourself and use White Space to find a new Success Formula that meets new market requirements. Not "more, better, faster" of the old Success Formula – that leads to rising costs, poorer returns and the unlikely hope that the past will repeat itself.
by Adam Hartung | Apr 21, 2006 | General, In the Rapids, In the Swamp, Leadership, Lifecycle, Lock-in, Openness
Wow, have you seen the share price of Google? Google’s value has more than doubled the last 12 months, and risen about 5-fold since going public some 21 months ago. Why is this happening? Simply because revenues are more than doubling annually, and profits keep exceeding everyone’s expectations; including management! Google is into the Rapids. After fighting to create a viable business model, it is now exploiting its advantages in traditional, and new markets, every month. It is winning share versus competitors (such as Yahoo! and Microsoft), while it is entering new markets and launching new products. Google is living in White Space, and exploiting its advantages.
Yahoo‘s valuation has remained flat over this period. And Microsoft has also failed to gain value. Why? Aren’t these great high-tech companies? Yes they are. But unfortunately, for the last two years they have been trying to Defend & Extend their old Success Formulas. Their management has fallen into the "me-too" category with its products, and has failed to find new markets. These companies have been great companies, but they are Locked-in to what first gave them market dominance, and they are missing the opportunities Google is finding.
Lock-in can affect any company, causing it to lose sight of the prime objective – growth leading to enhanced results. Poor Kraft has been stuck for 5 years, and despite owning some of the greatest names in consumer products managed by some of the industry’s most talented people, it can’t find a way to overcome focus on its past. Thus, its sales don’t grow and its value remains – stuck.
As we can see, this phenomenon is not limited to older companies, like Kraft. Even worse than Yahoo! and Microsoft has been Sun Microsystems. An early pioneer in developing servers for corporate and internet use, Sun got so locked into its formula of selling boxes loaded with their own software that the company almost went bust. Sun’s value is only about 7.5% of what it was a mere 6 years ago. Despite being the dominant hardware supplier at the time, and one of the most important companies for launching the internet.
Creating success has the same requirements, no matter what industry you’re in. Disrupt your Lock-in, maintain White Space to explore new opportunities, and above all – fight the urge to focus upon Defend & Extend.
PS – Eric Schmidt is the CEO at Google. Did you know that when Sun Microsystem peaked, he was the company Chief Technology Officer? When all looked good at Sun he went to Novell where he led a turnaround of what many thought was a dead networking company. Oh, and before Sun Eric had been an academic – not in business but in computer science. And an R&D geek at Xerox PARC, Bell Labs and Zilog. Eric is a great example of a person who avoids Lock-in, Disrupts himself and keeps looking for White Space where he can grow. The Phoenix Principle is as important for individuals as it is for work teams and businesses.
by Adam Hartung | Apr 16, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
If asked to name the world’s top operationally excellent company, one name you would have to consider is Wal-Mart. From humble beginnings, a relentless focus on operations led this company to become the world’s largest. For two decades Wal-Mart has been THE model of supply chain management, inventory reduction, procurement excellence and using technology in support of its operational goals. Wal-Mart has out-retailed every retailer, and become a huge success.
Wal-Mart’s profits have risen consistently for many years. The company’s stock, however, has not done as well. Between 1997 and 2000, the stock went from $10/share to $70/share. Since then, however, WMT has had a series of lower highs every year. Since early 2005, WMT has been a laggard of both the DJIA and the S&P 500. The problem has been a declining price-earnings multiple, as investors wonder how Wal-Mart will continue growing. Yes, profits are up, but how will the world’s biggest company grow?
How has Wal-Mart responded? By increasing its focus on operational excellence! The latest efforts are intended to cut inventory even further. Reducing the numbers of items carried, and risking out-of-stock items in the store. Wal-Mart is willing to have customers not find goods they want in order to even further improve it’s already world-class, record-setting efficiency while seeking to lower costs.
Wal-Mart is continuing to Defend & Extend the Success Formula that made it famous. Yes, that Success Formula made Wal-Mart an incredible success. But now Wal-Mart has to learn how to do new things in order to grow. Focus, focus, focus Wal-Mart has already proven it can do. But, since the company is unwilling to Disrupt itself, it keeps hoping that "more, better, faster" of what first made it famous will somehow bring it out of a 5-year slump. Instead, Wal-Mart needs internal Disruption, and White Space, to overcome the Challenges which have slowed its growth (and investor enthusiasm.) All 1-Trick ponies are eventually eclipsed by alternatives that change the competitive playing field.
No one thinks Wal-Mart is in a slide to ruin. After all, they are ….. Wal-Mart! But, then again, no one predicted that we’d see the wholesale decline in Woolworths, then Sears … and there was AT&T, and Polaroid …. and Xerox once looked like it could copy its success forever ….
by Adam Hartung | Apr 5, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Lifecycle, Lock-in
Newspaper stocks are getting the snot kicked out of themselves the past year. Investment analysts, industry analysts – why at this week’s industry trade show even the industry executives – are all saying that newspapers are losing readers, losing advertisers and losing their margins. Newspaper values are at unheard of lows.
So why is one of America’s billionaires starting a new newspaper in Baltimore? Philip Anshutz, of oil and telecom wealth, has been buying small newspapers in San Francisco and Washington – and now he’s starting one from scratch in Baltimore. Is he nuts?
Think about the competitive situation for a moment. The Baltimore Sun is really the only newspaper in town. It’s owned by the Tribune Company way back in Chicago. The paper has been under pressure to improve margins, so it has been cutting costs and people. It hasn’t changed its business model in decades, so it’s struggling to maintain what it used to provide. In other words, The Baltimore Sun is Locked-in to a declining Success Formula – which it is trying to Defend and Extend. With not-so-good results.
The Baltimore Sun is a target. It’s Lock-in means that this upstart new paper can see exactly how the only competitor is behaving – and can predict their behavior pretty darn well. With only one competitor to deal with, the upstart can take a focused attack. And, since the new Baltimore Examiner is just starting its life cycle it is in White Space to develop all new solutions for editorial, copy desk, graphics and advertising production, as well as printing and distribution. This new paper is able to start with very low overhead, use part-time reporters, go offshore for its editing and page layout work, and find some low-cost new printer. Whatever weaknesses exist at the Sun, they’ve made them obvious and the Examiner is in great shape to exploit them.
Newspapers are not a growing business. But that doesn’t mean the local scribner is going to be allowed an eloquent and profitable decline. When the leading competitor becomes so Locked-in, they become a target. And that provides an opportunity for a new competitor to benefit – even when the market isn’t growing 15%/year.
As a local monopoly, the Sun has no where to go but down. If they keep trying to Defend and Extend, well that’s exactly where they will end up. They are in the Swamp, and the Examiner is trying to push them into the Whirlpool. If the Sun doesn’t re-invent itself, it’s already depressed profits will evaporate. It’s a painful lesson to deal with – and it’s going to be tougher to re-invent now that a new competitor is on the scene.
by Adam Hartung | Mar 15, 2006 | General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you’ve read this BLOG for a while you know I am no fan of Sears. Since the merger of KMart and Sears the combined company has done nothing to change its competitiveness versus better managed companies like Target, Kohls and WalMart.
Today Sears stock jumped almost 13%. Oh my, should I reverse my position? After all, the company said (Marketwatch reported) it doubled fourth quarter profitability since a year ago when the companies merged. And revenues are up to $16Billion, from last year’s $5.95billion – wow! And Kmart stores eeked out a .9% same store sales increase during the holidays – the first such increase since 2001! Yeah!
Let’s see… Let’s read a bit more.. what else did they say? "Competitor’s are opening more stores and spending on promotions and marketing – which Sears Holdings isn’t" … Oh, let’s see, these results don’t compare today with combined results from a year ago… Revenues of the combined companies actually declined by 4.5%… well, well… For the year, same store sales at Sears fell 8.4%, while KMart same store sales dropped 1.2%…. oh, the solution — the management is "adjusting its apparel strategy to better meet customer demand" and therefore "expects declines will moderate"…
Those positive headlines, as they said in Oklahoma when I was young, is putting lipstick on a pig.
Sears is still Defending and Extending two completely broken Success Formulas. And the financial heads that put this deal together still haven’t internally Disrupted the operating practices, nor have they created effective White Space to develop a new, more competitive, solution (see previous BLOG on the failure of Sears Essentials). Without those two actions, these results are just financial reporting shenanigans – and those who invest in them deserve the risk they take.
by Adam Hartung | Mar 15, 2006 | General, In the Swamp, Leadership, Lifecycle, Lock-in
Today I got a call from a friend, asking me my opinion of DuPont. I worked for DuPont from 1987 to 1990, and of course DuPont is one of those large and historically great American companies. An early manufacturer of gunpowder for our war efforts, the company went on to innovate such great products as Nylon, Teflon and Kevlar. In The Graduate the famous recommendation to Dustin Hoffman to think "Plastics" is often credited as a plug for DuPont.
But, innovation has been slack at DuPont for quite a few years. They haven’t brought forward one of those great products for a long time. And, their returns have suffered as the company shrunk – through a combination of selling businesses (they owned, and then sold in the 1990s, Conoco for example, and spun off their pharmaceutical business in a joint venture to Merck) and declines in some "core" markets – like printing and other films. Their stock price has suffered.
Today, however, Dupont’s stock broke out to a short-term high after announcing expectations for better earnings. Several technicians said that with only a small additional move upward the stock could jump another 20%. Is this a juicy investment opportunity?
When I read the Marketwatch release, I was disheartened. DuPont didn’t jump up on an announcement of new products. Nor a breakthrough innovation. Nor was there any sign of any major Disruptions happening to their Lock-in, or new White Space projects being created. Instead, I learned that earnings are predicted to rise from closing several labs, shuttering plants and laying off more people. That, plus they think a horrible European market will finally take a turn for the better – no thanks to any new products from Dupont but rather just because enough time has passed while the marketplace stunk to expect an upturn.
It’s hard for me to get excited about DuPont. Even though their history is undeniably great. They keep cutting capacity, cutting jobs, taking restructuring charges and waiting for an economic turnaround. Their improved profits are short-term financial machinations. What would excite me would be to hear about some Disruptions in their internally focused Lock-in. Or to hear about new joint ventures, or other White Space projects intended to spark innovation and create new markets. Without those signs, I’d worry that the short-term stock improvement will just be short-term.
