by Adam Hartung | Feb 22, 2006 | General, In the Swamp, Leadership, Lock-in
Recently GM announced with pride that it had reduced it’s IT expenditures by 25%. The company’s IT spend to sales ration has dropped from 2.4% to 1.6% – a 33% decline. This was held up as a sign of great progress. But, as Baseline recently reported, because GM is looking at the wrong metrics this fact doesn’t matter much.
During this same period, GM’s employment declined by nearly 50%. And the amount of work outsourced (as a percent of revenue) increased from 67.7% to 75%. As a result, the number of transactions undertaken at GM declined markedly. So, while IT costs declined, at the same time the business supported by IT declined even faster. The net? IT costs per transaction actually INCREASED by almost 74%.
Businesses tend to Lock-in on the metrics used, just like they lock-in on behaviors and processes. If they keep looking at the old metrics, they miss the changes necessary to actually improve the business. Often one of the most critical Disruptions is Disrupting the metrics used. In the case of GM, they were caught bragging about peformance on an out-of-date metric. Another demonstration of Defending and Extending a broken Success Formula when what’s needed are entirely different measures to drive new behavior.
by Adam Hartung | Feb 22, 2006 | In the Swamp
McDonald’s has been in the news a lot lately. There is a hedge fund operator pushing the company to spin out its company owned stores. They just had to re-evaluate the fat content in their products, and discovered that "bad fat" is greater than previously reported. Then they had to report that there were other foodstuffs in their fries, which has led to lawsuits from allergy sufferers. And, while all this is happening, McDonald’s management is saying "hold the course, all is moving smoothly."
Welcome to the Swamp. "It’s always something" Roseann Rosanadana used to say on Saturday Night Live. And so it is in the Swamp. Even though management keeps saying things are fine, there is in fact a never ending litany of problems. Some appear small, and some appear large. But the fact is there are lots of unanticipated problems developing – and management seems to be forced to react from one problem to the next. Regularly on the defensive.
The Success Formula is in trouble. It’s no longer able to produce the desired results. Yet Lock-in is keeping the company implementing the same formula, seemingly unable to get ahead of problems. Because management is spending its time Defending and Extending the broken Success Formula, it’s not able to see that these problems will just keep coming and coming.
McDonald’s desperately needs to Disrupt its Lock-in and create a new Success Formula. That’s the only way to renew itself and get away from all these problems. It’s impossible to predict what the next problem will be, but it’s clear that from Mad Cow to bad fat they will simply keep coming. And for investors, the best thing is to steer clear of management trying to Defend and Extend what isn’t working.
by Adam Hartung | Feb 13, 2006 | Disruptions, General, In the Swamp, Leadership, Lifecycle, Lock-in
My three weeks in India were fantastic. I visited twenty-some companies, all developing new business models in their pursuit of new revenues. From company to company, I saw people working in White Space as they sought out Success Formulas that would provide short-term gains and create long-term advantage. Even for companies with tens of thousands of employees, it was clear that operations in India are constantly disrupting themselves as they seek to compete with each other, and continue driving enhanced value.
While there, I thought about all the U.S. companies that are blissfully ignoring this phenomenon. What I saw in India wasn’t just low-cost competitive undercutting, but in fact people doing the work differently – and as a result creating considerable new value for not only themselves but their customers. I kept wondering, "why do so many U.S. and European business leaders remain so unmoved by what is happening here?"
Then I recalled the story of CSC. Entering 2000, CSC had a robust commercial consulting business with revenues reportedly over $1B. According to industry analysts, this consulting division was by far the most profitable part of CSC, contributing nearly 3 times the profit for its revenue base compared to other divisions. Further, it was claimed to be growing at nearly 20%+ year.
Now, just 6 years later that same division is reported to be under $200M revenues (an 80% decline). And insiders say it has operated at losses to break-even since 2001. The division simply ignored the oncoming avalanche of opportunity being created by the internet and offshore IT services vendors – an avalanche they could readily see from their perch creating e-business opportunities and installing new technologies.
Unfortunately, as they missed the first wave of offshoring their revenues slumped and their profits vanished. In reaction, they brought back a President who had left during the dot-com days in order to provide new "focus" to the business. Upon his return, this President declared that from his 20 years of experience he knew that customers wanted their IT services to be done locally. He re-opened a slew of local offices in the U.S. and moved the P&L from a national service line model to a geographic P&L. He expected these local offices to get into clients and "slug it out" for revenues against the competitors. And he repeatedly said that he knew this would work – because it had worked in the 1970s and 1980s.
He was Locked-in to his old Success Formula. Unfortunately, he was perilously ignorant of the oncoming wave of qualified IT consultants in India now available to his clients across the internet. Year after year he, and CSC, watched as business was lost to new competitors, layoffs followed to "stabilize" the business, only to be followed by more pressure on prices, and fewer revenues and more layoffs. A vicious circle that was inevitable.
To this day, CSC has practically no commercial consultants in India. While Tata has 60,000, Infosys 40,000, Cognizant 30,000 and WiPro 30,000 – the vast bulk of which are supporting U.S. clients. Not to mention the dozens of smaller companies doing everything from IT services to business processes. Even Accenture has nearly 20,000 and Office Tiger (both U.S. companies) has 6,000. In reaction, CSC has retrenched to large outsourcing contracts (the profitability of which is highly doubtful) and increased its federal government business – where it can avoiding competing with Indian firms.
Lock-in leads to blinders. Blinders lead to ignorance (as my teacher once said "ignorance can be fixed"). When CSC commercial consulting faced its Challenge (offshore competitors) leading to a big problem (declining margins and revenues) they did not use this Challenge to Disrupt their model and create White Space. Many American companies, such as Accenture and IBM, did just that – creating large and very viable Indian organizations supporting clients competitively. Those companies are using the White Space to develop their own new Success Formulas. But CSC has lost the commercial consulting market. And they are threatened in all their commercial business. They are under attack from hedge fund operators who want to split up the company and capture value before more is lost.
Ignorance is perilous. If we allow Lock-in to determine our behavior we lose the ability to Disrupt and face our Challenges – leading to failure. Instead, we have to use Challenges to Disrupt and open White Space so we can find new Success Formulas. And via that route, we can remain competitive in the new marketplace.
by Adam Hartung | Jan 15, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
The Chicago Tribune ran a great overview of the situation facing McDonald’s leadership today. In a nutshell, an upstart hedge fund manager (William Ackman of Pershing Square Capital LP) is pushing McDonald’s to restructure itself by spinning off restaurant operations, selling real estate and otherwise changing the company. He is supported by a large REIT (Vornado Realty Trust) which would like to participate in the real estate restructuring. McDonald’s management is fighting off these efforts.
The really interesting question is, how did McDonald’s get itself into this mess? Quite simply, Lock-in to the past has kept McDonald’s from seeing its real Challenge. McDonald’s business today is remarkably like it was in the 1960s. The company still franchises and operates a hamburger chain. While there has been an amazing amount of change in the last 40 years, little of it has affected McDonald’s as they have continued Defending and Extending their early success. Now McDonald’s is mired in the Swamp, unable to control its own destiny due to the attacks from outsiders.
McDonald’s has had lots of opportunities. It has bought other restaurant concepts (such as Chipotles), yet it never really supported their growth as it kept focused on hamburgers. It built expertise in franchising as well as food and restaurant supplies distribution strengths. But it never moved into those businesses beyond supporting its core business. And as nutritional habits have changed among its baby boomer customer generation has aged, while an entirely new generations of customers has come along, McDonald’s steadfastly ignored the Challenges and kept trying to grow its old Success Formula.
You can’t blame the hedge fund operators and REITs for taking aim at McDonald’s. Any time a company becomes a slave to its Lock-in it becomes an easy target. Management is too easy to predict, and their unwillingness to address Challenges with their resources makes those resources a juicy desire for outsiders. Sometimes competitors take advantage, and sometimes its unexpected outsiders – like in this case.
We all have a natural tendency to support the incumbent. They’ve worked hard to get their positions, and we want them to succeed. But when the incumbents can’t address Challenges and overcome Lock-in the interests of shareholders, suppliers, employees and customers are best served by those who would force a change in behavior.
by Adam Hartung | Jan 8, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Harley Davidson is a great, well known brand. But as one of my old professors used to say "a good product, and a good company, doesn’t necessarily make for a good stock."
Despite it’s brand image, for the last 2 decades things have been changing at Harley. Half of revenues now come from brand merchandise (like jackets) rather than motorcycles. The average age of its customers has kept rising, until now its over 50. Its new product introduction has been between anemic and nonexistent.
No one has done a better job of hiding an inherently no-growth story better than Harley Davidson. It has raised prices, faked shortages and found more ways to Defend and Extend its brand as it has done almost nothing to bring in a new generation of customers. Its big effort to move forward was the launch of the V-Rod 3 years ago with an engine, no joke, made by Porsche. Unfortunately, Harley’s dealers bad-mouthed the machine and wouldn’t sell it as they continued to stay Locked in to the old business (and the old-fashioned "hogs"). And Harley knuckled under, downplaying the new bike to appease these dealers. And a new generation of customers, to whom the new bike appealed, continued going to Honda and Yamaha.
Harley has had a P/E multiple of 25. Recently it has fallen to 14. Some folks think this might make Harley a value. I’d say that given the Lock-in, and the complete capitulation to Defend & Extend management at Harley, they have been merrily floating along the Flats not realizing how close they were to the Swamp. Fourteen might be a very high P/E once the market realizes how few 50 year olds are left looking for a $25,000 motorcycle based on 30 year old technology.
by Adam Hartung | Nov 27, 2005 | Defend & Extend, In the Swamp, Leadership, Lifecycle
Every time we hear about a company hitting a stall we want to be optimistic. We want to believe they will turn around their situation and recover their growth. Unfortunately, once a business hits a growth stall (regardless of the cause), it has a less than 7% chance of ever sustaining growth greater than 2%/year.
Merck hit a growth stall about a year ago when one of its products was pulled from the market. Several other products were challenged. The immediate result was a dramatic decline in market capitalization. The company lost about 1/3 of its value in a day – and over about 6 months the company lost half its value. We would love to believe the company will recover its historic growth, so value shoppers begin buying up the stock. But the fact is that Merck has a greater than 70% chance of NEVER recovering that lost market capitalization.
We would love to blame the regulators, personal injury lawyers and even product customers for creating this stumble for Merck. But, regardless of cause, what we do know is that for Merck to recover will require a significant change in its Success Formula. The marketplace has shifted, competition has changed (affecting the profits of all pharmaceutical companies) and Merck must change if it is going to try and regain its lost growth.
But the company is not trying to reinvent its Success Formula. Instead, it is trying to Defend and Extend its old Success Formula with marginal changes and cost cutting. Although the company appointed a new CEO last May, it has not really Disrupted its Lock-in (in response to these market Challenges). It has not created White Space to develop a new Success Formula. It keeps trying to capture the lost growth by doing more, better, faster, cheaper.
Those who have heard me speak over the last year know that I have been a constant pessimist regarding Merck. While it’s stock occasionally gains a point or two, there is no upward trajectory. Why do I remain pessimistic? Because, like 70% of companies that stall, Merck keep trying to "fix" its problems with tweaks. Until the leadership Disrupts and uses White Space to reinvent, it will not address its market-based problems effectively.
I’d love to be optimistic – but there just aren’t any signs that would be prudent.
by Adam Hartung | Nov 20, 2005 | Defend & Extend, In the Swamp, Leadership, Lock-in
We all know how Apple rejuvenated itself with the iPod. From a declining, niche player in personal computers the company took off after launching the iPod. Taking advantage of commercially available MP3 technology, Apple stepped in after Napster was sued into oblivian to help customers accomplish their goals of building individual music libraries.
Why didn’t Sony take this tack? Sony not only had all the hardware (after all, they were leaders in radios, personal CD players and the marketplace for personal entertainment), but they actually owned a recording company — they had the content. Sony could have been first to build on the market Napster pioneered to reap the results.
But Sony chose to Lock-in on CDs. It missed the MP3 wave. And it still is. After leading the industry wave to wipe out Napster, Sony is now leading the industry to block piracy with copy protection software. Instead of folowing its customers and developing the marketplace, Sony keeps trying to blame its customes for its woes. Sony keeps fighting the last war, and in the process it is alienating its customers and its most important suppliers – the recording artists.
When markets shift, those who succeed move quickly to the new competitive ground. You can moan and groan and try to use lawyers in an effort to protect and old business, but that never works. Customers will find the suppliers who figure out how to give them what they want. Sony needs to wake up and align with its customers, instead of trying to find ways to protect its out-of-date (and failing) Success Formula.
by Adam Hartung | Nov 2, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Vornado has acquired a 1.2% stake in McDonald’s (check out full Bloomberg News article.) Does anyone remember this scenario? It was just November, 2004 when Vornado bought 4.8% of Sears leading to Sears acquisition by Kmart. Simply put, the Sears real estate was worth more than the stores (KMart’s rebirth as Sears Holdings hasn’t changed that situation, either). Vornado has learned how to spot these opportunities – including acting as a principal in buying Toys R Us in March to capture the value of that struggling retailer’s real estate.
While everyone knows that McDonald’s franchises most restaurant operations, did you know the company owns about 37% of the land under those stores, and 59% of the buildings? Once again, to sharp real estate people the land and buildings look more attractive than the hamburger operations which use them.
McDonald’s reaction? In an email McDonald’s spokesperson Anna Rozenich said that McDonald’s plans to stick to its current business strategy. Over the last 5 years McDonald’s has struggled with flattening demand for its products, selling off most non-hamburger operations, closing stores and restructuring. Now an external party has emerged to question the validity of the business model. But despite all these Challenges McD has refused to Disrupt its old Success Formula and develop new value for its shareholders, employees, vendors and customers.
This is the operating definition of Lock-in.
by Adam Hartung | Oct 27, 2005 | Defend & Extend, In the Swamp, Leadership, Lock-in
…. Apparently a lot. Have you seen what’s been happening to the share prices of companies like New York Times, Gannett, Knight Ridder and Dow Jones? Down, down, down, down – from 25% to 35% in the last year. Why should such great companies be struggling?
I always thought of these companies as news companies. But they think of themselves as newspaper companies. Seem subtle. Until you realize that newspaper readership is down across the board, as is advertising for newspapers. As we all know (and this blog demonstrates) most of us get most of our news from the web now. Instantaneous, customized, searchable news. We don’t wait for a paper to arrive and take time to browse it.
It would seem obvious that the best newspapers, who have the best news bureaus, would be leaders in taking news to the web. And leaders in attracting readers to those sites. But, alas, they spent most of their energy in early web days Defending & Extending their hard-copy business. They feared the web and the uncertain revenue model. They waited, and waited. Now, people don’t go to those sites first, or second, or often at all when they want news (for more detail see Chicago Tribune story.) And, most importantly, younger readers completely ignore these venerable names for finding their news, prefering web sites more customized to their interests.
These companies got themselves into trouble because they didn’t see themselves as News companies. They ignored the challenges the web brought in the 1990’s. They Defended & Extended their old Success Formulas. They reassured themselves their business would return. They failed to Disrupt their Lock-in to newsprint (what a simple, and obvious Lock-in), and they never created White Space teams with the PERMISSION to actually develop leadership in on-line news delivery (as well as a profit model for the emerging new market). Now they have a HUGE Re-invention Gap as they struggle to find a way to catch up with their customers, who are leaving them in the proverbial dust. And once again we see their employees (layoffs), vendors (cost cutting), customers (forced to find new ways to advertise effectively) and investors (losing billions of dollars in equity value) suffer.
Be careful how you refer to your business. Deadly Lock-in might start with something as simple as calling your business News versus Newspaper.
by Adam Hartung | Oct 26, 2005 | Defend & Extend, General, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
Imagine you bought stock in a small restaurant concept in 1993 (12 years ago) with a handful of restaurants. Today, that chain has expanded to 450 locations, profits have grown five-fold since turning profitable in 2004 and sales are up 33 percent in the first six months of this year after doubling between 2002 and 2004. Would you want to sell that stock?
I wouldn’t either. But that’s what McDonald’s is doing, by selling off ownership in Chipotles. Chipotles is growing faster, and more profitably than McDonald’s. But McD is saying they can’t afford to invest in Chipotle, they need to sell their ownership to have others pay for continuing to grow this skyrocketing opportunity. Why? Because McD wants to focus on their 37,000 stagnant hamburger restaurants.
The urge to Defend & Extend the hamburger business is greater than the urge to grow at McDonald’s. McDonald’s shareholders and franchisees would all benefit from McD getting behind expanding Chipotles. The growth and profit opportunities in the new business are multiples of the hamburger business. Yet, even though the data is clear, the Lock-in to perpetuating its outdated Success Formula keeps McDonald’s from taking advantage of its own opportunity. Instead of migrating McDonald’s Success Formula toward this overwhelmingly successful White Space project, they are sending it out the door.
McDonald’s is horribly Locked-in. Leadership doesn’t understand how to Disrupt that Lock-in in order to move the company from the Swamp back into the Rapids. They only difference between McD and GM is that McD hasn’t moved far enough into the Swamp. But time will tell.
For employees and investors, now’s the time to run, not walk, toward Chipotle. It’s always better to be in the Rapids of Growth than stuck in the Swamp of mediocre performance.
