by Adam Hartung | Oct 20, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Kraft‘s shares have dropped about 22% in the last year. They are flat over 2 years. They are down around 25% for three years, and down 35% from their peak in 2002. Recent profit announcements affirmed that Kraft is currently making 13.5% less than it made in the same quarter a year ago.
Company CEO Deromedi explained away the poor performance with "We don’t want to repeat mistakes we made in early 2003 when we raised prices and had significant share declines." So, 3 years into a restructuring the CEO says investors can hope for either sales at low profits, or less sales? (see full Chicago Tribune story)
When was the last time your boss said you could spend 3 years trying to get your job right with no performance improvement? The CEO certainly has high expectations for investor patience, doesn’t he?
Kraft is completely stuck in the Swamp, as it moves toward the Whirlpool. The company never disrupted its worn out Success Formula, and keeps trying to regain the glory years when "America Spelled Cheese K-R-A-F-T" (remember that ad slogan?) Yes, it is launching a new South Beach Diet line, but because it’s still using its old, poorly performing Success Formula that line is not moving the company toward a bright (and more profitable future.) The head of new products left in June. And in the last year they’ve sold businesses to both Wrigley and Kellogg in an effort to shore up the P&L.
Kraft’s leadership needs to create some White Space and find a new future – instead of trying to resurrect Velveeta-land.
by Adam Hartung | Oct 17, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
GM announced a plan to cut retiree and employee healthcare costs by $18B per year today. It also plans to cut another 8% of its workforce (25,000 jobs) on top of the 30% cut in employment it’s taken over the last 5 years. Oh, and by the way, the company is investigating selling it’s most profitable (and practically only) profitable business – GMAC.
Analysts cheered the actions, and the stock climbed on the news (despite reporting big losses.) What do they expect? Is GM going to save its way to prosperity?
GM is hopelessly mired in the Swamp. With losses mounting, and a corporate raider on their doorstep (Kirk Kerkorian now owns 10% of GM) you’d think leadership would recognize that the Challenges warrant some serious Disruption of their Success Formula (and not these ineffective disturbances). But no, not this leadership. They appear willing to take any action to Defend & Extend their failing Success Formula. Even if it means cutting off their supply of resources (GMAC) and cutting rations to their own troops.
Maybe Kerkorian can bring in a management team capable of really changing GM (he did team with Lee Iacocca on his takeover of MGM Grand). It’s certainly clear that the current leadership has no clue how to overcome existing Lock-In.
by Adam Hartung | Oct 17, 2005 | General, In the Swamp, Leadership, Lifecycle, Lock-in, Openness
To do something truly new and innovative requires operating in White Space. You have to get outside the box of the traditional business in order to develop a new Success Formula. And for White Space to have breakthrough results it must have Permission (as well as resources) to be breakthrough.
I spoke to a colleague recently who is head of change for a very, very large oil company. As you can imagine, profits are exceptional there these days. And he’s been very eager to make some big changes in a behemoth. But, even though top management puts out lots of words about their desire to make breakthroughs, his role is constantly being pushed to "manage" incremental improvements to existing processes.
He doesn’t really have permission, nor committed resources, to make breakthroughs. In this environment, he’s worked hard for two years to get leadership to accept the use of virtual teams for process analysis. He’s had to nudge and cajole to gain acceptance for experimenting with process changes that have saved millions of dollars while greatly improving customer and supplier relationships.
Is he failing? Not at all. His company does not perceive a serious external Challenge to their business – profits are greater than ever. Without a threat, there isn’t the passion for an internal Disruption. And they haven’t established White Space. If he were to try and drive breakthroughs he would be on a suicide mission that would do him, and his company, no good. So, in the current environment he’s actually doing quite well. He’s realized that until a Challenge promotes a Disruption his success comes from helping the organization further Defend & Extend its Success Formula. While the sledding has been slow, and sometimes frustrating, he’s in fact made some great contributions.
Success requires understanding what you can do, not just what you want to do. If you’re organization isn’t ready for White Space then recognizing your role is to help promote D&E practices is critical. Kamikaze’s have short life expectancies – and they don’t do much for helping the organization succeed.
by Adam Hartung | Oct 4, 2005 | In the Swamp, Leadership, Lifecycle, Lock-in
Sailors tie up small pieces of cloth on their lines to observe changes in the wind. These pieces are called "telltales", as they give the first indications of issues which the sailor must address. We use this analogy when looking at businesses, since we find that it is very valuable to recognize the early telltales of trouble.
Management often gives the most glaring signs of a telltale problem. Last week (as reported in the Chicago Tribune), Sears Holdings’ CEO, Aylwin Lewis, sent a letter to all employees. In it he placed a ban on employees carrying bags from other retailers into their jobs.
There is no doubt that it’s good for retail employees to shop at their employers. But, when a CEO puts such a dictum into writing, that is a telltale of a strategy, and organization, in trouble. Such a telltale is more important than a dozen press releases of a company’s strategy, it’s intended plans or it’s anticipated results. When a CEO takes the time to tell his employees he doesn’t like their shopping patterns it shows a leadership team struggling to defend and extend a broken Success Formula rather than find a new one.
by Adam Hartung | Sep 20, 2005 | General, In the Rapids, In the Swamp, Innovation, Leadership, Lifecycle
It’s always risky to challenge a company as large and successful as Microsoft – but read these quotes from the recent BusinessWeek article:
"Employees… feeling trapped in an organization whose past successes seem to stifle current creativity."
"Microsoft faces serious long-term challenges: the rising popularity of the Linux open-source operating system, a plague of viruses attacking its software, and potent rivals such as Google in the consumer realm and IBM (IBM ) in corporate computing. It’s the company’s ability to respond to these challenges that current and former employees fear is being compromised by Microsoft’s internal troubles."
"When Ballmer took over, he was determined to overcome the looming challenge of corporate middle age. He pored over how-to management books such as Jim Collins’ Good to Great. But since Ballmer took the helm, Microsoft has slipped the other way. The stock price has dropped over 40% during his tenure, and the company, whose revenue grew at an average annual clip of 36% through the 1990s, rose just 8% in the fiscal year that ended on June 30. That’s good for a company of Microsoft’s size, but it is the first time the software giant has had single-digit growth."
"..monopolies are at the root of the company’s malaise. As Microsoft fought the federal government and litigious rivals, it developed an almost reflexive instinct to protect Windows and Office, sometimes at the expense of looking for groundbreaking innovations." "Every time Bill and Steve made a change to be more like other big companies, we lost a little bit of what made Microsoft special" "So much of what Microsoft is doing right now is maintenance" "Instead of coming up with the next great technology, Microsoft programmers have to cater to itsmonopolies"
"With revenue growth slowing, Ballmer has tried to squeeze more down to the bottom line to make the company more appealing to investors. In the past fiscal year he slashed $2.6 billion out of operating expenses."
by Adam Hartung | Sep 19, 2005 | Disruptions, In the Rapids, In the Swamp, Leadership, Lifecycle
Readers of this BLOG know I’m a big fan of companies avoiding lock-in. I’m always pushing organizations to open White Space projects. So you’d think that a company looking to sell a business would be someone I’d attack.
Not so quick there.
Motorola is putting out feelers to sell it’s auto parts business. Ostensibly to "focus." That’s a word reporters and investors understand. You might think I’d say "hey, why don’t you fix that business? Why not explore new options?"
In this case, I fully support management. For over a year now Motorola has been opening White Space right and left. The results have been fantastic (six consecutive higher profit quarters) as Motorola has grown revenues in several new markets while breaking down old lock-ins and expanding revenues in the hotly contested cell phone business. The company is doing practically everything right.
Now is the BEST time to walk away from the old legacy business. Nowhere is lock-in stronger, and less valuable, than in the original legacy business. In Motorola’s case, finding a new future has been augmented by cutting its ties to the past – past practices, past metrics, past cultures and now past markets.
Sometimes developing a new future is best augmented by knowing when to walk away from the old business. And if you’ve already established White Space that’s producing results, you can walk away smiling.
by Adam Hartung | Sep 2, 2005 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lifecycle
How do you read the trends in a business from the outside? Look at the articles on page 3. We all read the headlines. But headlines are dictated by what’s relatively interesting TODAY. This short-term phenomenon is not a good way to interpret what’s happening over time.
On Wednesday of this week (8/31/05) the Chicago Tribune business section led with articles about the business impact of Katrina. As they should. But when you turned the page, there were two very interesting, and short, adjacent articles on Motorola and McDonalds (courtesy of Bloomberg News).
The 4 inch by 4 inch text box on Motorola calmly reported that the company was retiring another $1B in bonds. This is on top of $2B in bond repurchases over the last year. Debt is down over 40% since January, 2004 and the company’s credit rating by Moody’s has been raised. By the way, sales and profits have risen over 10% for 6 straight quarters. The lower debt will allow Motorola to consider new investments in R&D and possibly acquisitions.
Meanwhile, the 2 inch by 8 inch text box on McDonald’s said the company was borrowing $3B to repatriate foreign earnings in order to take advantage of a short-term government tax break. By the way, this caused a recent 10% drop in reported earnings on top of the smallest sales gain in 2 years. The repatriated cash will be used to extend the company’s business model by opening new stores (anyone recall the store shuttering program in 2000-2001?), remodelings and paying salaries (no joke – paying salaries!).
I’ve written in this BLOG before about the great difference between Motorola and McDonald’s. One has disrupted itself and opened White Space to innovate – clearly moving rapidly from the Swamp back into the Rapids. The other is practicing Defend & Extend management as it continues struggling in the Swamp. To track performance, keep your eyes on page 3.
by Adam Hartung | Aug 30, 2005 | General, In the Swamp, Leadership, Lifecycle, Openness
Last Christmas we were horrified by videos of people who went out to pick up shells on the beach in Thailand only to be overwhelmed by the tsunami which rushed in and created total devastation. Some people (most) thought the situation was a mere outgoing tide (larger than usual, to be sure). A few, however, recognized this was no mere tide, but a tsunami about to unleash. Instead of going to the beach, they ran as fast as possible the other way. These few saved themselves.
How do business leaders know when a problem in their business is merely the tide going out, and when it will be a tsunami challenging (possibly wrecking) their business model? This question is critical for leaders and investors. When the business is in the Rapids, and short-term problems can be fixed, then staying the course is the right thing to do. But, if the problems are actually signals of much deeper challenges then a lot more is needed before the business is dumped into the swamp and returns become elusive.
Wal-Mart stock has been dumped lately. Due to concerns about hurricane Katrina’s impact driving gas prices higher, investor’s have driven Wal-Mart’s value down to levels similar to the market collapse after terror on 9/11/01. Is the tide going out on Wal-Mart, sure to come back in and raise Wal-Mart to greater value, or should we be more worried about the future?
The key is to move beyond short-term concerns and look at longer-term trends. Wal-Mart has been struggling to maintain its value since peaking in the dot.com boom. Since 2000, the stock has gone sideways. Why? There have been a series of problems for Wal-Mart: Union problems/threats, store failures in Europe, lost customers to more trendy Target and Kohl’s, rising costs from energy prices, employee lawsuits over discrimination, government investigation for hiring illegal immigrants, and top executives fired for misappropriation of expense monies to wage illegal union-busting activities. Problems with customers losing discretionary spending dollars to high gas prices is merely the most recent in a series of concerns about Wal-Mart’s ability to re-invigorate growth and its profits.
One reason we review quarter-to-quarter results is it helps us determine if a company is in the Rapids, or not. When in the Rapids businesses can tweak their operations to recover from problems. But, when in they move into the Swamp we see recurring problems that aren’t easily overcome. Results are always promised to improve – and historical glory regained. Improvement is always just around the corner from China expansion, investments in lower-cost distribution, and store extensions. And internal problems are diminished by explaining away lawsuits and executive misdeeds as "one off" occurences. In the Swamp, there are so many alligators and mosquitos nipping at the operations we wonder if management has time to focus on how to get back into the Rapids!
Everyone wants large and successful institutions to regain their glory. But that is rare. Smart leaders have to know how to recognize when the market is changing, and they are looking at a tsunami – not just the outgoing tide. Long-term success requires honestly seeing the recurring problems as the symptoms of something much worse – and not always doing what was done (picking up the fish on the beach) but instead taking much more drastic action to address fundamental challenges.
by Adam Hartung | Aug 30, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Warren Buffet is often called the Oracle of Omaha. His track record at making money for investors in his company – Berkshire Hathaway – was remarkable for several years. Many have heard the story about how a mere $1,000 invested inthe late 1970’s is worth over $80,000 today. But, if you look closer, you’ll see that the company stock is about the same today as it was in 1998. Buffet really hasn’t made a lot of money for investors the last several years.
It’s foolish to attack an investing legend, yet it is worthwhile to look at whether what worked for Buffet for years is still working. As we know, the future is not the past and any company is subject to lock-in and deteriorating returns.
Last year Buffet’s Berkshire made a big investment in Pier 1 Imports. This helped prop up Pier 1’s stock price for a few months, but since then the company’s value has declined about 50%. This year the company suffered it’s first quarterly loss in history. According to Business Week, the company’s CEO has admitted he’s ashamed of company performance. Oops! Buffet hasn’t commented.
About 8 years ago Buffet’s Berkshire made a big investment in Coca-Cola. Such a large investment they put him on the Board. After that investment Coke’s market value doubled by 1998 – but then it started a slide that has Coke’s value back again to about what Buffet paid. Other than dividends, Berkshire hasn’t made any money. Oops! (And if you invested after Buffet you would have lost money.)
Buffet made a huge fortune with a strategy that worked incredibly well. But will it work going forward? He enjoyed buying companies that had a large asset which he perceived as undervalued and then hanging on while that asset rose in value. But increasingly these kinds of assets aren’t able to regain their old value. Companies like Pier 1 and Coke have hit growth stalls that have been deadly. Attempts to implement short-term fixes to their business models have been ineffective in the face of larger challenges to those models.
No one bats 1.00 (to use a baseball analogy) on their investments. But it’s increasingly obvious that Berkshire Hathaway’s strategy hasn’t been hitting so well. Their insurance and re-insurance investments aren’t producing like before, and even Mr. Buffet has been required to give testimony on intercompany relationships with scandals such as AIG. Oops! (This is not to impune Mr. Buffet – there have been no accusations of wrong doing by him or Berkshire Hathaway.)
Has Berkshire Hathaway hit a growth stall itself? Is the Oracle of Omaha locked-in, and possibly missing opportunities to improve shareholder return? Time will tell, but short term (looking at the last 10 years) Buffet shows all the signs of lock-in, and a stall – and that would trouble me if I owned Berkshire Hathaway stock. Mr. Buffet well deserves his opportunities on the public stage, yet it’s worth some hard thinking the next time you’re tempted to follow his lead on investments.
by Adam Hartung | Aug 20, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Some of you may remember the old war movies in which the soldiers say "it’s the bullet you don’t hear that gets you." There have been a lot of movies in which the people who are killed make the point that it’s not what you see that gets you, it’s what you don’t see. There is no "Cry of the Banshee" prior to receiving the deadly blow. In business, it’s the same thing. It’s not the factors you plan on that kills your profitability, it’s what you don’t see. It’s not the threat from the direct competition that makes you business model unviable – it’s something that you never expected.
During 2005 there are two remarkable businesses that never saw it coming – and now they are facing great pain. They are household names with tremendous legacy and unbelievably profitable histories. But I can’t find any analysts who think they have growth in their future – and even the companies themselves admit they are facing a lower growth future. And their market values, employees, vendors and customers are all facing difficulty
Wal-Mart and Merck.
Wal-Mart has done about everything a discount retailer can do right. They’ve cut costs, appealed directly to their customers with lower prices. Created tremendous careers for their employees. But what they didn’t predict was a tripling of gasoline prices taking a relatively huge bite out of the discretionary incomes of their target customers. Now, with energy costs eating up the money they’d spend at the Wal-Mart stores the company is struggling to find a way to keep up its growth history.
Merck was the darling of Wal-Street in 1987. It was the highest P/E in the DJIA. It’s growth was spectacular. Not one analyst thought you could go wrong by buying Merck stock (and in all fairness if you bought it then you would have made a lot of money). But no one ever figured that one questionable drug (Vioxx) could destroy billions of dollars in shareholder wealth. The Merck business model made them rich while improving the lives of millions of people. But that same business model pushed Merck to aggressively market drugs directly to patients (rather than to doctors only), and to possibly push drugs into market use a bit quicker. And now the very health of Merck itself is in question.
Both these companies have been undeniably successful. World leaders. And they honed and pruned their business models to perfection for the competitive marketplace they were in. They locked-in that business model, and worked to defend and extend it as fast as possible. And that lock-in to the successful past practices meant they never saw it coming – they didn’t see what would cause them to stall. They didn’t see what could eventually knock them off their top spots.
