by Adam Hartung | Jul 7, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
"Tribune Company Profitability Continues to Deteriorate" is the Crain's headline. Even though Tribune filed for bankruptcy several months ago, its sales, profits and cash flow have continued deteriorating. The company is selling assets, like the Chicago Cubs, in order to raise cash. But its media businesses, anchored by The Chicago Tribune, are a sinking ship which management has no idea how to plug. While the judge can wipe out debt, he cannot get rid of the internet and competitors that are reshaping the business in which Tribune participates. Bankruptcy doesn't "protect" the business, it merely delays what increasingly appears to be inevitable failure.
"GM Clears Key Hurdles to Bankruptcy Exit" is the BusinessWeek headline. In record time a judge has decided to let GM shift all its assets and employees into a "new" GM, leaving all the bondholders, employee contracts and lawsuits in the "old" GM. This will wipe out all the debt, obligations and lawsuits GM has complained about so vociferously. But it won't wipe out lower cost competitors like Kia, Hyuandai or Tata Motors. And it won't wipe out competitors with newer technology and faster product development cycles like Toyota or Honda. GM will still have to compete – but it has no real plan for overcoming competitive weaknesses in almost all aspects of the business.
It was 30 years ago when I first head the term "strategic bankruptcy." The idea was that a business could hide behind bankruptcy protection to fix some minor problem, and a clever management could thereby "save" a distressed business. But this is a wholly misapplied way to think about bankruptcy. In reality, bankruptcy is just another financial machination intended to allow Locked-in existing management to Defend & Extend a poorly performing Success Formula. Bankruptcy addresses a symptom of the weak business – debts and obligations – but does not address what's really wrong - a business model out of step with a shifted marketplace.
The people running GM are the same people that got it into so much trouble. The decision-making processes, product development processes, marketing approaches are all still Locked-in and the same. GM hasn't been Disrupted any more than Tribune company has. Quite to the contrary, instead of being Disrupted bankruptcy preserves most of the Locked-in status quo and breathes new life into it by eliminating the symptoms of a very diseased Success Formula. Meanwhile, White Space is obliterated as the reorganized company kills everything that smacks of doing anything new in a cost-cutting mania intended to further preserve the old Success Formula.
Everyone in the bankruptcy process talks about "lowering cost" as the way to save the business. When in fact the bankrupt business is so out of step with the market that lowering costs has only a minor impact on competititveness. Just look at the perennial bankruptcy filers – United Airlines, American Airlines and their brethren. Bankruptcy has never allowed them to be more competitive with much more profitable competitors like Southwest. Even after 2 or 3 trips through the overhaul process.
Bankruptcy does not bode well for any organization. It's a step on the road to either having your assets acquired by someone who's better market aligned, or failure. Those who think Tribune will emerge a strong media competitor are ignoring the lack of investment in internet development now happening – while Huffington Post et.al. are growing every week. Those who think the "new" GM will be a strong auto company are ignoring the market shifts that threw GM to the brink of failure over the last year. Both companies are still Defending & Extending the past in a greatly shifted world – and nobody can succeed following that formula.
Don't forget to download the ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes" for a primer on how to keep your business out of bankruptcy court during these market shifts.
by Adam Hartung | Jun 30, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in, Web/Tech
With all due respect to the great guitar playing songwriter Jerry Reed, today Starbucks and Dell continue to look like copies that were once hot – but now couldn't warm a nose in a blizzard.
"Starbucks continues food push with overhauled menu items" is the Advertising Age headline. Starbucks closed hundreds of stores last year, saw sales in stores open a year fall 8%, and profits dropped 77%. But they aren't bringing anything new to their business. They are revamping the food to make it more healthy. There's nothing wrong with introducing healthier food, but how does Chairman Schultze think this will turn around Starbucks? The company's "return to basics" program has made it overly sensitive to retail coffee prices, while robbing the company of its highly desired cache. An enhanced instant coffee did nothing for revenues. And now this overhauled menu doesn't really offer anything new to excite customers. It's still a ton of calories – even if they are healthy calories – offered at a high price.
Starbucks has given rejuvenated life to McDonald's. Nobody expected the McCafe to be a huge success. But Starbucks has played right into McDonald's sites by shutting down most of its "non coffee" operations and repositioning itself not as a destination but as a fast food outlet. McDonald's reminds me of the hunter who spends all day tramping the forest in search of a deer, only to get back to his pick-up and have a big buck walk within 20 yards of his vehicle. When he least expected to get his kill, it walked up on him. And that's what Starbucks has done. It's made McCafe much more viable than it appeared likely, simply because Starbucks chose to move into direct competition with McDonald's rather than continue on the new business programs it created earlier in the decade.
Starbucks has gifted McDonald's by choosing to fight them head-on right at McDonald's strengths – operational consistency and low price. And now Starbucks is showing complete foolishness by entering into traditional advertising – an area where McDonald's is a powerhouse (the inventor of Ronald McDonald is an expert at ad content and spending). Even worse, Starbucks, which eschewed advertising for years, has decided to promote its new food menu by placing ads in (drumroll please) newspapers! At a time when readership is dropping like a stone, and during summer months when seasonal readership is lowest, Starbucks is choosing to promote with the least effective ad medium available today. Even billboards would be a better choice! We have to ask, wouldn't the previous, much savvier, leadership have launched a wickedly intensive web marketing program to lure customers back into the stores? Some viral videos, lots of social media chat – that sort of thing which appeals to their target buyer? Why would anyone choose to fight a giant – like McD's – on their court, using their rules, against their resource strength? That's not savvy competition, it's suicide.
Simultaneously the once high-flying Dell has been in the doldrums for several years. Decades ago Dell built a Success Formula that ignored product developed, placing its energy into supply chain advantages. Competitors have matched those operational advances, and now Dell gives consumers little reason to make you prefer their product. Not to mention forays into service cost reductions like offshore customer support that absolutely turned off customers and sent them back into retail stores.
Now "Dell is working on a pocket web gadget" according to the Wall Street Journal headline. Not a phone, not a netbook, not a laptop the new device is an assemblage of acquired technology into a handheld internet device. How it will be used, and why, is completely unclear. That it will give you internet access seems to be the big selling point – but when you can accomplish that with your iPhone or Pre, or netbook should you choose a larger format, why would anyone want this device?
Dell seems to forget that it has to compete if it wants to succeed. It's products have to offer customers something new, something better. That's what made the iPHone so successful – it gave users a lot more than a traditional phone. And the same is true for Pre. And these devices now have dozens and dozens of applications available – everything from playing video games to ordering pizza at the closest delivery joint to reading MRI screens (if you happen to be a neurologist). Yet, this new Dell device has no new apps, and it's unclear it is in any way superior to your phone or netbook. Dell keeps trying to think it has distribution superiority, and thus can sell anything by forcing it upon customers. Even products that have no clear application. Dell is Locked-in to its old Success Formula, all about operational excellence, but that model has no advantage now that people with new technology – superior technology – can match their operational excellence.
When companies remain Locked-in too long they become obsolete. And it can happen surprisingly fast. Every reader of this blog can remember when Starbucks seemed invincible. And when Dell was the information technology darling. But both companies remain stuck trying to Defend & Extend their Success Formulas after the market has shifted – and their results are most likely going to end up similar to GM.
Don't forget to download my new ebook "The Fall of GM" and send it (or the link) along to your friends and social network pals. http://tinyurl.com/nap8w8
by Adam Hartung | Jun 29, 2009 | Defend & Extend, In the Whirlpool, Leadership, Lock-in
In May "The Largest U.S. Bankruptcies" was published in BusinessWeek – and since then we've added General Motors to the list. From biggest down:
- General Motors
- Lehman Brothers
- Washington Mutual
- Worldcom
- Enron
- Conseco
- Chrysler
- Thornburg Mortgage
- Pacific Gas & Electric
- Texaco
Did you notice that only 1 of these happened prior to 2001 (Texaco)? As I pointed out in Create Marketplace Disruption, the number of bankruptcies has been skyrocketing from historical norms. And the number of bankruptcies of truly huge companies has been growing at an unprecedented rate.
Ever since the modern corporation was born, the theory has been that being large gave a company lower risk. Since the 1940s people have believed that their jobs, and careers, are safer in big corporations. But today big corporations are failing at a truly alarming rate. What's changed?
Very large companies usually have a Success Formula, locked into place with hierarchy, decision-making processes, narrow strategy programs, consistent hiring processes, tight employee review processes, rigid IT infrastructure and very large investments designed to provide economies of scale. Their approach to success was driven by the notion that with size they would create entry barriers which would protect them from competitors, allowing for years of ongoing profitability. These practices were designed to focus the business on its core technology, products, customers and markets. Management theorists believed that with focus came ongoing success. They did expected businesses to be stable. With limited change.
But today we're seeing dramatic market shifts. And locked-in Success Formulas are literally failing because the company, and leadership, is unable to adapt to these shifts. During the 1950s, '60s, '70s and '80s competition was relatively stable. But that is no longer true. Success no longer comes from Defending & Extending what you used to do.
Dramatic improvements in telecommunications connectivity, computer assisted data accumulation and analysis, and global access to resources has changed the basis of competition. Now businesses must adjust to an extremely dynamic marketplace. Scale is meaningless when a new competitor can access your customers with a web page, achieve global distribution with a logistics partner, access a low-cost outsourced manufacturing plant via telephone, and provide 24×7 service with an Indian-based service contractor. When a new technology can go from invention to market in weeks, adaptability becomes far more important than size.
The marketplace has been shifting dramatically since 2001. In everything from manufacturing to financial services to commodities. Yet, far too few companies are adjusting to the new competitive requirements. Too many analysts and business leaders still seek market segments, market share and developing entry barriers. To succeed today businesses have to overcome Lock-in to Success Formulas in order to Disrupt their old approaches and remain vital to customers through the use of White Space to develop, test and implement new solutions. During periods of dramatic shift, those who follow these practices are far more successful. Regardless of size.
Don't forget to download the new ebook "The Fall of GM" for more on how the world's largest auto company failed to adjust to market shifts – and how you can avoid the GM fate by taking actions to make your business more adaptable.
by Adam Hartung | Jun 23, 2009 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
What is a brand worth? Do you spend a lot of time trying to "protect" your brand? A lot of marketing gurus spent the last 20 years talking about creating brands, and saying there's a lot of value in brands. Some companies have been valued based upon the expected future cash flow of sales attributed to a brand. Folks have heard it so often, often they simply assume a recognized name – a brand – must be worth a lot.
But, according to a Strategy + Business magazine article, "The trouble with brands," brand value isn't what it was cracked up to be. Using a boatload of data, this academic tome says that brand
trustworthiness has fallen 50%, brand quality perceptions are down 24%,
and even brand awareness is down 20%. It turns out, people don't think very highly of brands, in fact – they don't think about brands all that much after all.
And according to Fast Company in the article "The new rules of brand competition" the trend has gotten a lot worse. It seems that over time marketers have kept pumping the same message out about their brands, reinforcing the message again and again. But as time evolved, people gained less and less value from the brand. Pretty soon, the brand didn't mean anything any more. According to the Financial Times, in "Brands left to ponder price of loyalty," brand defection is now extremely common. Where consumer goods marketers came to expect 70% of profits from their most loyal customers, those customers are increasingly buying alternative products.
Hurrumph. This is not good news for brand marketers. When a company spends a lot on advertising, it wants to say that spend has a high ROI because it produces more sales at higher prices yielding more margin. Brand marketers knew how to segment users, then appeal to those users by banging away at some message over and over – with the notion that as long as you reinforced yourself to that segment you'd keep that customer.
But these folks ignore the fact that needs, and markets, shift. When markets shift, a brand that once seemed valuable could overnight be worth almost nothing. For example, I grew up thinking Ovaltine was a great chocolate drink. Have you ever heard of Ovaltine? I drank Tang because it went to the moon, and everyone wanted this "high-tech" food with its vitamin C. When was the last time you heard of Tang? It was once cache to be a "Marlboro Man" – rugged, virile, strong, successful, sexy. Now it stands for "cancer boy." Did the marketers screw up? No, the markets shifted. The world changed, products changed, needs changed and these brands which did exactly what they were supposed to do lost their value.
Lots of analysts get this wrong. Billions of dollars of value were trumped up when Eddie Lambert bought Sears out of his re-organized KMart. But neither company fits consumer needs as well as WalMart or Kohl's for the most part, so both are brands of practically no value. People said Craftsmen tools alone were worth more than Mr. Lampert paid for Sears – but that hasn't worked out as the market for tools has been flooded with different brands having lifetime warranties — and as the do-it-yourselfer market has declined precipitiously from the days when people expected to fix their own stuff. So a lot of money has been lost on those who thought KMart, Sears, Craftsman, Kenmore, Martha Stewart as a brand collection was worth significantly more than it's turned out to be. But that's because the market moved, and people found new solutions, not because you don't recognize the brands and what they used to stand for.
Every market shifts. Longevity requires the ability to adapt. But brand marketers tend to be "purists" who want the brand to live forever. No brand can live forever. Soon you won't even find the GE brand on light bulbs. That's if we even have light bulbs as we've known them in 15 years – what with the advent of LED lights that are much lower cost to operate and last multiples of the life of traditional bulbs. GE has to evolve – as it has with jet engines and a myriad of other products – to survive.
Think for a moment about Harley Davidson. Once, owning a Harley implied you were a true rebel. Someone outside the rules of society. That brand position worked well for attracting motorcycle riders 60 years ago. As people aged, many were re-attracted to the "bad boy" image of Harley, and the brand proliferated. A $50 jacket with a Harley Davidson winged logo might sell for $150 – implying the branding was worth $100/jacket!! But now, the average new Harley buyer is over 50 years old! The market has several loyalists, but unfortuanately they are getting older and dying. Within 20 years Harley will be struggling to survive as the market is dominated by riders who are tied to different brands associated with entirely different products.
If you see that your sales are increasingly to a group of "hard core" loyalists, it's time to seriously rethink your future. Your brand has found itself into a "niche" that will continue shrinking. To succeed long-term, everything has to evolve. You have to be willing to Disrupt the old notions, in order to replace them with new. So you either have to be willing to abandon the old brand – or cut its resources to build a new one. For example, Harley could buy Ducati, stop spending on Harley and put money into Ducati to build it into a brand competitive with Japanese manufacturers. This would dramatically Disrupt Harley – but it might save the company from following GM into bankruptcy.
The marketing lore is filled with myths about getting focused on core customers with a targeted brand. It all sounded so appealing. But it turns out that sort of logic paints you into a corner from which you have almost no hope of survival. To be successful you have to be willing to go toward new markets. You have to be willing to Disrupt "what you stand for" in order to become "what the market wants." Think like Virgin, or Nike. Be a brand that applies itself to future market needs – not spending all its resources trying to defend its old position.
Don't forget to download the new ebook "The Fall of GM" to learn more about why it's so critical to let Disruptions and White Space guide your planning rather than Lock-in to old notions.
by Adam Hartung | Jun 22, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Rapids, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Web/Tech
For years business leaders have sought advice which would allow their organizations to become "evergreen." Evergreen businesses constantly renew themselves, remaining healthy and growing constantly without even appearing to turn dormant. Of course, as I often discuss, most companies never achieve this status. Today investors, employees and vendors of Apple should be very pleased. Apple is showing the signs of becoming evergreen.
For the last few years Apple has done quite well. Resurgent from a near collapse as an also-ran producer of niche computers, Apple became much more as it succeeded with the iPod, iTunes and iPhone. But many analysts, business news pundits and investors wanted all the credit to go to CEO Steve Jobs. It's popular to use the "CEO as hero" thinking, and say Steve Jobs singlehandedly saved Apple. But, as talented as Steve Jobs is, we all know that there are a lot of very talented people at Apple and it was Mr. Jobs willingness to Disrupt the old Success Formula and implement White Space which let that talent come out that really turned around Apple. The question remained, however, whether Disruptions and White Space were embedded, or only happening as long as Mr. Jobs ran the show. And largely due to this question, the stock price tumbled and people grew anxious when he took medical leave (chart here).
This weekend we learned that yes, Mr. Jobs has been very sick. The Wall Street Journal today reported "Jobs had liver transplant". With this confirmation, we know that the company has been run by the COO Tim Cook and not a "shadow" Mr. Jobs. Simultaneously, first report on the Silicon Valley/San Jose Business Journal is "Apple Claims 1M iPhone Sales" last weekend in the launch of its new 3G S mobile phone and operating system. This is a huge number by the measure of any company, exceeded analysts expectations by 33-50%, and equals the last weekend launch of a new model – despite the currently horrible economy. This performance indicates that Apple is building a company that can survive Mr. Jobs.
On the other side of the coin, "Walgreen's profit drops as costs hit income" is the Crain's Chicago Business report. Walgreen's is struggling because it's old Success Formula, which relied very heavily on opening several new stores a week, no longer produces the old rates of return. Changes in financing, coupled with saturation, means that Walgreen's has to change its Success Formula to make money a different way, and that has been tough for them to find. The retail market shifted. Although Walgreen's opened White Space projects the last few years, there have been no Disruptions and thus none of the new ideas "stuck." Growth has slowed, profits have fallen and Walgreen's has gone into a Growth Stall. Now all projects are geared at inventory reduction and cost cutting, as described at Marketwatch.com in "Higher Costs Hurt Walgreen's Profits."
Now the company is saying it wants to take out $1B in costs in 2011. No statement about how to regain growth, just a cost reduction — one of the first, and most critical, signs of Defend & Extend Management doing the wrong things when the company hits the Flats. And now management is saying that costs will be higher in 2009/2010 in order to allow it to cut costs in 2011. If you're asking yourself "say what?" you aren't alone. This is pure financial machination. Raise costs today, declare a lower profit, in order to try padding the opportunity to declare a ferocious improvement in future year(s). This has nothing to do with growth, and never helps a company. To the contrary, it's the second most critical sign of D&E Management doing the wrong thing at the most critical time in the company's history. When in the Flats, instead of Disrupting and using White Space to regain growth these actions push the company into the Swamp of low growth and horrible profit performance.
We now can predict performance at Walgreen's pretty accurately. They will do more of the same, trying to do it better, faster and cheaper. They will have little or no revenue growth. They may sell stores and use that to justify a flat to down revenue line. The use of accounting tricks will help management to "engineer" short-term profit reporting. But the business has slid into a Growth Stall from which it has only a 7% chance of ever again growing consistently at a mere 2%. This is exactly the kind of behavior that got GM into bankruptcy – see "The Fall of GM."
The right stuff seems to be happening at Apple. But keep your eyes open, a new iPhone is primarily Extend behavior – not requiring a Disruption or necessarily even White Space. We need to see Apple exhibit more Disruptions and White Space to make us true believers. On the other hand, it's definitely time to throw in the towel on Walgreen's. Management is resorting to financial machinations to engineer profits, and that's always a bad sign. When management attention is on accounting rather than Disruptions and White Space to grow the future is sure to be grim.
by Adam Hartung | Jun 19, 2009 | Boards of Directors, Books, Defend & Extend, eBooks, In the Whirlpool, Leadership, Lifecycle, Lock-in, Transportation
Of all the companies that typified America’s rise as an industrial superpower, none was more successful than General Motors.
What happened? Why has it fallen so far? GM at its biggest boasted some 600,000 well-paid employees. It will be left with something like 60,000 after it emerges from bankruptcy. How did that happen? Why did its stock price tumble from $96 per share at its height to 80 cents recently? Why did its market share shrink from one out of every two cars sold to less than one in five last quarter?
And thus begins the new ebook about the fall of GM. In 1,000 words this ebook covers the source of GM’s success – as well as what led to its failure. And what GM could have done differently – as well as why it didn’t do these things. Read it, and share it. Let folks know about it via Twitter. Post to your Facebook page and groups, as well as your Linked-in groups. As markets are shifting the fate of GM threatens all businesses. Even those that are following the best practices that used to make money. Let’s use the story of GM — and the costs its bankruptcy have had on employees, investors, vendors and the support organizations around the industry as well as government bodies — as a rallying cry to help turn around this recession and get our businesses growing again!
Download Fall of GM
by Adam Hartung | Jun 10, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
As I've given presentations around the country the last year I'm frequently asked about the role of leadership in Phoenix Principle companies. All people can bring Phoenix Principle behaviors to their work teams and functional groups. Yet there is no doubt that organizations do much better when the leaders are also committed to Phoenix Principle behaviors.
Unfortunately, all too often, top leaders are more interested in Defend & Extend Management. BusinessWeek's recent article "How to Succeed at Proctor & Gamble" talks about replacing CEO icons such as Charles Schwab, Michael Dell and Jack Welch. Unfortunately, only one of these was a real Phoenix Principle leader – and the others ended up coming back to their organizations when the replacements tried too much D&E behavior – leaving their shareholders with far too low returns and only dreams of rising investment value. Even more unfortunate is the fact that too many management gurus simply love to wax eloquently about leaders of big companies – regardless of their performance. Such as Warren Bennis's description of A.G. Lafley at P&G as "Rushmorian." Those at the top are given praise just because they got to the top. Yet, we've all known leaders who were far from being praise-worthy. Even the mundane can be loved by business reviewers that rely on them for money, access, ad dollars and influence.
There's a simple rule for identifying good leadership. Grow revenues and profits while achieving above average rates of return and positioning the organizations for ongoing double digit growth upon departure. It's not the size of the organization that determines the quality of a leader, it's the results. We too often forget this.
Back to departing P&G CEO, Mr. Lafley. Preparing to retire, he's taken the high ground of claiming to be "Mr. Innovation" for P&G. Experts on innovation classify them into Variations, Derivatives, Platforms or Fundamental. Using this classification scheme (from Praveen Gupta Managing Editor of the International Journal of Innovation Science and author of Business Innovation) we can see that Mr. Lafley was good at driving Variations and Derivatives at P&G. But under his leadership what did P&G do to launch new platforms or fundamental new technologies? While variations and derivatives drive new sales – "flavor of the month" marketing as it's sometimes called – they don't produce high profits because they are easily copied by competitors and offer relatively little new market growth. They don't position a company for long-term growth because all variations and derivatives eventually run their course. They may help retain customers for a while, but they rarely attract new ones. Eventually, market shifts leave them weaker and unable to maintain results due to spending too much time and resource Defending & Extending what worked in the past. Mr. Lafley has done little to Disrupt P&G's decades-old Success Formula or introduce White Space that would make P&G a role model for the new post-Industrial era.
Too often, bigness stands for goodness among those choosing business leaders. For example, GM is replacing departed CEO Rick Wagoner with Ed Whitacre according to the Detroit Free Press in "Former AT&T chief to lead GM." Mr. Whitacre's claim to fame is that as a lifetime AT&T employee, when the company was forced to spin out the regional Bell phone companies he led Southwestern Bell through acquisitions until it recreated AT&T – as a much less innovative company. Mr. Whitacre is a model of the custodial CEO determined to Defend & Extend the old business – in his case spending 20+ years recreating the AT&T judge Green took apart. Where a judge unleashed the telecommunications revolution, Mr. Whitacre simply put back together a company that is no longer a leader in any growth markets. Market leaders today are Apple and Google and those who are delivering value at the confluence of communication regardless of technology.
Today, few under age 30 even want a land-line – and most have no real concept of "long distance". Can the man who put back together the pieces of AT&T, the leader in land-line telephones and old-fashioned "long distance service" be the kind of leader to push GM into the information economy? Does he understand how to create new business models? Or is he the kind of person dedicated to preserving business models created in the 1920s, 30s and 40s? Can the man who let all the innovation of Ma Bell dissipate into new players while recreating an out-of-date business be expected to remake GM into a company that can compete with Kia and Tata Motors?
Any kind of person can become the leader of a company. Businesses are not democracies. The people at the top get there through a combination of factors. There is no litmus test to be a CEO – not even consistent production of good results. But in far too many many cases the historical road to the top has been by being the champion of D&E Management; by caretaking the old Success Formula, never letting anyone attack it. They have avoided Disruptions, ignored new competitors, and risen because they were more interested in "protecting the core" than producing above-average results (often protecting a seriously rotting core). Much to the chagrin of shareholders in many cases.
Now that the world has shifted, we need people leading companies that can modify old Success Formulas to changing market circumstances. Leaders who are able to develop and promote future scenarios that can guide the company to prosperity, not merely extend past practices. Leaders who obsess about competitors to identify market shifts and new opportunities for growth. Leaders who are not afraid to attack old Lock-ins, Disrupting the status quo so the business can evolve. Leaders who cherish White Space and keep multiple market tests operating so the company can move toward what works for meeting emerging client needs. Leaders like Lee Iacocca, Jack Welch, Steve Jobs and John Chambers. They can improve corporate longevity by shifting their organizations with the marketplace, maintaining revenue and profit growth supporting job growth and increased vendor sales.
by Adam Hartung | Jun 2, 2009 | Current Affairs, In the Whirlpool, Leadership, Openness
How appropriate. "GM strikes deal to sell Hummer" headlines a Marketwatch.com article. A day after declaring bankruptcy, Hummer with all its branding and product drawings is going to China. It seems everything about GM is iconic – including its movement of an operating auto businesses to China.
Is this bad for America, or good? I'd rather say it's inevitable. In a global economy, industrial production will move to the lowest cost location. And with a low valued currency, a very lowly paid workforce, and access to very inexpensive capital that puts China at the top of the list. Unless you want to bring back Chairman Mao and wall-in China, the population density and government programs make it inevitable that the country will be a leader in manufacturing.
But that doesn't equate to high value.
America is the world's largest agricultural nation. But has that made America wealthy? Not since the 1800s has it been true that land ownership for agricultural uses made Americans – and the nation – wealthy. As the value of agriculture declined – largely due to dramatic increases in production – America's wealth shifted to industrial production. It was by being the largest and most productive industrial nation that America prospered during the Industrial economy.
But now, industrial production has razor thin margins. Much like agriculture. Over-invest in capacity, and you can end up with under-utilized (or closed) plants and not much margin from other businesses to cover the cost. Not since the 1990s has America operated anywhere near "full capacity" on its manufacturing base. The "good" years of the last decade were unable to produce industrial jobs, or wealth for industrial companies (i.e. – GM's bankruptcy.)
In the great battle for economic leadership, the next wave is about information. How to obtain, use and manipulate information is where value is now created. Steel traders can make more than steel producers today. If you want to improve your profitability, and your longevity, you have to change your thinking from "how do I make and sell more stuff" to "what do I know they don't know, and how do I turn that into value?"
For somebody selling autos, it's becoming a lot more important to understand customer wants and preferences than to be good at making cars. Toyota and Honda can identify opportunities first, and put products into the market faster than anyone else. They can maximize their product development and short-run capability to reach targets fast, and gain advantages over competitors. Don't forget, Honda made money not just on small, high mileage cars but on a full-size pick-up called the Ridgeline (and Toyota on the Tundra). These companies are better at using scenarios to recognize early market shifts, and clearer about competitor moves so they can position products to fulfill unique customers needs. Even if it means launching products not traditional to their "core" – like Honda's Ridgeline, it's manufacturing robotics, and its new jet airplanes.
In the industrial era, people sought scale advantages and tried to build entry barriers against competitors. In the information economy flexibility is equally (or more) important than size. Recognizing customer needs and competitor actions early is more important than catering to old, devoted customer groups. Willingness to Disrupt, and do what you must do to change the market by using White Space test projects keeps you ahead of the competition – rather than trying to Defend & Extend your "core."
For the industry, having Hummer production in China could turn out to be a good thing. It will lower product cost. If the distribution in the USA can gain control of the market, by recognizing customer needs and directing the production, the distributors can grab all the value away from the Chinese manufacturer. If, on the other hand, the dealers try to act like old fashioned dealers who merely keep stock and negotiate price — then they won't create value and margins will stink. There are ways to make money in the information economy, even for traditional players, but it requires changing your Success Formula from industrial-era behaviors to the needs of an information-based economy. You can follow GM – or you can try to be like Cisco.
by Adam Hartung | May 29, 2009 | Current Affairs, In the Whirlpool, Leadership, Lifecycle
GM will file bankruptcy next week ("GM reaches swap deal, but bankruptcy still lies ahead" Marketwatch). It's likely historians will look back on this event as a major turning point in the change away from an industrial world (away from making money on "hard" assets like factories). GM was considered invincible. As were all the auto companies. The reorganizing of Ford, and bankruptcy of Chrysler will be remembered, but not likely with the impact of GM filing bankruptcy. Pick up any book on America post WWII and you'll find a discussion of General Motors. The quintessential industrial company. Destined to live forever due to its massive revenues and assets. After next week, history books will change. Altered by the previously unimaginable bankruptcy of GM. If "What's good for GM is good for America" is no longer true, what does it mean for America when GM declares Bankruptcy?
None of America's car companies will ever again be strong, vibrant auto companies. They are in the Whirlpook and can't get out. It's simply impossible. GM is now worth about $450million (at current prices of about $.80/share). It already owes the federal government $20billion – which is supposed to be converted to equity, with more equity owned by employees and converted bondholders. For most of the time since the 1970s, the average value of GM has been only $15billion (split adjusted average price $25). To again become viable GM wants the government to increase its investment to $60billion ("GM bondholders may recoup $14Billion" Marketwatch.com. That means for GM to ever be worth just the amount being supplied by the government bailout it would have to be worth $116/share – which is $20/share more than it was worth at its peak in the market blowout of 2000! (Chart here).
That means it is impossible to conceive of any way GM could ever be successful enough to achieve enough value as a car company to repay the government – and thus it has no future ability to provide dividends to private investors. Even though GM says it will be repositioned to be healthy, that simply is not true. It's no more healthy or attractive than Quasimodo, the hunchback of Notre Dame, could have ever hoped to be – or the elephant man. Helping them is charity, not a business proposition. When a company has no conceivable hope of making enough money to repay its investors it cannot attract management talent, or additional capital as assets wear out, and it eventually fails. It won't be long before the people running GM realize their future are as bureaucrats in a non-profit – but with far less psychic value than working at, for example, the Red Cross.
Meanwhile, Chrysler is downsizing dramatically as it looks for its way out of bankruptcy. As it tries to give the company to Italians to run, the company is dropping obligations it has carried for years. Even the venerable Lee Iacocca, who literally saved the company 20some years ago, will lose his pension and even his company car ("Iacocca losing pension, car in Chrysler bankruptcy" Reuters).
Ford, which restructured before this latest market shift, has not asked for bailout money. But its market share is dropping fast. Its vendors (including Visteon) are going bankrupt and Ford is guaranteeing their debt to keep them in business – with an open-ended cost not yet reflected in Ford's P&L. Even though it restructured, Ford's balance sheet is shot ("What About Ford?" 24/7 Wall Street). It has no money to design a new line of competitive vehicles.
None of these 3 companies have the wherewithal as operating businesses to replace assets. And they are competing with Japanese, Korean and Indian companies that have lower operating costs, lower fixed asset investments, higher quality and newer product lines, better customer satisfaction rates, higher profits and stronger balance sheets. Without competition it's hard to expect America's car companies to do well. When you look at competitors you realize this game can still have several more moves (especially with market intervention by government players with public policy objectives) – but the end is predicatable. Only for reasons of public policy, rather than business investment, would you continue to fund any of these American competitors.
Even though the switch from an industrial economy to an information economy began in the 1990s, historians will likely link the switch to June, 2009. (I guess that's fair, since the shift from an agrarian economy to an industrial economy began in the 1920s but wasn't recognized until the late 1940s.) Just as GM was the company that epitomized the success of industial business models, it will be the company that becomes the icon for the end of industrial models. It failed much faster, and worse, than anyone expected.
If "What's good for GM" (as in the government bailout) isn't good for America any longer – what is? For many people, this is shift is conceptually easy to understand – but hard to do anything about. They don't know what to do next; what to do differently. They fully expect to continue focusing on balance sheets and assets and the tools we used to analyze industrial companies. And those people will see their money drift away. Just like you can't make decent returns farming in a post-agrarian economy, you won't be able to make money on assets in a post-industrial economy. From here on, it's all about the information value and learning how to maximize it. It's not about old-style execution, its about adaptability to rapidly shifting markets built on information.
Let's consider CDW – a 1990s marvel of growth shipping computers to businsesses around America. CDW has pushed hardware and software onto its customers for 2 decades in its chase with Dell. But every year, making money as a push distributor gets harder and harder. And that's because buyers have so many different sources for products that the value of the salesperson/distributor keeps declining. Finding the product, the product info, inventory, low shipping and low price is now very easily accomplished with a PC on the web. Every year you need CDW less and less. Just like we've seen distributors squeezed out of travel we're seeing them squeezed out of industry after industry – including computer componentry. If CDW keeps thinking of itself as a "
;push" company selling products – a very industrial view of its business – it's future profitability is highly jeapardized.
The market has shifted. For CDW to have high value it must find value in the value of the information in its business. Perhaps like the Chicago Mercantile Exchange they could create and trade futures contracts on the value of storage, computing capacity or some other business commodity. The information about their products – production, inventory and consumption – being more profitable than the products themselves (everyone knows more profit is made by Merc commodity traders than all the farmers in America combined). Or CDW needs to develop extensive databases on their customers' behaviors so they can supply them with new things (services or products) before they even realize they need them — sort of like how Google has all those searches stored on computers so they can predict the behavior of you, or a group your identified with, before you even type an internet command. CDW's value as a box pusher is dropping fast. In the future CDW will have to be a lot smarter about the information surrounding products, services and customers if it wants to make money.
A lot of people are very uncomfortable these days. Since the 1990s, markets keep shifting fast – and hard. Nothing seems to stay the same very long. Those trying to follow 1980s business strategy keep trying to find some rock to cling to – some way to build an industrial-era entry barrier to protect themselves from competition. They try using financial statements, which are geared around assets, to run the business. Their uncomfortableness will not diminish, because their approach is hopelessly out of date. GM knew those tools better than anyone – and we can see how that worked out for them.
To regain control of your future you have to recognize that the base of the pyramid has shifted. How we once made money won't work any more. Value doesn't grow from just owning, holding and operating assets. Maximizing utility of assets will not produce high rates of return. We are now in a new economy. One where outdated distribution systems (like the auto dealer structure) simply get in the way of success. One where a focus on the product, rather than its use or customer, won't make high rates of return. With the bankruptcy of GM reliance on the old business model must now be declared over. We've entered the Google age (for lack of a better icon) – and it affects every business and manager in the world.
The future requires companies focus on markets, shifts and adaptable organizations. Successful businesses must have good market sensing systems, rather than rely on powerful six sigma internal quality programs. They have to know their competitors even better than they know customers to deal with rapid changes in market moves. They have to be willing to become what the market needs – not what they want to define as a core competency. They have to accept Disruptions as normal – not something to avoid. And they have to use White Space to learn how to be what they are not, so they remain vital as markets shift. So they can quickly evolve to the next source of value creation.
by Adam Hartung | May 18, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in, Web/Tech
"Newspapers face pressure in selling online advertising" is today's headline about newspapers. Seems even when the papers realize they must sell more online ads they can't do it. Instead of selling what people want, the way they want it, the newspapers are trying to sell online ads the way they sold paper ads – with poor results.
We all know that newspaper ad spending is down some 20-30%. But even in this soft economy internet ad spending is up 13% versus a year ago. Except for newspaper sites. At Gannett, NYT and McClatchy internet ad sales are down versus a year ago!
People don't treat internet news like they do a newspaper. The whole process of looking for news, retrieving it, reading it, and going to the next thing is nothing like a newspaper. Yet, daily newspapers keep trying to think of internet publishing like it's as simple as putting a paper on the web! What works much better, we know, are sites focused on specific issues – like Marketwatch.com for financial info, or FoodNetwork.com. Also, nobody wants to hunt for an on-line classified ad at a newspaper site – not when it's easier to go to cars.com or vehix.com to look for cars, or monster.com to look for jobs. Web searching means that you aren't looking to browse across whatever a newspaper editor wants to feed you. Instead you want to look into a topic, often bouncing across sites for relevant or newer information. But a look at ChicagoTribune.com or USAToday.com quickly shows these sites are still trying to be a newspaper.
Likewise, online advertisers have far different expectations than print advertisers. Newspapers simply said "we have xxxx subscribers" and expected buyers to pay. But on the web advertisers know they can pay for placement against specific topics, and they can expect a specific number of page views for their money. As the article says "if newspapers want to get their online revenue growing again, once the economy recovers, they have to tie ad rates more closely to results, charge less for ads and provide web content that readers can't get at every news aggregation site."
When markets shift, it's not enough to try applying your old Success Formula to the new market. That kind of Defend & Extend practice won't work. You're trying to put a square (or at least oblong) peg into a round hole. Shifted markets require new solutions that meet the new needs. You have to study those needs, and project what customers will pay for. And you have to give them product that's superior to competitors in some key way. Old customers aren't trying to buy from you. Loyalty doesn't go far in a well greased internet enabled world. You have to substantiate the reason customers need to remain loyal. You have to offer them solutions that meet their emerging needs, not the old ones.
Years ago IBM almost went bust trying to be a mainframe company when people found hardware prices plummeting and off-the-shelf software good enough for their needs. IBM had to develop new scenarios, which showed customers needed services to implement technology. Then IBM had to demonstrate they could deliver those services competitively. Only by Disrupting their old Success Formula, tied to very large hardware sales, and implementing White Space where they developed an entirely new Success Formula were they able to migrate forward and save the company from failure.
Unfortunately, most newspaper companies haven't figured this out yet. They don't realize that bloggers and other on-line content generators are frequently scooping their news bureaus, getting to news fans faster and with more insight. They don't realize that on-line delivery is not about a centralized aggregation of news, but rather the freshness and insight. And they haven't figured out that advertisers take advantage of enhanced metrics to demand better results from their spending. The New York Times, Gannett and other big newspaper companies better study the IBM turnaround before it's too late.
