by Adam Hartung | Feb 27, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
The Rocky Mountain News has folded up shop. After 150 years, no more newspaper in Denver, CO. (read article here). This is newsworthy because of the size of Denver, but the trend has been obvious. The newspaper's owner (Scripps) closed the Albuquerque Tribune and Cincinnati Post last year. And this is just the beginning. Hearst has already said it may well have to close the San Francisco Chronicle within weeks. Tribune Company, parent of The Chicago Tribune and Los Angeles Times has filed for bankruptcy, as has Philadelphia Newspapers which publishes the Philadelphia Inquirer and Philadelphia Daily Journal. The American Society of Newspaper Editors has cancelled its annual convention for 2009 (read article here.)
Just as I predicted in this blog months ago, when Sam Zell leveraged up Tribune in his buyout, the odds of any particular newspaper surviving is not very good. It was 3 years ago when I was talking to the CFO at the LATimes about the future of newspapers. He felt sure that cost cutting would get the company through "a tough stretch" and then things would get better. When I asked him if he was planning to increase spending in LATimes.com or other on-line media to make sure his projection was true – he asked me what the .com had to do with the paper. He felt the paper would soon recover. Even though there were no indicators that subscriptions would reverse trend and start growing, and even though advertisers were literally saying they never intended to return on-line ad spending back to newspapers, he felt sure the paper would succeed. When I asked why, he said "if we don't report the news, who will? Bloggers??????" and with that exasperation he reinforced in his own mind that there was no option to a successful city newspaper so no need for further discussion. He could not imagine a "democratized" newsworld without editors and publishers that controlled content and writers that were limited by that control.
February 6 I gave a speech in Chicago about growth strategies in this economy. One attendee asked me "what newspapers do you read?" As I formulated my answer, my discussion with the old LATimes CFO came to mind. "I don't read newspapers any more" I had to admit. Good thing I wasn't running for vice-president! But I realized that I'd quit reading newspapers and now picked up most of my alerts from bloggers! I am signed up to various web sites, including blogs, which send me ticklers all day long and aid my web searching for news. I get more information, faster today than ever before – and reading a newspaper seems like such a waste of time! And if that's my behavior, at age 50, I'm a joke compared to people under 30 who can use the web 10x faster than me with their better tool use.
The newspapers are going the way of magazines. That is clear. When we all started watching TV, LOOK, LIFE and The Saturday Evening Post lost meaning. Not all magazines disappeared, but the general purpose ones did. Now, even those have little value. In a connected, 24×7 world newspapers simply quit making sense a decade ago. It just took longer for everyone to realize it. While the newspapers would like to blame the recession for their failure, that's simply not true. The world shifted and they became obsolete – an anachronism. People today consume more news than at any time in history – including pre-recession years like 2007. The recession has not diminished the demand for news or journalism. And advertisers are reaching out for customers just like before. But neither readers nor advertisers are going to newspapers. The action is now all on the web – which continues growing pages at double digit rates every quarter!
So where will you get your news? If you read this blog, you likely already get most news from the web. And others will also do so. Increasingly, editors that have strong opinions (be they conservative or liberal) will have less influence on what is reported. Those who can find and report the news will themselves determine what's out there to be found – and they will capture that value themselves. To use 1990s language, Bloggers are "disintermediating" publishers. And with Google able to push ads to their sites (be they on computers or handhelds), these journalists will be able to capture the ad value themselves. If you want to see the new aggregator of the future, go to www.HuffingtonPost.com. Or www.Marketwatch.com for business info. By ignoring traditional printing and distribution, they can produce multiples of the news content of old aggregators, invest in technology to keep it updated in real time 24×7.
While people are bemoaning the decline of newspapers, take heart in the benefits. How much less newsprint will be created, reducing the demand for pulp from trees? How much less recycling of old newsprint will be required? What benefits to the ecology will come? How much more access will you have to find out all sides of various issues – rather than the point of view taken by the local newspaper publisher who mostly dictated what you used to hear about an issue? How much better educated will you be? Why, given the benefits of on-line news, would anyone want to go back to newspapers?
Bemoaning the loss of newspapers is like bemoaning the decline in rail travel – it may have romantic remembrances of a previous time, but who would ever want to give up their car and wait on trains again? As you look at YOUR business – do you blame the recession for troubles when in fact there's been a market shift? Have things "softened in the short-term," or have customers moved on to seeking new solutions that better fit their needs? It's easy to act like the LATimes CFO and project a return to old market conditions. But will that really happen? Or has the market you're in shifted, leaving you with a weak future? Will you act like Sam Zell and "double down" on a business that the market is shifting away from?
In today's economy, we can all too easily let hope for a return to the good old days keep us from using more realistic explanations. If so, we can end up like those who made kerosene for lamps (expecting electricity to be too hard to install), coal for heating, and passenger cars for trains. Be careful how easily you may think that tomorrow will look like yesterday – because most of the time it won't.
by Adam Hartung | Feb 15, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in, Web/Tech
In Create Marketplace Disruption I talk about how Sun Microsystems (see chart here) became wedded to a Success Formula which was tied to selling computers. In its early days Sun had to build its own systems, workstations and servers, to make its techology available to customers. As the company grew, it continued pushing the hardware, even though increasingly all of its value add was in the software. One of its more famous innovations was a software product called Java – now used all across the web. But because Sun could not figure out how to sell hardware with Java the company literally gave the product away – on the theory that growing internet use would increase demand for servers and workstations.
But like most Locked-in Success Formulas, Sun's fell into diminishing returns. The market shifted. First it's biggest buyers, telecom companies, fell into a depression early in the century. And corporate buyers struggled to maintain old IT budgets, increasingly transfering work offshore and demanding lots more performance at lower prices. Secondly, an emerging software standard, Linux, started competing with Sun at a much lower price point, and corporate buyers found this a viable solution. And thirdly, Linux and Microsoft both improved performance operating on somewhat "generic" PC hardware that was considerably cheaper than Sun's hardware, further augmenting corporate movement away from Sun.
But Sun continued to push forward with its old Success Formula. Now analysts are confused about Sun's direction, and largely think the company less likely to survive (read article here). With most analysts recommending investors sell Sun Microsystem shares, as one analyste (Rob Enderle) put it "They seem like a software company, but they are sort of like a hardware company." He added that after years of giving software away for free in efforts to entice hardware buyers Sun Microsystems is on the verge of being obsolete.
Sun Microsystems is just another example of a company so busy focusing on doing what it always did that it didn't evolve to what the market demanded – and rewarded. As software became the value, Sun did more but didn't figure out how to evolve its Success Formula to charge for it. The company remained Locked-in to its old practices, and refused to Disrupt and open White Space where it could find a more valuable Success Formula for the future. Too bad for employees, vendors and investors.
by Adam Hartung | Feb 10, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
GM is in intense negotiations with bondholders, employees (via the union) and the government over its future. At stake is nothing less than the future of America's largest auto company. A company that saw revenue decline more than 40% in January after deciding in December to idle most of its manufacturing plants.
The negotiations are focusing on whether GM can be competitive. But, unfortunately, GM seems to be directing that discussion toward cost reductions (read article here). As if all GM needs to do is somehow lower costs and it will be competitive with Toyota, which displaced GM atop the global auto industry as the world's largest in January. What customers globally know is that the issue at GM isn't just about cost (which can pretty much be translated into "union contract busting.") Customers want quality products that fit their needs, produced at high quality, with low service costs, and low cost of use (interpret – higher mileage.) It's been 20 years since the yen/dollar valuation gave Japanese manufacturers lower cost of production – and yet year after year Toyota, Honda, Subaru and Suzuki keep growing share while U.S. manufacturers keep declining.
One of the more difficult to understand articles this week was the lauding of GM's vice-chairman Bob Lutz. Mr. Lutz is more than 70 years old! He might well have been a great executive 35 years ago (in 1974) when he was an up-and-coming executive. But my how the world, and the auto industry, has changed since then. I'll never forget watching him interviewed on television about the Tesla (the electric sports car) and seeing him laugh. He literally dismissed Tesla as unimportant – not up to the standards of GM and it's industry leadership. At the time my thought was "I think you'd be a lot smarter to listen to these new guys than be so smug and ignore them." Of course, in short order, Toyota's hybrid vehicles helped lead Toyota past GM, and the approach of Mr. Lutz was looking less and less viable. Good bye, and good riddance, would be a better report for an executive who not only stayed around too long and didn't "save" GM, but ignored powerful competitors while trying to defend an outdated Success Formula.
It is time for GM, and the other domestic auto competitors, to move on. The old Success Formula has failed. It's not about just doing less well, with GM stock valued at $2.70 and the negotiation about converting bondholders to equity holders in order to get more government bailout money — the game is over. What worked for GM in the 1950s, and most of the 1960s, doesn't work any more. And the success of Toyota and Honda demonstrates that. America doesn't need Bob Lutz (and his compadres) any more – may he enjoy his retirement (which is a lot more secure than the thousands of GM retirees that weren't executives). If investors, employees and vendors of the American auto industry are to avoid even more downfall it is time to develop an entirely new game – with new leaders.
GM (and its brethren) need to quit villifying unions as the "boogeymen" causing all their problems. Management signed those union agreements – and if they weren't viable management should have dealt with them. The employees of GM - and all the citizens of Detroit, southeastern Michigan and northwester Ohio as well as the extended midwest – have a vested interest in the succes of this industry. They will agree to leadership which helps them succeed. Continue the old "company vs. union" battles will do no good. Leadership needs to be focused on offering an approach to delivering products that will energize employees and ucstomers alike.
GM must define a new future. Not one based upon a series of cost cuts – which will be matched by competitors. GM needs to demonstrate it can change its view of R&D, product development, customer finance and distribution to meet current customer needs. For GM to be viable, management must demonstrate it knows that tweaking the old model is insufficient. It's time to develop an "entirely new car company" as Roger Smith said when he funded the launch of Saturn. And America's banks, investors and auto buyers all know this.
Increasingly at GM, Disrupting the old business model seems unlikely. Current management is so Locked-in it continues searching for ways to Defend the old model, in spite of deteriorating results at the nadir of failure. If America is to invest in this company, it deserves new management which is able to develop a new company that can truly compete. It is time to demand new leaders who are not the "old guard", but instead leaders who are able to bring new products to market that are competitive by implementing White Space where these new products can be launched through new distribution. For America to keep supporting GM the company needs to move beyond old arguments about labor costs, and get serious about changing its product line and distribution system as well as its legacy employment costs. It's possible to turn around GM – but only if management will abandon its Defend & Extend Management practices and instead use Disruptions to open White Space for a better company to emerge.
by Adam Hartung | Jan 28, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
In a recent presentation I told the audience that they had quit printing newspapers in Detroit during the week. The audience said they weren't surprised, and didn't much care. The other day I asked a room full of college students when the last time was they looked at a newspaper (not read, just looked) – and not a single person could remember the last time. In Houston I asked two groups for the headline of the day that morning – not a single person had looked at the newspaper, and none in the group subscribed to a newspaper. Even my wife, who used to demand a Wednesday newspaper so she could receive the grocery ads, asked me why we bother to subscribe any more because she now gets the ads in the mail. This wholly unscientific representation was pretty clear. People simply don't care much about newspapers any more.
So, if you had $100 bucks to invest, and you had the following options, would you invest it in
- A professional baseball team (like the Boston Red Sox or Chicago Cubs)?
- A manhattan skyscraper?
- A newspaper?
That is exactly the question which is facing the New York Times Company (see chart here), and their decision is to invest in a newspaper. In fact, they are selling their interest in the Boston Red Sox and 19 floors in their Manhattan headquarters so they can prop up the newspaper business which saw ad revenue declines of greater than 16% – and classified ad declines of a whopping 29% (read article here). (Classified ads are for cars, lawn mowers, and jobs – you know, the things you now go to find on Craigslist.com, ebay.com, vehix.com and Monster.com and aren't likely to ever spend money on with a newspaper.)
The value of New York Times Company has dropped 90% in the last 5 years – from $50 to $5. The decline in advertising is not a new phenomenon, nor is it related to the financial crisis. People simply quit reading newspapers several years ago, and that trend has continued. Simultaneously, competition for ads grew tremendously – such as the classified ads described above. Corporate advertisers discovered they could reach a lot more readers a lot cheaper if they put ads on the internet using services from Google and Yahoo! There was no surprise in the demise of the newspaper business.
At NYT, the smart thing to do would be to sell, or maybe close, the newspaper and maximize the value of investments in About.com and other web projects (which today are only 12% of revenue) as well as Boston Sports (owner of the Red Sox) and hang on to that Manhattan property until real estate turns around in 5 years (more or less). Why sell the most valuable things you own, and put the money into a product that has seen double-digit demand and revenue declines for several years?
Of course, Tribune Company isn't showing any greater business intelligence. Management borrowed far, far more than the newspaper is worth 2 years ago through an employee stock ownership plan (can you understand "good-bye pension"?). So last week they sold the Chicago Cubs. For $900million. Tribune bought the Cubs, including Wrigley Field, 28 years ago for $20million. That's a 14.5% annualized rate of return for 28 consecutive years. Not even Peter Lynch, the famed mutual fund manager, can claim that kind of record!
Through adroit management and good marketing, they modernized the Wrigley Field assets and the Cubs team – and without ever winning the World Series drove the value straight up. As fast as people quit reading the Chicago Tribune newspaper they went to Cubs games. Who cares if the team doesn't win, there's always next year. And unlike newspapers, there aren't going to be any more professional baseball teams in Chicago (there are already two for those who don't know - Chicago's White Sox won the World Series in 2005). And they aren't building any additional arenas in downtown Chicago to compete with Wrigley Field. Here's a business with monopoly-like characteristics and unlimited value creation potential. But management sold it in order to pay off the debt they took on to take the newspaper private.
Defending the original business gets Locked-in at companies. Long after its value has declined, uneconomic decisions are made to try keeping it alive. Smart competitors don't sell good assets to invest in bad businesses. They follow the capitalistic system and direct investments where their value can grow. The New York Times may be a good newspaper – but who cares if people would rather get their news from TV and the internet – and they don't read newspapers "for fun?" When people don't read, and advertisers can get better return from media vehicles that don't have the printing and distribution costs of newspapers, what difference does it make if the outdated product is "good?" If you think the New York Times Company is cheap at $5.00 a share, you'll think it's really cheap in bankruptcy court. Just ask the employee shareholders at Tribune Company.
by Adam Hartung | Jan 14, 2009 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership
Yesterday Yahoo! announced it was replacing its old CEO with Carol Bartz, former CEO at Autodesk. Interestingly, most analysts aren't very excited – because they don't think Ms. Bartz brings the right experience to the challenge (read article on analyst reaction here.) The complaint is that Ms. Bartz is not steeped in consumer goods or advertising experience, so she's not the right person for the significant challenges facing Yahoo!
Yahoo! does not need "more of the same." Yahoo! needs to adapt to the technology requirements necessary to succeed in on-line ad placement. Google is way, way out front in internet advertising sales, and there's not a single executive at Google with experience in ad sales or consumer goods! Google has changed the game in advertising largely because it has not been Locked-in to old notions about advertising, and has instead created new competitive approaches leaving old players in the dust. And largely because its executives have eschewed historical advertising lore in favor of creating new solutions.
Yahoo! doesn't need someone with advertising experience. Yahoo! needs someone that will Disrupt the organization and change its Success Formula. And for this, Ms. Bartz may well be exactly the right person. While she led Autocad the company which changed the world of CAD/CAM (Computer-aided-design/computer-aided-manufacturing software), and in the process brought down a large GE division (Calma) and in the end crippled DEC (Digital Equipment Corp.) which was extremely dependent on CAD/CAM workstation sales. Autocad was supposedly a "toy" running on cheap PCs, but it became the software used by many engineers that was a fraction of competitor's cost and operated on machines a fraction of those needed to run competitor software.
In the process, Ms. Bartz became known as "one tough cookie." A CEO who understood that competitors gave nothing easily, and it takes a very tough smaller competitor to unseat market leaders. Year after year she led a company that brought forward new products which challenged competitors – all better financed, with larger market share and long lists of large, successful customers. And after 15 years or so Autocad emerged as the premier competitor. Isn't that the experience most needed by Yahoo!?
Meanwhile, one of the old leaders in ad sales – Chicago Tribune – is now changing its format from broadsheet to tabloid (read article here). For those not steeped in newspapers, broadsheets (like Wall Street Journal or USAToday) have long been considered "quality" journals, while tabloid format (like a magazine) has been considered a lower quality product. Although this switch is a cost saver, and any implication on journalistic quality is largely symbolic, the reality is that Tribune Corporation has slashed its journalistic staff in Chicago, L.A. (L.A. Times) and other markets to a shadow ghost of the past. In just a few years, a leading news organization has become almost irrelevant – and left two of America's largest cities with far too little journalistic oversight. Now it's trying to save itself into success (read article here).
Yahoo! is changing its CEO, and appears to be putting in place someone ready to Disrupt and install White Space. Tribune Corporation has slashed cost, slashed cost, slashed cost, increased its debt, and turned itself into a shell of what it used to be. Now the company is taking actions to lower paper cost – in an effort to again save a few more pennies. After watching its local classified advertisers go to CraigsList.com, and its display ad customers go to Google, its new leader, Sam Zell, remains unwilling to Disrupt and invest in White Space to become an effective internet news organization. Today even HuffingtonPost.com is able to offer more news on more topics faster than any news properties at Tribune Corporation to an avid internet news readership.
Following the Tribune lead, Gannett – publisher of USAToday – has announced it intends to force everyone in the company to work for one week for no pay (read article here). Apparently not even color pictures and feel-good journalism can attract advertisers. Probably because not even hotel guests care any more about getting a newspaper. Not when they log on to the wireless internet upon awakening to check e-mail and news alerts before they even open the room door to go to breakfast. Gannett will have no more success trying to save its business by forcing employees to work for free than Tribune has had with its cost cuts. Ignoring market shifts is not successfully met by trying to do more of the same cheaper.
What Gannett, Tribune Corporation and other news organizations need is their own Carol Bartz. Someone who may not be steeped in all the tradition and experience of the industry – but knows how to Disrupt the status quo and use White Space to launch new products and move toward products customers want.
by Adam Hartung | Dec 16, 2008 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in, Quotes
In 1993 Pulitzer Prize winning author David Halberstam wrote a book about the 1950s – called appropriately "The Fifties". He takes time in this book to talk about GM – a company today that has seen its leadership embarrassed, and its value for investors disintegrate in the face of mounting competition. It's humiliated executives have asked Congress for a bailout to save the employees and customers from total failure – because they seem unable to figure out a solution themselves. Read what Mr. Halberstam, a New York Times reporter, had to say about GM's rise to prominence:
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"No one at GM could ever have dared forecast so much prosperity over such a long period of time. It was a brilliant moment, unparalleled in American corporate history. Success begat success… The postware economic boom may have benefited many Americans, but no one benefited more than General Motors. The average car, which had cost $1,270 at the beginning of the decade, had risen to $1,822 by the end of it…twice as fast as the rest of the wholesale cost index.
There was in all of this success for General Motors a certain arrogance of power. This was not only an institution apart; it was so big, so rich, and so powerful that it was regarded in the collective psyche of the nation as something more than a mere corporation: It was like a nation unto itself, a seperate entity, with laws and a culture all its own.
The men who ran the corporation, almost without exception, came from small towns in America… Everything about them reflected their confidence tht they had achieved virtually all there was to achieve in life. Others, critics, outside Detroit, might believe that these men were not such giants and might believe that they did not so much create that vast postwar economic wave as they had the good fortune to ride it… As for the intellectuals, if they wanted to drive small foreign cars, live in small houses, and make small salaries, why even bother to argue with them?
As success of the company grew, its informal rules gradually became codified. The culture was first and foremost hierarchical: An enterprising young executive tended to take all signals, share all attitudes and prejudices of the men above him, as his wife tended to play the sports and card games favored by the boss's wife, to emulate how she dressed and even to serve the same foods for dinner.
The essential goodness of the corporation was never questioned. It as regarded as, of all the many places to work, the best, because it was the biggest, the most respected, made the most money and, very quietly, through bonuses and stock, rewarded its top people the most handsomely."
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If this was the world of GM, codified as Mr. Halberstam explains, it becomes easier to understand the behavior of GM in the 1960s, 1970s, 1980s and 1990s - as competitors kept chipping away at market share and power. From 50% share of all automobiles sold in the 1950s, GM's share is now only half that. Executives, managers and even union employees quickly came to believe (in the late 40's and 50's)the future would always be like the past. But Toyota, Honda, Nissan, Subaru, Kia and others didn't accept GM's claim to a monarchy. And now, everyone is paying for it.
Lock-in is built when companies are doing well. And Lock-in keeps the organization from changing. It is easy to belittle challenges, and blame poor performance on others. As competitors evolve, at times making big improvements, the Locked-in organization will explain away poor performance – but resist accepting the need to change. In the end, if we don't learn how to Disrupt the Lock-in and use White Space to become more competitive we all end up in the Whirlpool. Even GM.
by Adam Hartung | Dec 10, 2008 | Current Affairs, Defend & Extend, General, In the Whirlpool
Illinois' Governor Rod Blagojevich has burst onto the national scene. Not in a good way, obviously. What's surprising, though, is how people are reacting to the fact that today he returned to work and has shown no inclination to resign. They seemed surprised. They seem perplexed that he did not immediately resign. One newsperson on superstation WGN television said he thought this case was in greater need of a psychologist to explain the governor's behavior than a lawyer. I could not help but chuckle when I heard an NBC political analyst on "Countdown" say the "logical" thing for the Governor to do was resign. None of these people are taking the time to think about the Governor's Success Formula.
Rod Blagojevich is the product of some pretty rough-and-tumble politics, still carried out in the wards around Chicago. This is not to imply any wrongdoing on the part of Chicago's Mayor or his administration, nor any of the state employees of Illinois. But reality is that for many years politics in Chicago meant, "you wash my hands and I'll wash yours." While things have changed at the top, for many people in the bowels of government work, this Success Formula was ingrained. For many, if you want your street plowed of snow early, you make sure you contribute to the Alderman's re-election fund – and that was considered absolutely normal. In the old Secretary of State's office you could buy a truck driver's license without even taking the test. Even though several leaders have changed, there's been no real Disruption in local politics and so for many participants, many work teams and some functional groups, this Success Formula has endured. (Although the Secretary of State's office is a model example of change – and nothing at all like it was for many years under previous Secretaries.)
Governor Blagojevich got his "jump start" into politics by marrying the daughter of a powerful Chicago Alderman – Richard Mell. Mell has been powerful for a long time, and as a result he's learned how to play big time, hard ball politics. You don't back down easily, and you play each and every situation to win – not tie – and certainly not to withdraw. You never quite know what might happen, and those who attack may be attacked before they can make something stick. Play to win, all the time, every time. Horse trading is part of the game.
I would not be surprised to learn that similar hard-ball poiticing is common in many city halls and state offices across America – and between most of our representatives in the Congress and Senate. Even Presidents learn how to make compromises – albeit a lot more subtly and ethically than how we're hearing the Governor did it. To some extent, he seems less the "political criminal" (as characterized by the U.S. Attorney) than the politically naive who got too high without the proper training in "how to get things done" politically.
A result of his training was that the Governor learned to play to win. Never give up. Thus, he's utterly predictable. From his point of view, so far he's been convicted of nothing. He may be disliked right now – but there are many examples of politicians who see themselves publicly rehabilitated. In the 1980s a highly discounted politician, who had not even bothered to pay taxes for more than a decade, was elected Chicago's mayor and was quite popular (Harold Washington). Why would the Governor give up? Why resign? He still has the power of the governorship, and any effort to impeach him will take months – if it should succeed. Until the day comes when he absolutely, positively has to stop – why stop?
That's the way of Success Formulas. They don't work by other people's rules. They don't work by consensus, or public opinion, or even common sense. George Wallace extolled the virtues of segregation and even launched a campaign for the Presidency long after segregation was widely deplored in America. Richard Nixon felt humiliated as Vice-President by the lack of respect he was given from Eisenhower – including a complete lack of endorsement when he ran for President. And of course he lost his first run for President, and he was not well liked in his own party. Yet, he successfully positioned himself to win 2 terms as President before resigning in disgrace due to his involvement in ordering the Watergate break-in. None of these people did what would seem "normal" to most people. But they were entirely consistent with their Success Formulas.
We can expect that Governor Blagojevich will work very hard to protect himself, his family and his future. After all, if you listen to the counts against him you can see that was exactly what he was doing as Governor. There is no reason to think he will change that behavior now. While he is now severely challenged, and he has a big stack of problems, he has not been Disrupted – and he has not taken on any White Space where he would try anything new. To the contrary, he is in the same job, with the same people, doing the same work. What he will do is very predictable – it will be the action most likely to help himself and his family. You don't need to be a psychiatrist to understand the Governor – you just need to look at his past and understand his Success Formula. And notice that nothing has happened which is likely to make the Governor think he should change that Success Formula now.
After all, his predecessor (a Republican) didn't change his Success Formula and now the #2 Democrat in the U.S. Senate (Dick Durbin) is asking the President to pardon him for past wrongdoings so he can get out of prison. Why wouldn't Blagojevich ask the incoming President to pardon him in exchange for stepping down from the Governorship (for the good of the state)? To this day, many people think that was "the deal" Nixon made with Congressman Ford when he gave him the Vice-Presidency - which led to him becoming the first President to never be voted on by the American population when Nixon resigned. It was rather quickly that the new President Ford pardoned ex-President Nixon "for the good of the country."
Never underestimate the power of Success Formulas. People will follow them long, long after their results have proven unsatisfactory. Lock-in, established years (often decades) before keeps the person going in the same direction despite the lack of recent success. As small wins come in, they reinforce that the Success Formula will work again, if just adhered to closely enough. And many leaders – in government or in industry (don't forget Bernie Ebbers at Worldcom or Mr. Skilling at Enron) will deny wrongdoing and remain committed to their course even in the face of considerable evidence that to change would be more beneficial.
Of course, if you allow yourself to be Disrupted – and you keep White Space alive in your life – you can avoid this problem. You can learn to adapt your Success Formula to produce better results as environments around you shift. But that has not been the way of Governor Blagojevich. Do you allow Disruptions and White Space in your life? Or are you risking a drift into weaker results while remaining tied to old Lock-ins?
by Adam Hartung | Dec 8, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
So we now hear that Congress will loan $15billion to GM, Ford and Chrysler intended to keep them going concerns until at least March. We've been told that there are requirements on the loans that will better the industry. But honestly, there's nothing new being proposed that makes any difference, nor the proper teeth in Congress's proposed bill. (Read about the bill here.)
The bill limits executive bonuses and severance packages. But why does it let management (and the Boards of Directors) keep their jobs? It is clear that these leaders, and their management teams, led these companies into desperate circumstances. They put their bondholders, equity investors and employees all at risk. They passed the "brink" and got to the point of requiring government assistance to stop a cataclysmic disaster. So why are these people left in their jobs? How can anyone expect a really changed industry if the people who sold off assets for 2 decades trying to Defend & Extend a thoroughly out of date and broken Success Formula are given the money to invest?
Oh, we can expect a "car czar" who is supposed to oversee these loans and assure a the industry invests appropriately for change. Who's the right guy for this job (don't forget – I applied!)? We now read that the lawyer who oversaw the handout of money to survivors of 9/11/01 victims. This is, of course, the right qualifications to evaluate business plans, investment rates and innnovation programs for an industry. He's shown he can hand out money – but where has he shown he knows anything about re-engineering a very broken, large company? Where does he have credentials for un-knotting the Lock-in that keeps these companies dysfunctional? And how is he supposed to stand up to management teams that claim to have superior knowledge about auto company management – despite driving these companies into the proverbial financial ground.
The union leadership apparently wants Board seats in exchange for concessions. What difference will that make? Do union leaders know how to turn around companies where they encouraged Lock-in that cost them thousands of jobs? Are they trying to reach back to the kind of union practices that kept coal stokers on trains long after electric automotives were introduced? Defending & Extending out of date union practices won't fix these companies either. What these union leaders need to be asking for is government promises to secure the unfunded pension obligations, and creating a government program to preserve heath care costs that are likely to be stripped in an effort to lower variable costs. There is no bailout that can cover these costs indefinitely – and that is where labor restructuring needs to focus.
As investors, Americans deserve better than leftover thinking for their investment. More of the old management won't fix the problems. What's required is White Space to make significant changes:
- Auto design has to change from backward integration and standardization for manufacturing to forward-thinking which brings customers
- Distribution has to allow customers more opportunites to buy than the old-fashioned, and tedious, dealer structure which puts off almost all customers (and makes buying an unpleasant event). Customers deserve the right to buy direct if they like, and from dealers if they enjoy what dealers offer.
- Manufacturing has to change from "scale" to "build to order". Flexibility has to overtake 80 year old industrial design practices which have made the products inflexible and too expensive.
- Pension reform is essential. The overhead costs of pensions makes these companies unviable. This will require government intervention.
- Health care reform is essential. Perhaps Michigan should follow the Oregon example (and Massachusetts), and be a leader in developing programs to have state-assisted insurance coverage for everyone. Perhaps this should be an experiment in changing from employer paid health coverage, which offshore competitors do not have to shoulder, to self-paid coverage with guaranteed protection.
These are complex problems. They defy simple solutions. They require White Space. Cut Saturn free (again, like when it was founded) to experiment with new solutions. Give other nameplates the indepence to experiment with other possibilities. Monitor performance, see what works, and migrate toward what succeeds.
Now is the time to implement Disruptions and try something new. When the airline industry was grounded in 2001 there was a tremendous opportunity to restructure from unprofitable hub-and-spoke systems with outdated practices to new approaches using White Space. But neither government, nor the industry, took advantage of the stoppage to really try something new. Everyone was in a rush to start operating again, with practically no change. A huge opportunity was lost. And that sounds like the direction we're headed with the desperately uncompetitive auto industry.
We should not make that mistake again. Now is the time to Disrupt these companies. Fire the executive teams and the Boards. They've never been shy about firing employees or vendors. Put new management in place that understands how to manage innovation – rather than Lock-in. Get people in the jobs who don't want to Defend & Extend what's broken – but instead want to make changes and learn what will make these companies world class once again. And put in place competent oversight that can make sure change happens.
by Adam Hartung | Dec 7, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
A year ago Sam Zell was telling Chicago that he knew how to make money in newspapers. He was certain, absolutely certain, that Tribune Company newspapers – including The Chicago Tribune and The Los Angeles Times – would soon be returned to higher readership, higher ad rates and greater profits. Now, Tribune Company is preparing for bankruptcy (read article here.)
Sam Zell did a horrible job of scenario planning. He didn't look into the future and develop scenarios about what was likely to happen in news. Instead, he simply assumed that readers would return if he made a few format and editorial changes, the economy would strengthen and he could depend on advertisers returning as well. He expected a fast, big payback for his investment. Just like he'd done in real estate all those years.
Sam Zell had a very Locked-in Success Formula. He had spent a lifetime buying property, usually properties already in locations demanded. All he had to do was fix up the property and let growing demand for the scarce resource – his building in a demanded location – drive up the value. He didn't stick around to make money off rent. He didn't run a business that made a product and sold it. He bought properties, dressed them up and sold them at a profit. To him, Tribune Company was a property that was being ignored. All he had to do was fix it up a bit, wait a bit, and sell it to someone for more than he paid.
Oops. That Success Formula doesn't work when customers are walking away from the property to pursue a better one. News seekers in droves are going to the internet for their news. They no longer want to browse a newspaper – understanding that takes time, and it gives only a single source. The internet gives them fast answers to their queries from multiple sources. And advertisers are going where the readers are going – to the internet as well. The cost for a printed medium is high, and the results are hard to prove. Whereas internet ads can be tracked for number of page views, number of click-throughs and even sales. The readers are more, and the follow-up is superior. Advertisers have found it easy to forget about newspaper ads, especially in a soft marketplace.
Meanwhile, the Tribune Company Success Formula was firmly stuck in the 1990s. From sales people to editors, denial about shifting reader needs was everywhere. Even though each news company – from newspaper to radio and TV – had great access to reporters and first touch at many news stories, they did not realize that readers were looking for that news on the web first. Each newspaper and station was Locked-in to pushing the news through its format, ignoring the enormous audience opportunity they had in their local markets by using cross-media approaches, including the web. There was no one approaching customers with multi-format advertising opportunities. Nor was the company investing heavily into web sites or portals that could attract large numbers of on-line readers. The on-line environments were under-invested, and selling ads was completely fractured. There was limited, at best, sales efforts to get advertisers onto the weak websites running news from each individual business unit.
What Tribune Company needed was not only scenario planning that identified the range of opportunities for ad sales – but a sincerely intense analysis of on-line competitors. Instead of bragging that the company had leading newspapers in major cities, the leadership should have recognized its fast declining share of total news coverage – due to shifts in how people acquire their news. By focusing internally, cutting costs and trying techniques like new formats, Sam Zell missed the opportunity to really study competitors and figure out how to transform Tribune into a competitive news company – like, say, News Corp.
And while he was busy firing people and making changes on the periphery, Sam Zell was unwilling to really Disrupt Tribune Corporation. He didn't change the business model – the Success Formula. He whacked the chicken coop, scaring employees, readers and advertisers alike as he talked about firing people until he made money. But he never caused his leadership team to really stop and talk about the future of news. They were too busy looking for people to lay off or protecting their own jobs — while Sam was trying to find buyers for the Cubs, Wrigley Field and the Tribune Tower as a potential condo project.
And Sam's Success Formula had no space for White Space. Sam didn't see any reason to try new things – like having salespeople sell internet ads as well as print ads. Or trying to drive traffic to the Tribune or L.A. Times web sites. As a property "flipper" extra-ordinary, Mr. Zell was not interested in developing a new business model. So none was developed – nor any energy spent trying to create one.
Now, America's second and third largest cities are at risk of losing their primary local newspapers. The suppliers are seeing their customer shrink, and possibly their accounts receivable jeopardized. Advertisers are wondering how they reach their local customers. And employees are looking for new jobs. Meanwhile, citizens are wondering who will be out interviewing the mayors, governors and congresspeople of their fine states. Who will be supplying the news?
The cost to Sam Zell Defending & Extending both his Success Formula and that at Tribune Company is enormous. The bond holders – most certainly pension funds and bond mutual funds - will take a horrible hit. The employees and employees of suppliers pay as well. And the citizens, dependent upon a robust news community will also suffer. It's too bad Mr. Zell didn't talk less, and listen more – implementing White Space to make a leading news company that would impress his customers across the U.S.A. I guess he'll have a lot of time to read Mr. Murdoch's newspapers (like the Wall Street Journal), watch Mr. Murdoch's Fox television stations and look at Fox's web site (have a MySpace page yet Sam?) after Mr. Zell's equity value gets wiped out in bankruptcy. Surely the creditors will ask for a new leader – who faces a much more difficult challenge now that the resources have been gutted by Mr. Zell.
by Adam Hartung | Dec 4, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Innovation, Leadership
Well the heads of GM, Ford and Chrysler are back in Washington asking Congress for cash. According to Senator Dodd it's a sure thing they'll get it (read article here). And accordinto the the Government Accountability Office even if Congress doesn't approve bailout money, Treasury or the Federal Reserve can provide assistance from the TARP fund (read article here). So, it looks like something will happen.
This time the auto companies are saying they intend to "reinvent" themselves with the money. Uh-huh. And exactly who's going to lead this re-invention? Why the same leaders that got into this problem. Now, do we believe that? A lot of people in Congress have their doubts – seeing as how the bankers didn't seem to change much after being told they would get bailed out. So these Congressional folks are saying they want the auto leaders to report back on their plans to change – and of course GM's head said he'd be happy for the oversight. "It would be very helpful for us, whether it's a board or an individual, to have someone to work with on this, to submit our proposals and then for that person to say,'OK, don't agree with that. You've got to change this," said GM CEO Richard Wagoner. (Read quote and more here.)
So Senator Dodd and Speaker Pelosi – for the good of America – I volunteer for the job. I'll review GM, Ford and Chrysler's plans for innovation and report back on the likelihood of them revitalizing the industry. Now that I've put that on the table – I'll just wait for your phone call or email – you can reach me right here through this blog if you like (see the "contact me" area).
Oh, you don't think I'm the guy Mr. Wagoner had in mind? Why not? Do you suppose he was looking for some "industry guru" who is already sympathetic to his claims that the problems are not of management's making – but rather due to economic circumstantces? Do you think Mr. Wagoner prefers someone who is more traditional, on corporate boards that have been agreeable to CEOs for years – accepting of their tough jobs and approving their extreme paychecks? Do you suppose he doesn't want somebody who has expertise in innovation at all, but rather someone who wants to slowly seek change via one small, incremental step at a time, because that's the way big companies do things? Perhaps someone with government experience, used to the pace of change in government agencies? Or perhaps a lawyer who will be sure all actions are within current legal boundaries – whether they actually create benefit or not?
I do think GM and Ford can be saved. But I don't think current management will do it. They are so Locked-in, so used to the "boundaries" of convention, that there is no way they can create companies competitive with Honda, Toyota and Kia. The first thing any oversight agency should do is change the leadership teams, attack the industry Lock-ins and establish White Space to build a new company. Maybe look at Tessla – the electric car company auto execs love to laugh at — but that hasn't asked for any money from Congress as it's built its sold-out sports car using laptop batteries – for some new management. Or ask John DeLorean to quit dealing drugs long enough give up a few ideas (Ok, that is going to far). But surely, with all those talented graduates at the University of Michigan and Northwestern there has to be some people ready to actually do things differently.
GM needs more than oversight. It needs change. Big change. Let's hope Congress takes Mr. Wagoner's words to heart and finds somebody who knows something about innovation to watch over the billions they give these companies.
