by Adam Hartung | Nov 15, 2008 | Defend & Extend, Disruptions, General, In the Whirlpool, Innovation, Leadership, Lock-in, Openness
On Tuesday, New York Times columnist Thomas Friedman (author of The World is Flat) chided the auto companies for their lack of innovation and desire for government assistance (read article here). Setting off a firestorm of comments across the web, he not only recommended replacing the Board of Directors and executives at GM (as I have blogged), but went so far as to recommend asking Steve Jobs to take over GM leadership as an act of national service.
The other side of this argument was made by columnist John Dvorak on Marketwatch (read article here). Mr. Dvorak says this is a foolish idea, because the auto industry is so integrated and unique that only someone within the auto industry could hope to run an auto company. He recommends searching within the bowels of the auto companies for some overlooked wonderkind who is able to turn around the organization while maintaining the existing business model. He goes on to say that the only reason Steve Jobs has been successful is due to the unique features of the tech industry, implying no tech manager could hope to run a company as complex as GM.
Mr. Dvorak suffers from the sort of traditional management thinking that has gotten GM (Ford, Chrysler, Citibank, Washington Mutual, Sears, General Growth Properties, Sun Microsystems, etc.) into big trouble. As he lists off the "unique features" of the industry, and discusses "the manufacturing, inventory, subassemblies, delivery and other systems that are in place…too delicately balanced and complicated for a newbie to deal with" he describes Lock-in. Mr. Dvorak views what's been done in the name of Defend & Extend Management as good – and therefore necessary to keep. Thus, any turnaround would require doing more of what's been done – hoping somehow doing it better, faster and cheaper can make the company successful again. But he completely ignores the fact, which he actually makes in his article, that there are a lot of other auto companies competing with GM, Ford and Chrysler — and they are better at running these complexities than GM, because they are able to make autos that customers purchase at a higher profit. Mr. Dvorak ignores the obvious fact that it is very likely the structural and behavioral Lock-ins which he thinks impossible for a new leader to manage that are causing the horrible results in the U.S. auto companies. He ignores the notion that it is the very heart of the GM Success Formula that is competitively outdated, and thus causing these horrible results.
Successful turnarounds are rarely accomplished by people who are part of the industry. Because those in the companies are Locked-in to the Success Formula which is producing the poor results. Existing leders and mangers accept those Lock-ins, and that old Success Formula, thus trying marginal changes – or more of the same but with less resource. What really works is when a new leader implements significant Disruptions that cause people to approach the work with a very different frame of mind, and then implement White Space projects (usually several, and with lots of resources and visibility) which allow the company to develop a very different Success Formula to which the company can migrate. Example – consumer products leader Lou Gerstner's turnaround of tech giant IBM.
While Steve Jobs likely could make a significant difference in GM, I don't think it has to be Steve Jobs. We so love our heros we start thinking only they can make a difference. What GM needs is new leadership that works like Steve Jobs. Leadership that (a) focuses on future needs rather than current problems (b) obsesses about competition rather than thinking all solutions lie within the company (c) is not only willing to be Disruptive – but enjoys creating Disruptions to the Lock-ins which overwhelm the Status Quo Police and (d) set up White Space projects where leaders are given permission to do things very differently, and the resources to achieve significant goals.
It can happen in the auto industry. About 25 years ago much maligned Chairman Roger Smith took cost savings from closing outdated plants in places like Flint, Michigan (the reason for Michael Moore's first docu-story Roger and Me) and invested them in a start-up company called Saturn. Saturn was White Space where the leaders were not forced to follow old G.M. Success Formula tactics – like keeping the same union contracts, or using the same components, or using the same dealers, or using the same customer pricing mechanisms. Saturn came on the scene with great fanfare. With only 3 vehicles in their initial line-up, the company's brand became "Apple-like" with its near-cult status. People loved the smaller cars, the focus on safety and consistency, the no-negotiating price method and the low-pressure dealerships. This was a great example of White Space that produced a very significant change in customer opinions about American cars - and car companies – and in just a few years.
Unfortunately, Roger Smith retired and over the years GM's management has dismantled what made Saturn great. Rather than migrate GM in the direction of what made Saturn a winner, they slowly pulled Saturn into the old Success Formula of GM, killing its advantages. Away went all the uniqueness of Saturn as it was turned into just another division GM. Similarly, the acquisition of Hummer from American General offered an opportunity for GM to move in unique directions – but quickly Hummer became just another division which focused on a narrow product range and eliminated much of its uniqueness homogenizing the brand into something far less desirable. GM spent billions on developing an electric car, more than a decade before the hybrids were launched by Toyota and Honda. But management's Lock-in to preset ideas about what that car needed to do caused them to kill the project — and go so far as to sue test customers to retrieve the electric autos they LOVED.
GM desperately needs leaders willing to Disrupt. And willing to implement White Space to develop a new Success Formula. Leaders willing to let the company migrate toward new ways of operating – who believe it is essential. People like Steve Jobs. People the auto companies weeded out long ago when forcing those who move up to slavishly accept the failing Success Formula and focus on Defending & Extending it – despite the declining results. It will take people from outside GM, Ford and Chrysler to turn them around. It can be done.
by Adam Hartung | Nov 12, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
What to do with GM and Ford? It sort of sounds like "what do we do about our miscreant son ______?" The reality is that both companies are on the brink of failure – and no one believes they can survive without some sort of government bailout. The national news is now active in the debate about whether to bailout or not – and how to bailout – from Nancy Pelosi in the U.S. House of Representatives to MSNBC pundits Keith Oberman and Chris Mathews to CNBC stock maven Jim Cramer. But plenty of people are angry. They were first angered by the bank bailout – and now this potential auto industry bailout makes them angrier. Cries of "socialism" are not hard to find.
Not many Americans want GM and Ford to disappear. The loss of millions of jobs, havoc on the unemployment, insurance and pension systems and the disappearance of thousands of dealerships along with the subsequent short-term shortage of product would be a tornado of problems making the banking crisis look like a west Texas dust devil. But simultaneously, almost everyone is angry about bailing out the companies. So where should this anger be directed, and can it be used constructively?
We must hold management accountable for the terrible state of these companies. Even if you want to blame the union leaders, no labor contracts could have been created without acceptance by company management. Under every bad decision rock will be the fingerprints of someone in management at the company. It is management's responsibility to look out for the fiduciary well being of debtors and investors – as well as the long-term interests of customers who want service and replacement product, and employees who want to keep working, and suppliers who want to support the business. All of these groups have suffered badly due to bad management decisions.
So, are these managers all a bunch of dopes? That would be a radically over-simplified conclusion. These managers are well educated, many from the top schools. They are experienced. They have more vested in the success of their companies than almost anyone. Most have sacrificed pay, bonuses and benefits over the last several years, just like their employees (or even moreso) as part of helping their companies make it year to year.
What we have to realize is that these managers are Locked-in to the Success Formulas their companies created in the 1940s-1960s. During those heydays, investing in auto manufacturing was a great way to grow wealth. Working in an auto company made you amongst the highest paid workers on the globe. Times were good, GM and Ford were on top, and the companies created behavioral norms and structural decision-making systems that helped them do more of what was making money. The companies Locked-in on those behaviors and processes, and they are still trying to run these companies according to those outdated Lock-ins. Even though the marketplace has shifted dramatically over the last 50 years, amazingly little has changed within the Lock-ins at these companies. They have steadfastly Defended & Extended their Success Formulas – even ignoring the learning opportunities from acquisitions in aerospace and computers.
There are auto companies not on the brink of extinction. Toyota, Honda and Kia may not be raking in the money this year, but no one thinks they are going broke. They disrupted the auto market, and have never looked back. As the market Disruptors, they have taken advantage of their Locked-in competitors in everything from labor agreements to manufacturing processes to design methods and even sales/marketing approaches. GM and Ford have been sitting targets, easy to prey upon, because they were so unwilling to Disrupt and use White Space to evolve. Quite to the contrary, the Locked-in leaders at GM and Ford have sold asset after asset – from Hughes Aircraft to EDS to GMAC at GM, for example – in their effort to protect the auto industry Lock-in within their companies yielding poorer and poorer return on assets year after year after year.
Now that the leaders of these companies (and this goes for the financial industry players looking for TARP bailouts) are asking for bailout, someone must step up to forcing change in the management. Not because they are bad people, or ignorant, but because they are Locked-in to approaches assured of not improving results. It makes no sense to put money into Locked-in management teams that have proven they can't make an adequate rate of return. While some are saying "the smartest people about the auto industry are in the auto industry" (or banking), what they really mean is "the people who are Locked-in to how this industry has historically operated, and ignored market shifts to the point they took their companies to the edge of bankruptcy, are asking now for government support to maintain their Lock-in." And that would be a foolish way to invest anyone's money – private or taxpayher. Benjamin Franklin is credited with once saying "lunacy is doing what you always did but expecting a different result." It would be lunacy to bail out these companies and leave the existing management in place – to do more of what was done that led them to failure.
If managing was easy managers would be paid less than workers. To earn more – like the remarkable pay of CEOs – managers are supposed to keep their companies making high rates of return. If they don't, why are these managers there? Once they fail, why should management teams be given money to do more of what they've already done, but to unsuccessful results? Recent examples of AIG managers who are going on lavish business trips so shortly after their company was saved from bankruptcy by the governement is a clear indicator of how ready these managers are to return to the same behaviors and decision-making processes that almost destroyed their companies. They are planning on more of the same, with possibly a little trimming around the edges. Not the kind of change needed for these companies to regain competitiveness. Have you heard any of these management teams take responsibility for their company failures, or recommend they be replaced? Or are they asking for money to keep themselves employed?
There's a lot of competition for managerial positions. There are a lot of leaders and managers who have been pushed out of organizations due to downsizings, or even age. There are thousands of managers receiving new management degrees every year. If these bailouts are to be effective, then we should assuage the anger of those supplying the bailout funds with a change in the management of these companies. If we don't want government employees running them, according to stagnant rules incapable of keeping up with rapid market shifts, then we need a new batch of leaders and managers who are willing to Disrupt how these companies operate – internally – and start up a batch of White Space projects to create new Success Formulas that are competitive and able to produce positive returns in today's marketplace. If we don't change the leadership, we shouldn't expect much payback for the investment.
by Adam Hartung | Nov 10, 2008 | Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in
What a day this Monday is turning out to be. Circuit City files for Chapter 11 (read Reuters article here, and Marketwatch article here). Sirius radio looks like it will follow soon (read article here). And Deutsche Bank analysts are predicting GM will end up wiping out shareholders through either bankruptcy or a government bailout that will eliminate the equity (read article here). GM was trying to find a solution by merging with Chrysler, but that deal's now dead leaving Ford at risk of failure, and Chrysler in need of a partner if it is to survive (read Financial Times article here). Who's pulling the rug out from all these stalwarts of American capitalism?
Let's not forget that Circuit City was the statistically best performing company in Jim Collins' wildly popular book "Good to Great". How could a company that was considered a model for all leaders to follow decline so far, so fast? Is it worth considering that the management approach the author recommends possibly might not be as effective as promised? Mr. Collins' recommends companies figure out their approach to the market, then get everyone committed to that approach. After that, his recommendation is to leave ego at the door, and execute, execute, execute against the approach and its metrics. Those who work hard, and sacrifice, he predicts will win. So, should we conclude that Circuit City changed after he wrote his book? Did management become vainglorious? Did leaders, managers and employees lose commitment to the market approach? Did everyone quit working hard, quit sacrificing? Is that the problem in all these companies? Egotistical management lacking committed and hard working employees willing to sacrifice?
My research into hundreds of companies for "Create Marketplace Disruption" concluded just the opposite. In most instances of troubled companies, management was extremely dedicated and hard working. Examples of sacrifice were everywhere, as employees dropped bonuses and accepted pay and benefit cuts. Vendors took longer terms and lower prices while carrying inventory for their troubled customers. Customers remained loyal often right up to the point of failure. In reality, there was just as much commitment and sacrifice, hard work and effort in those that failed as those that succeeded. As Mr. Rosenzweig concludes in "The Halo Effect" these characteristics do not explain performance of winners as distinctive from losers. So, what is it?
Following best practices can oftentimes be as harmful as anything else. Companies that get into trouble consistently demonstrated commitment to Defend & Extend management, even after market shifts rendered D&E management unable to improve results. Continuing to optimize, to do more while trying to be faster and better and cutting costs in efforts to be cheaper simply did not turn the corner on performance. For example, just today a leading marketing web site is recommending that companies need to implement only tactics that are designed to optimize the existing brand and its performance while eschewing innovation (read article here). Innovation is costly and risky, they presume, so investing in wht you know is the only way to go. That same journal pointed out that all the American auto companies were focusing on cost cuts in an effort to save themselves (read article here) - when we all know the biggest problem these companies face are autos which aren't competitive with foreign products which have equal or higher quality at better pricing and often considerable advantages in fuel economy, longevity, cost of ownership and performance.
When management focuses internally, bad things happen. Focusing on how to operate better presumes there will be no market changes which alter competitiveness. The reality is that most companies falter because they miss market shifts – and the shifts cause competitors to become relatively more attractive. If management keeps trying to do what it used to do better, it misses market changes and keeps falling farther and farther behind. Simple product enhancements (product variations or simple derivatives), early cost cuts, and other short-term actions give a false sense of betterment leading to complacency – as competitors keep gaining share due to better relative market position.
The retail marketplace started shifting powerfully in the late 1990s as internet retailers changed the costs and processes for customers. Circuit City ignored these market trends far too long. The auto industry has been shifting ever since offshore competitors started gaining share in the 1980s. But the "Big 3", their employees and their vendors ignored these trends for too long. Even as offshore competitors opened facilities in America, the changed competitive marketplace was ignored as GM, Ford and Chrysler tried doing more of what they'd always done. In the end, who pulls the rug on these companies? It's the competition.
Competitors who link their Success Formula to changing markets use scenario planning to keep abreast of necessary changes and obsess about all competitors to learn what they can do to remain in front with customers. These winning competitors don't Defend & Extend some plan management creates, but instead use Disruptions to keep themselves adaptable to changing markets, and use White Space to constantly test new solutions which can keep them advantaged. The losers are the ones who keep trying to do more, better, faster, cheaper with their old Success Formula, and fall behind competitors who ignore the siren's call of optimization, focus, productivity and sacrifice in favor of adaptability and leading market trends.
by Adam Hartung | Nov 6, 2008 | In the Rapids, In the Swamp, In the Whirlpool, Leadership
Companies get into trouble when they stop developing scenarios and plan to succeed by merely Defending & Extending what they’ve always done. In the last few weeks we saw Bear Stearns and Lehman Brothers disappear because they did not prepare for market shifts. Merrill Lynch almost followed them, and may still if Bank of America (chart here) decides to change the name (now that Merrill is becoming a wholly owned subsidiary of BofA).
Companies get into trouble when they stop developing scenarios and plan to succeed by merely Defending & Extending what they’ve always done. In the last few weeks we saw Bear Stearns and Lehman Brothers disappear because they did not prepare for market shifts. Merrill Lynch almost followed them, and may still if Bank of America (chart here) decides to change the name (now that Merrill is becoming a wholly owned subsidiary of BofA). Another example popped up today when we learned the Las Vegas Sands (chart here) is on the brink of failure (read article here). As Sands management ran up the debt, it failed to consider scenarios which could have caused people to not gamble – like a recession! When you aren’t looking at the range of possible shifts, it’s easy to be blindsided. In the last year, the Sands stock price has declined from $120/share to $8. That’s an amazing $40billion loss of value! And all because it forgot to plan for market shifts.
On the other hand, let’s look at Apple (see chart here). Apple is highly dependent upon computer chips for all its devices, from the Mac to the iPhone. Originally the company was built on microprocessors from Motorola. But that changed years ago as the company adopted chips from IBM. Now Apple is using chips from Intel. In its phone products, Apple once used IBM chips but now licenses its chips designs from ARM holdings and modifies them for its own use. And recently Apple hired the former IBM chip head to a new position managing device hardware engineering (read article here).
Wow, Apple looks to be all over the board. Some accuse Apple of being a lousy partner with is chip suppliers. Or accuse CEO Jobs of being a control freak who is trying to get into the chip business. But think again:
- Apple is highly dependent on chips. If they guess wrong on the chips, and over-commit, they could end up suddenly behind competitors and in big trouble.
- How is Apple to know if its vendors will remain on top of the technology curve? If the partner slips, Apple could slip with it.
- Competitors are all around Apple with new products, including Google with its new phone and Motorola with its new commitment to the same software Google is using. They are trying different technology solutions with the hope of eclipsing Apple.
What we see is Apple looking forward, and seeing a range of potential scenarios. Any of these vendors could be dominant, or could be a flop. Additionally, Apple itself has some ideas about what could create market leading product that might eclipse the vendors. What we see is a company that is keeping its options open. Apple is using scenario planning to identify a range of potential outcomes, and it is trying its best to keep itself positioned to win regardless of which outcome occurs. It is obsessing about competitors, and keeping itself flexible to move quickly with market shifts should a competitor take an action which could jump it into the lead.
Making big bets is NOT the job of management. That’s a fool’s folley. Good leaders use scenario planning to identify a wide range of options, and work hard to keep their options open to win regardless of which scenario develops. You have to marvel at how clever CEO Steve Jobs is to position Apple for future success, and how good it is for investors that he would add someone to his top staff who can help keep all options open. This is a very good sign for Apple investors, employees and customers that Apple will remain a strong, viable competitor into the future – even as the shifts of technology threaten to whipsaw the market.
by Adam Hartung | Nov 4, 2008 | Defend & Extend, General, In the Whirlpool, Leadership
In 2004 Motorola (see chart here) was about to take off. It's radio business was continuing to grow as it launched into digital products. And its handheld cellular business was about to go nuts with the launch of a new product called Razr. A new CEO was focusing the company on the future, obsessing about competitors that were launching new products, Disrupting everything from the new product launch process to free corporate lunches and opening White Space all over to get growth going. And it worked.
But then, almost as fast as it grew, Motorola went south. Instead of continuing the new approach, Ed Zander, the CEO, became overwhelmed by a 2-pronged set of concerns. Carl Icahn started buying shares and asking to oust the CEO so he could (somehow) start cutting costs. Instead of taking on Mr. Icahn by demonstrating how his results were headed the right direction while Mr. Icahn was clueless when it comes to high-tech, Mr. Zander began cost cutting to appease Mr. Icahn. Secondly, Mr. Zander stopped pushing the scenario building, competitor obsession, Disruptions and White Space. Instead, he reacted to employee uneasiness by turning immediately to a Defend & Extend strategy, Locked-in on the Razr. New products dried up as the company just pushed harder and harder on Razr sales. The company quickly began operating as it had 8 years earlier when it slid into disarray, lousy returns and massive layoffs as the future grew murky.
Now Motorola is trying to define a new future. The plan is to split the company into 2 parts. Radio and cellular. But the problem is that the biggest, cellular, is in deeply difficult territory. Sales are down, new product launches are few and profits are gone. So the Board hired a new CEO for that business – the former Chief Operating Officer at Qualcomm. And now Crain's Chicago Business reports he's issued an internal memo with his plan (read article here). So can we expect a turnaround?
His plan involves changing his top reports. And he's cutting a line of new products being launched to save cash and "better position products for the future." He's narrowing the technology line-up toward those he believes are the most likely winners. And he's reorganizing along geographic lines. So do you think this will "fix" Moto?
There are reasons to be concerned:
- Products are being stopped from market review. In the end, White Space has demonstrated that the marketplace is much better at selecting winners than executives are. It was "getting Razr out the door" that got Moto going again – an historical problem at Motorola that loves to over-engineer everything and has been slow to new products letting competitors chew them up.
- The company is narrowing its technology use. History has shown that technology shifts can happen fast in high tech, and those companies that avoid the bets by playing the widest technology tend to make the most money the longest. Making technology bets is a quick way to turn a large fortune into a small one – and Moto doesn't have much fortune left.
- There is no Disruption in what he's doing. Changes in employees at the top, and reorganizing along traditional lines, does not attack the behavioral or structural Lock-ins. Without an attack on existing Lock-ins the organization will not do anything new. Organizations like to Defend & Extend what they've always done. Given that there's no Disruption planned, why would we believe the organization will be more productive?
- No White Space. The opposite could be implied, with the decision to stop a new product launch and to narrow the technology use. It's up to the leadership to be right, to guess the future of technologies and customer needs as well as the design of new products. Instead of White Space to develop a new Success Formula to which the company can migrate, this is an effort to have the CEO be brilliant and lead the organization into better results. Unfortunately, this approach almost always fails as Lock-in inhibits transition and the difficulties of being prescient become obvious.
I'd love to see Moto come back. But with the approach as relayed by the Chicago journalists, it appears unlikely. Perhaps a few big investors with private equity will think that a "streamlined" and "focused" Moto will be a better bet. But the fact is that only the market will decide if Moto is a good operation. And that will require having new products and services that meet changed market needs. Moto operates in a hotly competitive marketplace. It doesn't have the luxury of dictating what will work and what won't. Competitors will have more to say about its success than management will. And this approach is weak on scenario development – and absent on talking about competitors. Without Disruption and White Space, how can we expect the company to be effectively market reactive? Doesn't look good for shareholders, employees, suppliers or customers.
by Adam Hartung | Nov 3, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
Circuit City (see chart here) has announced it will close another 155 stores (see article here). Here, right before the big holiday buying season, Circuit City is contracting drastically. The company is almost out of cash, and is running into problems obtaining inventory. And with the likely demise of the company soon, it's unclear how many customers will buy from Circuit City when they can't take back items that break after the retailer is gone.
What makes this story somewhat remarkable is that Circuit City was one of the 11 companies Jim Collins profiled in "Good to Great." Not only was it one of what were considered the best 11 corporate performers in the world – it's turnaround to greatness score was the absolute highest of all the companies profiled, more than twice as high as the next best performer, and more than 3 times higher than the average "Good to Great" company. Jim is considered a management guru, who receives around $100,000 every time he gives a speech to corporate clients. "Good to Great" has been considered a corporate bible by many CEOs and other executives who have taken the stories from Mr. Collins to heart and decided his approach is the best way to great success. So to have Circuit City severely falter, and most likely fail, after only a handful of years since Mr. Collins published his book is an event worth spending some time discussing.
Despite Mr. Collins' great wealth accumulation and speaking success, he is not without detractors. Many academics have questioned the validity of his research. And in "The Halo Effect" professor Rosenzweig of Switzerland's top business school casts Mr. Collins as a fraud. Unfortunately for Mr. Collins, a review of the performance of his 11 "Great" companies demonstrates their performance since publishing the book is – at best – average. When one fails, perhaps it's worth spending some time reconsidering Mr. Collins' recommendations.
What appears true is that companies Mr. Collins likes end up in growth markets. Then, they pursue very targeted strategies which Mr. Collins recommends you not alter much nor even challenge. Mr. Collins ascribes business success in these companies, as he does in his first book about start-ups that get big ("Built to Last"), largely to dogged determination and sacrifice. He proselityzes that success is the result of hard work, dedication, and focus. And, from all appearances, once a company is into the Rapids of Growth, such actions to reinforce the Success Formula are helpful for the early leader to grow. For those who turnaround, much of their success can be ascribed to getting into a growth market and then simply doing what got them there.
But the problem with Mr. Collins' "Great" companies occurs when they lose their growth. In most cases, exactly as it happened with Circuit City, competitors figure out the Success Formula and they copy it. Additionally, lacking the significant Success Formula Lock-ins (behavioral and structural) which Mr. Collins loves and become part of the "Great" companies, new competitors more quickly implement new ways of competing which the "Great"companies ignore. In Circuit City's case, this was obvious in spades as Circuit City ignored on-line competitors which have lower cost, faster inventory turns, wider selection and lower price than traditional brick-and-mortar stores.
As a result, even Collins's "Great" companies end up falling out of the Rapids. Quickly they move into the back half of the life cycle, mired in the Swamp. Without the current of growth, which pushed them in the Rapids toward profitability, they are consumed fighting competitors. But, doing "more, better, faster, cheaper" of what they've always done simply does not make them more profitable. Competitors create market shifts which require changes in the Success Formula to continue thriving. But, with "everyone on the bus" (a favorite phrase of Mr. Collins) no one knows how to do anything new, and there's no place to try anything new. Quickly, results continue faltering and the company is sucked into the Whirlpool of failure – a prediction being made by Marketwatch.com when labeling today's Circuit City article "Circuit City Circling the Drain." Of course, it's hard to argue with Marketwatch's editors when the company value has declined from over 30 dallars per share to 30 cents per share in about 2 years!
Phoenix companies avoid this sort of fall by overcoming their Lock-ins. Something Mr. Collins never discusses. Yes, these Lock-ins help them grow during the Rapids. But all markets eventually shift. The Rapids disappear due to competitive changes. To succeed long-term companies have to Disrupt their Success Formulas by attacking Lock-in BEFORE they find themselves in the Whirlpool. And they implement White Space where they can test and develop a new Success Formula toward which the company can migrate for long-term success. Winning long-term requires more than a single turnaround into a growth market and then slavish willingness to do only one thing. Instead, it requires figuring out likely market changes with extensive scenario planning, being obsessive about competitors in order to identify new competitive changes. And then Disrupting and using White Space to constantly be reborn.
by Adam Hartung | Oct 20, 2008 | In the Swamp, In the Whirlpool, Leadership, Lock-in
With the economy soft, and sales harder to come by, more companies are thinking about what changes they can make to be more competitive. But what we’re seeing now is the emergence of competitors that Disrupted when times were good, and the decline of those who chose to Defend & Extend old Success Formulas in order to maximize profits back then.
Let’s take a look at Sun Microsystems (see chart here.) Trading today at $5.25/share, Sun was a darling of the internet boom – peaking at about $250/share in 2000. But $5.25/share (adjusted for splits) is about what Sun was worth in the mid-1990s. At that time Sun was a big winner as internet usage exploded and the telecom companies – as well as industry participants from tech to manufacturers – could not get enough Unix servers. Everyone was predicting that the need for servers was never going to decline, and Sun was "#1 with a rocket", to use an old radio term for a big hit song.
In 1995 Sun held a management retreat for all its managers and higher in Monterey, CA. Scott McNealy, the chairman and CEO, asked the audience "if you could buy Apple, would you do it?" The audience reacted with a positive roar! These managers all saw the benefit of having a low-price workstation line to augment their expensive servers. Further, Unix was notoriously difficult to use and the hope of bringing a better GUI interface was very appealing. They saw that if they could help the sales of Macs it would be a great way to slow the Wintel (Microsoft Windows plus Intel microprocessor) PC platform – which was the biggest competitor to Unix. And Apple had lots of applications in media and the office that eluded the very techie Sun products. These managers, directors and V.P.s had all thought about an Apple + Sun merger, and they saw the opportunities.
Mr. McNealy looked at the raucous, hopeful crowd and said, "you think you could fix that mess? With all we have to do to keep up with market growth, you don’t see buying Apple as a major diversion?" The air was sucked out of the room. Obviously, Apple was troubled. But there was real hope for growth in new and unpredictable ways from combining the two companies, their positive brands, their great technologies and their creative roots. But Mr. McNealy went on to tell the audience that the executive team had thought about the acquisition, and just couldn’t see doing it. It would be too disruptive.
That management retreat had as its keynote speaker Gary Hamel, author of Competing for the Future. Mr. Hamel gave a great presentation about how his research showed great companies figured out their core – their core strength – and then reinforced that strength. The rest of the retreat was spent with the management personnel in various break-out sessions defining the "core" at Sun Microsystems and then identifying how Sun could reinforce that core.
Of course, it only took 5 years for the internet bubble to burst. The telecoms were some of the first victims, with their value plummeting. Demand for servers fell off a proverbial cliff. Meanwhile, Unix servers from IBM and others had increased in performance and capability – giving the once high-flying Sun a competitive kick in the pants. Worse, the power of Wintel servers had continued to increase, making the price difference between a Unix server and a Wintel server much less acceptable. IT Department customers were beginning to shift to PC servers in order to lower cost. And Sun, with its focus on servers, had no desktop product to sell – no competitor to the PC – nor any software products to sell. The internet market was rapidly shifting toward Cisco and those who sold robust network gear. Sun was watching its market disappear right out from under it – and happening in weeks.
Now it’s unclear what the future holds for Sun Microsystems (read article here). Sales have not recovered. Losses have been mounting. Sun’s dealing with hundreds of millions of dollars in restructuring costs (again), and some of its businesses are now worth so little that the company is probably going to be forced to write off millions (maybe billions) in goodwill on the books. If it has to write off too much good will, Sun could end up declaring bankruptcy.
The time for Disruption at Sun was when business was good – in 1995 and 1996. Had they bought Apple, who knows what combination might have happened. At the time, Cisco (see chart here) was growing quite handily. But Cisco built into its ethos the notion that the company would obsolete its own products. This desire, to never ride too far out the product curve and instead cannibalize their own sales before competitors did, has allowed Cisco to keep growing revenues and profits. Instead of "focusing on its core" Cisco keeps looking for the competitors (companies and products) that could make Cisco obsolete – and using those competitors to help Cisco drive growth.
Even with Disruptions, many competitors will not survive this recession. Not because the managers are lazy or sloppy. But because they will become victims of better competitors who built Success Formulas more aligned with future market needs. Those who Disrupted in 2005 and 2006, who positioned themselves for globalization and rapid market shifts, will do relatively better in 2009 than those who chose to Defend & Extend what they used to do. The best time to Disrupt and create White Space is when things are good – because that prepares you to win big when markets shift and times get tough.
by Adam Hartung | Sep 22, 2008 | Defend & Extend, Disruptions, Ethics, General, In the Whirlpool, Leadership, Lock-in
By now, everyone knows the story. After all the cost to take over Freddie Mac and Fannie Mae, plus the guarantees given to J.P. Morgan Chase for their acquisition of Bear Sterns, and the cost to keep AIG alive – in the range of $300million to $600million – the Treasury secretary now says the U.S. taxpayers need to spend at least (it could be more – even more than 2x this amount) $700billion to purchase the bad loans sitting on the books of banks, investment firms, insurance companies and hedge funds.
So what does the taxpayer get for this? So far, all the taxpayer is told is "it’ll stave off an even worse crisis." I’m reminded of the words attributed to Illinois Senator Everett Dirkson "a billion here and a billion there and pretty soon it adds up to real money." This is a lollapalooza of a bunch of money – and yet no one seems interested in saying what the taxpayer gets. The proposal is pinned on "things will be worse if you don’t", without much talk about how things will ever get better. There’s no talk about how this will create more jobs, create rising incomes, or improve asset values. Just "it can get a lot worse."
So, put yourself in the role of CEO. If someone came into your office saying "I think we made a whopper of a mistake, and you need to agree to pony up something like $1 to $1.3trillion dollars to bail us out." After you get back up, what would you ask? How about, "what’s this for?" To which you hear "Well, it seems we simply made a bunch of bad investments, and now we have to buy them all back." Nothing about how your business will be better for having done it.
Now, it might occur to ask, "if I do this, how do I know it won’t happen again?" And that’s the question you really should be asking today. Have you heard before about this problem, and told your previous actions would stop the problem? If yes, wouldn’t you say "hey, I’m a bit tired of running around this tree and getting these recurrent bad news meetings. Seems like every Monday is something of a ‘here’s the newest crisis’ environment. What’s your plan to adjust to the market requirement?" And if the plan is to do more of the same, but now with more resources, done harder, and working smarter you’d be pretty smart to say "if the previous actions didn’t work, why should these work?"
In the end, this $700billion to $1.6trillion isn’t changing anything. It’s just putting the proverbial "finger in the dyke." Only what started out as a few hundred million dollars (the finger in the first hole) has exploded into over $1trillion and the dyke hole isn’t the size of a finger – it’s the Holland Tunnel! Clearly, what was tried hasn’t worked. Yet, this is asking more of the same. So, in the legislation the person who’s been watching and saying "things will be fine" and spending the hundreds of millions has now said "just to make sure this works, I want not only all this money but no oversight on what I might need to spend additionally – and no controls over what actions I might need to take – in order to finally stop the flooding problem." Uh, right. Since everything you’ve done before didn’t work the obvious right answer is to give you more money than I ever imagined, and on top of that give you unbridled permission to do anything else you want to keep trying more of the same to stop the problem.
When do you say "no"? Confronted week after week with crisis after crisis, when do you say "I don’t think this is working?" It’s so easy to go along. It’s so easy to say "this has been the way we’ve always done it. Things haven’t worked so far, so clearly all we need to do is do more of it. Possibly more than any of us ever dreamed imaginable – but surely if we do enough, do more, eventually it will work."
Now, more than ever, we need White Space. The financial markets have shifted. Competition has shifted. The balance of competitiveness has shifted to those who have access to lower cost resources of everything from oil to labor. Those who focus on industrial production can now see that it is dominated by those who have more people, who are equally trained and who work for less. Whether that is the production of shirts, or software code. Trying to prop up a global financial system based on the "full faith and credit of the U.S. government" is difficult when that government is significantly in debt, has lost its position as #1 in manufacturing output, and no longer controls the financing of everything from dams to auto purchases. Trying to "fix" this situation with solutions designed to work in another era, under a different set of circumstances, will not produce better results.
At the very least, when confronted with this kind of situation it is the time for leaders to say "where is the White Space to develop a new solution? If I have $1.3trillion to buy the problem – either by giving up the money or by printing more – and I forego all other expenditures (like health care, or defense against competitors) to put the money here – I deserve to see some money spent on developing a new solution. One that is built upon the new market characteristics." This is not the S&L crisis again, nor is it the failure of a single big bank. We are seeing the results of a market shift which the industry was not prepared for. And the only way to come out successful is to have White Space to develop a new solution.
So far, no one has asked for permission to develop a new solution – nor has anyone even proposed it. No one has even asked for resources to develop a new financial system. All the money is going to attempt propping up the old system – and the more we dig, the deeper we get.
At the very least, for $700billion, we need White Space. We don’t need hedge fund managers who are salivating to buy up beaten down assets. We don’t need regulators trying to roll back the clock. Nor do we need "do nothing" recommendations with "have faith this will all work out in a capitalistic system." We are in the information age – not the industrial age. We are in a global economy – not a U.S.-led international economy. We are facing new competitors, with different advantages, doing very different things. And we need new solutions. Without those, each Monday will continue to feel like the movie "Groundhog Day" as we relive over and again the problems we don’t address by simply throwing money at it. We have to find a way to move beyond "more of the same."
Mr. Paulson is willing to bet the U.S. Treasury on doing more of the same. He’s ready to spend money Americans don’t have (since there is a negative U.S. government budget and huge deficit.) This means either higher taxes, or turning on the printing press and creating inflation. That’s a bet he’s willing to take. Are you? Or would you like to see some options? Some new solutions? Or even some teams that are working on new solutions? If he’s your V.P., your CFO, do you approve his recommendation, or do you ask for something more – some White Space to develop a solution that does more than stave off future crisis. Do you look to the future, and how to win, or do you try to preserve the past and put all your money on the bet that old solutions will work?
by Adam Hartung | Sep 11, 2008 | In the Swamp, In the Whirlpool, Leadership, Lock-in
Leaders of organizations, especially those with lots of employees and/or big revenues, have a leveraged impact when making decisions. If a manager with 8 people in a group makes an error, it’s felt by those 8, plus those all 9 work with. If the CEO of a business with over $1B of revenue, or more than 1,000 employees makes a bad decision think about the leverage that creates. Lots of people suffer. Not only the employees, but customers, investors and suppliers.
This is very apparent now at Tribune Company and especially the newspapers it controls – including the Los Angeles Times and the Chicago Tribune. These aren’t the only 2 businesses owned by Tribune Corp., but their success, or lack therof, has a serious impact on the 35-50 million people that are tightly connected to the markets where they report the news. Yes, it is true that newspapers no longer have the power they once did. But there’s no doubt that lots of our news is still dependent upon writers and editors working at these two newspapers. If we’re to root out political corruption at the state or local level, or report on energy crises, or agricultural concerns we depend significantly on reporters at big city newspapers. As reported in BusinessWeek recently (read article here), these newspapers are now at significant risk of failure due to the leadership of Sam Zell.
Back at the end of 2006 Tribune’s equity value was down 65% from its high in 1999. Revenues had been declining since 2004. Cash flow was being propped up with draconian cuts across the organization. Pink slips littered the hallways, and long-term employees were being handed early retirement plans. It was clear that management was doing everything possible to dress up the corporation for a higher valuation to some potential suitor – which was proving hard to find. Most people were very wary of the proposed pricing, recognizing that changing market dynamics in media were pushing advertising more toward the web, and coming right out of newspapers. Meanwhile, in cable targeted channels were fragmenting the market leavng variety channels running reruns or second-rate programs (like CW) with precious few eyeballs and struggling ad revenues. This was all bad news for Tribune Corporation. Something needed to be done that would help Tribune find a new way to compete and grow against the ever-more-popular internet and ad-placement behemoth Google.
Enter Sam Zell, who had a Success Formula he was ready to apply. Throughout his history he had bought beaten up real estate, borrowed a gob of money against it, done some fixing up, leased it out and then sold it for a big gain. In real estate, this had always worked. So he was ready to apply his Success Formula to newspapers. He had no plans to change the operating Success Formula at Tribune Corporation, believing the revenue problems would self-correct. He read 3 papers every day, so he figured people would be like him and return to reading newspapers soon enough. And advertisers would follow. He was going to own the Cubs and Wrigley field, but he didn’t much like baseball, so to him this was just another asset to leverage and sell. Same for those 25 second-tier television stations around the country. He didn’t intend to change the Tribune’s operating Success Formula, just tweak it a bit. And overlay his own Success Formula based on lots of debt, waiting for recovery, doing some simple sprucing, and being overbearing with employees.
Of course, as I predicted in my several blogs at the time, this was a recipe for disaster. The Tribune Corp needed a big dose of internal Disruption, and plenty of White Space to figure out where advertisers were going and how to appeal to them. Tribune needed to move hard and fast to more web understanding, and dramatically rethink how to manage its independent television stations in a world where they were the weakest of weakening broadcast stations – as well as the most generic of cable stations. Revenues were going to continue to decline – and facing a predictable economic weakening they would decline a lot and very fast. The last thing Tribune Corporation needed was more debt. It needed to conserve its assets to pay for a transformation of the company – after it could figure out what that transformation needed to be!
After adding an additional $8billion debt, growing it to $13.5billion,, and investing only $350million of his money, Sam Zell set off on a path of value destruction. And who holds the bag? The bondholders of course. Someone once told me that debt was not supposed to carry risk – that’s what equity was for. But Zell convinced investment bankers to sell his extremely risky bonds to various holders (mostly pension funds) so he could finance an overpriced deal. Now those bondholders have seen as much as a 65% reduction in the value of their investments. Were the pensioners to know they wold be so glad! Mr. Zell’s Success Formula, so tied to real estate during boom times, was the worst thing that could be applied to the struggling newspapers at Tribune. But he was able to apply it using other people’s money – so he has little to lose and much to gain while the bondholders have much to lose and almost nothing to gain.
Meanwhile, employees across Tribune are falling like flies exposed to DDT. And the news products in L.A. and Chicago are getting weaker with each passing month as journalists aren’t there to write. The people of these great cities are simply left knowing less about what’s happening in their metropolises. Everyone in both cities is getting a cold slap from this folly.
Mr. Zell keeps saying he’ll do whatever he has to do to make money with Tribune Corporation. But that’s not true. What he means is he’ll do whatever his old Success Formula recommends he do. So now, as his own newspaper boss says, they are chewing off a leg to try and get out of the falling revenue trap. This is not an approach that will make for a strong Tribune Corporation. It is a path toward a corporation with no resources, weak products and customers left without a solution. What Tribune needs is White Space to figure out how to compete as a 21st century media company. But instead all energy is being diverted toward paying off the bonds Mr. Zell sold to fund his all-too-risky bet on debt.
We all have a responsibility to understand our Success Formulas. And to understand those of the people who would lead our organization. If we see that Success Formula Locked-in, we can bet on more of the same – regardless of the outcome. Mr. Zell would rather fail as a cost-cutter than lead Tribune Corporation to its next legacy of success. But unfortunately, it is all the people dependent on Mr. Zell who will suffer most – the vendors, customers, investors and employees. They will suffer from his outdated Success Formula even more than he will – as he jets each weekend to between his home in Malibu and his home in Chicago. Leaders have the greatest responsibility to recognize their Success Formula Lock-ins, and be open to Disrupt and use White Space to find solutions which can succeed. Because when they fail, everyone around them fails as well.
by Adam Hartung | Aug 27, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
The U.S. credit crisis has a lot of people very concerned about the economy. (Read LATimes article on the high stakes of this problem here.) As well it should. It was a credit crisis in the 1930s which created a rash of loan failures lead to bank failures, deflation and the worst economy in American history. While we keep being assured there will not be another Great Depression, there is still reason for serious concern. Three major financial institutions have failed in the last year (Countrywide, Bear Sterns and IndyMac), and one of the world’s leading economists has predicted the worst is yet to come with at least one additional major financial institution collapsing. So, isn’t it worth asking "how did we get into this mess?"
It wasn’t long ago the big controversy was about how much the heads of Freddie Mac and Fannie Mae were getting paid. The argument was whether these institutions were independent banks, or government agencies. After all, they were guaranteeing FHA and similar loans, so they were using government backing as they regulated the mortgage market as well as underwrote its activities. So the question was whether the leaders should be paid like regulators – say a Federal Reserve Board member – or like executives of an independent bank. As the mortgage markets ballooned these institutions were booking more and more paper profits, and the CEO pay had gone up dramatically. Many people were questioning whether this was appropriate.
Now we can see that both institutions were allowing ever riskier loans to be made by mortgage providers. And both are near insolvency. Equity holders have been nearly wiped out as Freddie Mac’s value has dropped from $70/share to under $5 (see chart here) and Fannie Mae has dropped from $80 to $6.50 (see chart here.) Privatizing these formerly government agencies hasn’t worked out too well for investors lately.
Freddie and Fannie didn’t have bad leaders, they just kept trying to make it possible for their primary customers – the banks and mortgage companies – to keep making more and larger loans. They didn’t come out and say "we’re going to take more risk", they just slowly inched their way forward allowing loans to have less down payment, allowing the buildings to have higher valuations as collateral, allowing higher debt-to-income ratios. They didn’t start out in 1995 with the idea they would eventually be making loans for $300,000 to people who never before owned a house, had no down payment, could provide no proof of income and on an asset valuation that was 25% higher than the most recent sale. That loan would never have been approved by any bank in 1995. Or 1996. Or 2001.
But the banks and mortgage companies wanted to grow. They had a well known Success Formula. They could advertise a good rate, implement the loan application process, then sell off the loan in the secondary market with a Fannie Mae or Freddie Mac guarantee. As real estate values took off, they simply needed more leniency on some of these items so they could do more loans faster and cheaper – extend their business (the back half of Defend & Extend Management). They wanted to Defend & Extend what they knew how to do. So Freddie Mac and Fannie Mae went along. And they got the big financial houses involved as well as they packaged up what were becoming increasingly risky loans.
And that’s what happens in D&E management. In order to keep growing, it is tempting to push just a little harder by trying to extend the old Success Formula. Cut a cost corner here. Take a little more risk there. Just do a little bit more of what was previously done. Everyone can see that these actions are taking them downstream. But, so far so good! Nobody has drowned yet. We might be able to see the waterfall ahead, and hear the water crashing down below a little clearer, but so far we haven’t seen any problems. So let’s try to do just a little bit more.
Of course, inevitably, D&E managers go over the waterfall – and take their customers, investors, employees, suppliers and this time the U.S. citizenry along with them. They reach just a little farther than they should have, and then it’s a free-for-all as the business gets sucked into the Whirlpool from which there will be no return.
We saw this before, when the Savings & Loan industry melted down and went away because of the ever increasing risk its leaders took. Equity holders were wiped out, and many lenders were significantly damaged despite the unprecedented government bailout at the time. In the end, we suffered a recession and a big loss of faith in real estate as the Keating 5 were tried and the S&L industry collapsed. All by trying to maintain the Lock-in, then Extend the business just a little more into some new area. And by getting the regulators to go along, the entire country and its economy end up at risk.
D&E managers don’t like risk, and intend to take risk. But because there isn’t any White Space to develop a new Success Formula they keep extending the old one. They claim they aren’t taking risk, but in fact they are. Each risk may be small, but as we’ve seen they quickly add up. These leaders start turning a blind eye to the risk as they remain Locked-in and see no other way to grow. They have to grow, and they have to remain Locked-in, so they take risks that to outsiders might look crazy. (Think about how Enron started guaranteeing its own derivatives so it could keep growing.) But Lock-in allows them to pretend the risk isn’t as great as it is. These extensions keep the Success Formula in place, and make it appear to be producing better results. But these extensions are moving closer and closer to the waterfall, and the inevitable fall into the Whirlpool. Eventually, we all must have White Space to evolve a new Success Formula, or the trip over the waterfall is inevitable.
