by Adam Hartung | Aug 25, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership
Most managers want to move up. It is characteristic to have ambition in organizations. To want to do more, to accomplish more, and to receive more compensation. So we look for opportunities to do more, inside our organizations and outside. Usually we move positions because we don’t have upward mobility internally, so we find the opportunity externally. But, not all upward moves are worth the risk.
Look at the revolving door installed by Mr. Lampert at the executive suite of Chicago headquarted Sears (see chart here). (Read more about another round of Sears executive changes here.) Mr. Lampert has convinced some very talented people to take top positions at Sears. He has hired people away from companies as well known as Yum Brands, Motorola, Proctor & Gamble, Now he’s hoping that a new crop of execs will save the company from its perilous slide which has cut equity value more than 50% in the last year. But, rather than becoming business saviors, these new executives will probably be limiting their careers when Sears continues to falter.
It’s the nature of leaders to be optimistic. To think they can accomplish what previous managers couldn’t. And some are better than others. But we should eschew the "hero" complex entirely when looking at a new position. Success will have more to do with circumstances than us as individuals. And when a business is struggling, like Sears, it’s only hope to turn around requires it give up looking in the rear view mirror at old advantages and focus completely on the future. It must be clear about competitor strengths, and ignore the temptation to think of customers as an asset. It must Disrupt the old Lock-ins, and nullify the Status Quo Police. And it must implement White Space where the manager has permission to do whatever it takes to succeed – unbounded by old Lock-ins – as well as the resources committed in advance to accomplish the goals. Without those 4 things, success is not going to happen. No matter how good you are.
Looking at Sears and Mr. Lampert we know a few things. He keeps talking about the old Sears advantages, and trying to find a way to recapture them. He’s trying to plan for the past, not the future. Meanwhile, he isn’t looking for new customers by being a cutting edge competitor, instead he’s trying to hang onto old customers and Defend them from better competitors. Thirdly, he likes to "whack the chicken coop" by making lots of noise and firing people, but he’s not willing to Disrupt old processes, practices and behaviors in order to nullify the Status Quo. And Fourthly, he absolutely doesn’t have any White Space as he keeps trying to fiddle with the old Sears to improve it. Rather than create White Space he shuts it down in cost cutting actions while trying to "fix" a hopelessly out of date Success Formula.
Those who left good jobs to go to Sears for Mr. Lampert have not escalated their careers. And the new batch of managers he’s hired will fare no better. Sears under Mr. Lampert is not following The Phoenix Principle to turn itself around, but rather keeps trying to find some way that it can be cheaper, faster, better and thus Defend & Extend what worked 30 years ago.
If you want to make a career move, do not listen to the Siren’s song about how everything can be different if the right person is in the job. Circumstances make more difference than the person. We work in organizations that have powerful Lock-in to behaviors, structural systems and cost. Unless the primary pieces of successful change are there, no individual will make much difference. Yes, it’s good to want to get ahead. But make sure you don’t take a job where your head will be handed to you.
by Adam Hartung | Aug 21, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
What is success? We often think of it as accomplishing goals. If we set a goal, and achieve it, we succeeded. If however we repetitively don’t achieve goals that leads to failure. So, you would think that managers would do the things that would most likely insure reaching goals year after year, quarter after quarter and month after month. And because markets shift, that would mean doing things differently to deal with market shifts.
But if we look at Chicago-based United Airlines, as an example, we can see that is not how many leaders define success. Their definition of success is all about Defending & Extending an old Success Formula – even when the results of that Success Formula have sunk to dismal lows. Often leaders, and this does appear true at United Airlines, would rather fail, by missing goals over and over, than Disrupt and use White Space to change. As we know, United fell into bankruptcy (not the first time) earlier this decade blaming the events of 9/11/01. But everyone who’s followed United knows the company has never flourished, and has a long litany of missing its goals for revenues, revenue per passenger mile, and especially all measures of profit.
No business can succeed without the support of its customers and employees. Investors will not achieve a satisfactory rate of return when customers and/or employees are unhappy. Yet, let’s look at the actions United is taking to deal with its most recent hard times. It lengthened check-in lines by refusing to develop a streamlined method for gate access – preferring to maintain its status quo while security requirements grew substantially. It started charging to check a bag, even though carry-on bags are the biggest problem for security checks and boardig. It cut food on all domestic coach flights. And now it has cut food for most international flights in coach class (read article here.) With each step, United Airlines might as well get a bullhorn and shout through the terminal "we think you customers are irrelevant to us as an airline. We wish you would shut up and do what we tell you to do and quit complaining. We’d be a great company if it wasn’t for you stupid customers."
United Airlines’ unions have made round after round of concessions the last 25 years. All classes of employee, from pilot to gate agent to flight attendant to ground crew to mechanic have taken pay cuts. They have deferred compensation into pension plans, only to see the deferral wiped out by company losses. They have seen benefits slashed. And they have seen work rules tightened in order to pursue tighter enformcement of behavior intended to cut hours worked, overtime and even base pay. Meanwhile, the executives (and there’s been a lot of executives through the United revolving door) have paid themselves quite richly on both base pay and bonuses – and departing execs have received very rich golden parachutes. With each management decision they got out the old bullhorn and announced "hey, you employees should just shut up and be glad you have a job. We run this place, for better or worse, and you don’t have a say in what we do. You’re the reason we’re not a more successful company, you crummy employees, and its because of you that we as a management team look so incompetent."
Now, the employees have taken to wearing plastic bracelets that say "Glenn’s Gotta Go" referring to a dismissal of the CEO (read article here.) And management is taking the tack that these employees are out of line with this behavior. Management says employees should "suck it up" and keep their grievances quiet. Even though management has not done the employees any favors for over 20 years, they are upset these overworked, much abused and underpaid employees would offer up this quiet form of civil disobedience. But employees are finding themselves more aligned with customers than management these days – and their wrist bands are a show of unity with the customers that management is the group out of step with shifting market requirements.
At the end of the day, management is responsible for results. Current results. United could have hedged fuel costs, like Southwest, and never gotten into its current jam. Management could have acted at any time the last 30 years to work with Unions to make a better airline, rather than maintain long-term contentious negotiations keeping them from the benefits of employee ideas. United Management could have launched Ted with the permission to develop a new Success Formula rather than hamstringing the idea to nothing more than a name change on certain flights. Management could have done many things differently.
But over the years, despite different people in the managerial seats, United Airline leadership has chosen to remain steadfast to its Lock-ins. It has consistently chosen to Defend & Extend a lousy business model that’s never consistently made money. For United Airlines management, success has not been about meeting goals – it has been about extending the status quo. No matter who suffers amongst customers, employees or vendors. Despite what management is saying, these leaders would rather fail than change. Success isn’t nearly as important for them as we would assume.
by Adam Hartung | Aug 13, 2008 | General, In the Whirlpool, Leadership, Lifecycle
"Things will work out in the end." "It’s always darkest just before the dawn." These were a couple of phrases my mother used to say. To her, just have faith and everything would work out. Raised in Oklahoma during the Great Depression, and never having the opportunity to go to school beyond about the 6th grade (and a sparse 6 grades at that), she simply had to trust in faith most of the time. But for us in business, we should be quite a bit smarter than that. It’s not faith that drives our success – but the ability to know when to make changes reacting to shifting markets. Because too often, things don’t work out in the end – and the darkness never goes away.
Just today it was reported (read article here) that Whitehall Jewelers will be liquidating its inventory and shutting its 370 stores. For the company’s employees, investors, suppliers and customers very soon there will be no tomorrow. Things didn’t work out. But you can bet management was not admitting this. Management kept expecting things to work out. Why just in April Whitehall paid over $14million to buy the assets and take over 78 stores from another failed jeweler – Friedman’s. Surely they did not expect to be throwing that money down the drain. Yet, by June Whitehall itself filed for Chapter 11 bankruptcy. And now the company is liquidating. The final end.
All Businesses go through a lifecycle. From the Wellspring of ideas it eventually finds a market allowing it to enter the Rapids of high growth. But then growth hits a bump – usually because the market shifts and the old Success Formula no longer produces above-average performance. Growth hits the Flats. It’s here that management needs to reassess it’s Success Formula – Disrupt and use White Space projects to create a new Success Formula, throwing itself back into the Rapids and keep growing. But most don’t.
Instead leaders will decide to protect the old Success Formula by Defending & Extending it – hoping the market will return to its previous state. But markets don’t go backward. Only forward. Thus the business and the market keep getting farther and farther apart – developing a re-invention gap – that the business doesn’t close. The business moves into the Swamp, where it’s so busy fighting the alligators and mosquitos – the competitors that are pushing the market forward and it’s business nowhere – it forgot the original mission was to make money, rather than defend its old products and practices. Growth is spotty to nonexistent.
In the Swamp management constantly asks its stakeholders to have faith. To believe things will get better. To trust that given just a little more time, a little more money, a break in one form or another and the business will suddenly return to producing returns like it did before. They keep promising things will work out in the end, and the darkest days are behind it. But, inevitably, things just keep getting worse. Until one day, as a surprise to most stakeholders who have been optimistically hoping for the best, the business ends. Possibly in an acquisition or merger (like the Bear Stearns takeover by JPMorgan Chase) or liquidation (like Bennigan’s a bit over one week ago – and now Whitehall). By trying to do more, better, faster and cheaper management lets the business slip into the Whirlpool of no return.
When you enter your church, synagogue, temple or mosque have faith. But when you work, invest, sell or buy you need to be sure the organization clearly recognizes market shifts. Management needs to be aware of the hard reality that market shifts can be deadly – totally deadly. Deadly to the point of failure. Unless management reacts to these shifts using The Phoenix Principle, with clear determination to Disrupt and use White Space to regain growth – building a new Success Formula rather than trying to Defend & Extend the old, tired one – the end is assured, it’s only a matter of time.
by Adam Hartung | Aug 6, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle
If you don’t control your destiny, who does? Most Americans are especially proud of their independence, because it gives them the strong sense that their destiny is up to them. While everyone understands the role of luck and timing, those who also understand their strengths can find ways to maximize them. Anericans have the opportunity to make the most out of our circumstances. And that independence is also true for business. In America, home of capitalism if not the birthplace, any business has the ability to direct itself toward greater returns and success. And the larger you are, the greater your resources, the greater your ability to control your destiny and maximize your results.
So how is it that General Motors, the world’s largest auto company, would say that it’s destiny is not in the hands of its leaders? As the Board of Directors at GM reinforced its support in its CEO, I was shocked to read the following quote in today’s Chicago Tribune (read article here):
- "Most of the problems the company is suffering are not of their own making. There’s been radical changes in North American demand," said David Hel, an analyst at Burnham Securities Inc. in Sierra Vista, Ariz., said. "I don’t think making a change at the top is going to solve that."
Excuse me???? What was that? We’re to believe the largest auto company in the world, with all those assets, all that cash flow, all those employees, was without the ability to influence its own competitiveness and results? We’re to believe that no leader would have managed this absolutely dysmally performing company any better the last 5 years? The CEO, who over the last few years has watched the company lose market share, see it’s share price drop to a 54 year low (chart here), sold off many of the most valuable remaining assets (like GMAC) and overseen write-offs that exceed the entire market value of the firm is not responsible?? I do hope your investment firm receives enormously large fees for helping GM with its pension plan investments, or whatever it is you do for them, to make such a blatantly ridiculous comment. Because you just shot your personal credibility all to heck. l’m sure employees and investors could help identify a raft of better leaders than the ones who drove GM into its current dire straits. Mr. Waggoner may be well educated, well speaking, bright, cordial, tall, and good looking – but he’s done one heck of a terrible job as CEO at GM.
I guess following Mr. Hel’s confused thinking the leaders at Toyota, Honda, Nissan and Kia have no responsibility for the success of their companies. It’s all just a random set of variables that leads to success, or failure for an auto company?
Time for a reality check here. Of course the decisions made by leaders at GM were very different than the decisions made by Honda’s leaders. And the outcomes are radially different. What has befallen General Motors is a failure to recognize that markets keep growing, just in different ways. The demand for transportation has never been greater than it is today. Sure it may have shifted, from horses years ago to trains to automobiles to airplanes. And the kinds of autos people want to buy may have shifted around since the Model T was number 1. And the growth in auto sales may now be greater in China and India than the USA. But the demand for transportation is growing, not declining. So the market is growing – just not GM. Because GM quit trying to grow, and tried to Defend & Extend its practices and traditional markets.
GM leadership was willing to consider itself a "mature" company. Thus GM’s management expectations for growth were allowed to subside. Instead of measuring itself against total growth, managers became happy to talk about GM share and growth in selected segments. Thus GM could justify its below-market growth, and claim that it was an acceptably mature company. The leadership was OK with performing poorly because it abdicated its responsibility to growth – despite the impact on shareholders, employees, suppliers and customers. Management, and apparently the Board of Directors, is more happy to fail as GM than to become a better company – albeit one significantly different than the one sucking tail pipe fumes now.
Once any leadership team accepts that slower growth is acceptable, ultimate failure is a fait accompli – it will happen. Growth absolutely will slow. And eventually that will lead to enormous troubles. For any analyst or investor to claim that growth is out of the hands of management is syccophantic. As we know, despite the move to small cars in the 1970s, then big cars, and to higher quality cars, and then to higher mile-per-gallon cars year after year the offshore manufacturers have been growing share at the expense of the U.S. companies (except for the great success Chrysler had prior to its acquisition and innovation killing management changes by Daimler Benz). These offshore competitors did not relegate themselves to excuses about shifting customer tastes between segments as they came out with new models that covered the board – including pickups and SUVs – to keep their share profitably growing.
If you haven’t thrown in the towel on GM – you should definitely do so now. Clearly, the leadership team has given up on figuring out how to be successful. They are hoping to do no more than survive by doing what they’ve always done. And we know that won’t work. They may survive a while, but without growth the competitors will eventually eat up all their customers, resources and eventually them. By admitting they can’t believe a different leadership team could find a better way to compete, and grow, demise is a fait accompli.
by Adam Hartung | Aug 4, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
We all know we’re going to die. But we don’t usually think about it as we live each day. We pretty much run our lives the same until we are exposed to a new threat, like a particularly dangerous intersection or a tainted food, and then we change our behavior to deal with the threat. We know the average longevity for an American adult is around 75, so we fully expect to live that long and we don’t really think beyond that.
The same is true for most businesses. Yet, for about a decade we’ve known that the odds of a healthy public company surviving a mere decade is, at best 50/50. With such a short expected half-life, it should be surprising that pretty much all businesses do their planning as if they will go on forever. We apply optimism to our businesses the same way we do our lives. No CEO or other top executive will say "I imagine my company is in the half unlikely to make it another decade." Individually this makes sense, but collectively it is a disaster. Business leaders keep being surprised by the fragility of their Success Formulas as their businesses fall into the Whirlpool, wiping out shareholders and bondholders as well employee jobs.
Last week Chicago woke up to the painful, overnight demise of Bennigan’s (read story here). One of the oldest casual dining restaurant chains, Chicago was one of Bennigan’s top markets with 10% of its company stores located here. Also, Bennigan’s largest store was very visibly located on Michigan Avenue in the heart of the city. So Chicagoans were very surprised that at midnight on July 29 the owners called up store managers telling them to shutter the stores – the company is liquidating. Apparently the chain could not compete in a market of recession-softened demand, busted real estate values and higher food prices. So overnight, the business disappeared – leaving franchisees of 140 stores wondering what they heck they’re now supposed to do.
Bennigan’s, owned by Metromedia Restaurant Group, is a startling example of the myth of perpetuity. Despite being one of the very first casual dining concepts, increased competition was not hard to spot. Likewise, the dissolving of real estate values has been happening for months – like a slow pour of honey. And that recessions cause downdrafts in eating out has been known ever since restaurants have existed. And that food costs would increase was being predicted almost 3 years ago as fuel prices went up and showed no sign of a major downward reversal. It takes a lot of fuel to make and transport those quasi-prepared meals to restaurants – as well as a lot of energy to heat and cool the locations to customer expectations. None of these trends were hard to spot. But somehow, Benegan’s management did not plan for them.
As management Locks-in on its Success Formula it becomes blind to changes that could be very threatening – possibly business ending. As problems develop, seen in revenue or profit declines, the tendency is to say "we have to do more of this, do it faster, do it better, do it cheaper." When reality may be there is a need to take much more drastic action. But the desire to Defend & Extend becomes paramount among the optimists, who keep hoping for "things to return to better conditions." When, often, the current situation is more likely "the new reality." Or "the new normal." The past conditions are very unlikely to ever return.
Anyone expecting a return to widely available, extremely low cost credit had better think again about all those banks writing down billions of loans, and the near collapse of the mortgage industry as Freddie Mac and Fannie Mae stand on the brink of failure. And as auto leasing companies shut off all leasing products due to fear of lower residual values. Anyone thinking about a return to rapid U.S. job expansion had better take a look at the videos of hundreds of millions of workers in China, India and South America all desperate for a job at any wage. Anyone expecting lower taxes and a government bail-out had better take a look at the record-breaking deficit built up the last 8 years (when the budget was last balanced) and the expected upcoming costs for war (continued or ending), health care, and the aging/retiring population demand on social security.
What happened in the past was then, all that’s important is planning for the future. Without taking a very sobering look at what might happen, it’s easy to be Pollyanna. And that is how leadership teams fall into the half of businesses that don’t survive. It’s not lack of hard work. It’s an unwillingness to realize things change and we have to prepare for those changes. If we get stuck in D&E management, we keep doing what we always did despite declining returns. And eventually, you just can’t keep going any longer.
Failure rarely is as dramatic as it happened at Bennigan’s. Usually the wind up happens through an acquisition and slower shut down (like JPMorgan is about to complete with Bear Sterns), or through a longer process of management bleeding out the company assets (not unlike SBC’s takeover of AT&T). But the end point for Bear-Sterns and Bennigan’s were the same. They are no more. Any management team unwilling to accept the staggeringly pessimistic statistic that it has a 50% chance of failure in a decade is a likely candidate.
Keep that in mind GM, Ford, United Airlines, Delta and Citibank. We don’t like to think these sorts of iconic companies with long histories and past glory can disappear. Yet, past members of the Dow Jones Industrial Average included Woolworth’s, American Can, Johns-Manville, Esmark, Inco, Internationals Harvester and Nickel, Nash Motors, National Distillers and Swift. None of those DJIA companies thought they would ever leave the DJIA – much less disappear. Yet they did. If we run our business as if it can go on forever by doing more of the same we doom it to demise. Whether it’s fast like Bennigan’s, or more slowly.
by Adam Hartung | Jul 15, 2008 | Defend & Extend, In the Rapids, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Readers of this blog know my lifecycle references. We start out in the Wellspring of ideas. To be successful we have to find the Rapids of high growth. In the Rapids life is beautiful as we make money and everyone wants to give us more. When growth slows we hit the Flats – where we keep paddling like crazy trying to figure out what happened to the Rapids. But because we’ve slipped from the Rapids to the Flats, pretty quickly we drift into the Swamp where growth is really hard to come by. We end up spending all our energy fighting the ferociously competitive alligators and mosquitos, often forgetting our real objective. In the end something happens the business isn’t planning for, and like pulling the drain on a sink the Swamp becomes a final Whirlpool sucking the organization away.
The most important time for management to make the right decisions is in the Flats. It’s the Flats where leaders have to steer the company back into the Rapids, or else drift into the Swamp. So let’s compare General Motors and Honda.
GM saw it’s growth start slipping almost 30 years ago. Roger Smith tried to steer the company back into the Rapids by creating a stand-alone company called Saturn that would learn to act like a "Japanese" car company. He also bought Hughes Electronics and EDS to diversify GM into very high growth markets (electronics, avionics, aircraft and IT). But Smith was often maligned by analysts and fellow executives who wanted GM to remain a "car company." Eventually GM sold Hughes and EDS to raise money to shore up its declining auto business where it was mired in the Swamp. GM leadership even abandoned the idea of an independent Saturn, and eventually forced the White Space project to start using common components with other GM autos, common functions like procurement, common systems and even common dealers. Now Saturn is just anther GM nameplate.
Today, GM is starting to hear the sucking sound of the Whirlpool. The company is constantly trying to stave off rumors of an impending bankruptcy. Meanwhile, the company equity value today is less than it was 50 years ago – meaning an investor would have nothing to show for a lifetime of ownership except dividends. And today those were halted – a key indicator that GM is heading into the Whirlpool. Cost cuts now are center stage as the company closes capacity and is even whacking salaried employment 20%. Management keeps saying it has enough liquidity to survive 2008 – whoopee! – which is only another 6 months. So it is looking to shut down nameplates (like Hummer), more plants and sell as many remaining assets as possible. It’s hard to see how anything good will happen for GM’s investors, employees, suppliers or customers as the business keeps churning faster toward the Whirlpool of failure. (Read more about current actions being taken at GM here.) GM is claiming it could not predict the auto market changes being created by higher priced oil – even though this "crisis" has been emerging for 3 years and is unerringly similar to the market shift which happened during the oil price shock of the 1970s.
Meanwhile, Honda sales have grown 4.5% this year. Right, while we keep hearing about the total market declining, Honda sales are growing (read article here). Management at GM, and many analysts, like to portray this as luck. Hardly. Honda and GM compete in the same markets. They just took very different management actions.
Honda never tried to develop a plan to do one thing and dominate the market. Market domination was never its goal. Instead, growth in sales and value has remained #1. In it’s quest to grow, Honda did not merely remain an automobile company. Rather than eschewing other businesses as diversions, Honda successfully developed profitable growing businesses in everything from lawn mowers to lawn tractors to electic generators to boat motors to motorcycles to quadrunners to snowmobiles to snowblowers to robots and jet airplanes – and cars. Of course, in cars they make small cars, luxury cars, all-purpose vehicles and even a full size pick-up. They sell products directly from Honda to end users in some markets, they sell through dealers in other markets to distributors who wholesale products to retailers in other markets and even to large mega-retailers like Home Depot in other markets. No single distribution system. And they sell products in almost every country on earth – including being the #1 motorcycle supplier in India with it’s Hero-Honda joint venture. (Unlike GM which has long maintained an overt focus on North America blinding its opportunities elsewhere.)
As markets shift, Honda is preparing for those shifts. It doesn’t let "focus" make it overly dependent on any one market – or any one sub-market within a single market. In motorcycles, for example, it offers everything from a small scooter for the urbanite to dirt bikes for leisure use to cross-over bikes that can be used on trails and roads to small motorcycles for short-riding to large motorcycles for long riding to crotch rockets for testosterone driven young men to huge, oversized Gold Wing bikes for 50 year old highway touring riders. It does the same in autos, where it offers everything from a hybrid to the high-mileage traditional Civic small car to multi-person mini-vans to full size pickups and even luxury cars under the Acura brand. While GM is trying to be big, Honda has mastered the art of growing and making money by constantly bringing out new products in new markets and learning from those experiences so it can migrate its Success Formula.
Far too many management teams think their job is to "focus" and be #1 in some defined market. Of course, all those definitions are arbitrary, and being #1 doesn’t mean anything if you can’t make money. GM has been huge, but it has been unable to generate enough profit to replace its capital for decades. Now Honda, who is #1 in some markets, but not in most, is showing that by being agile and nimble, by avoiding Lock-in to old-fashioned notions of market share, it can be more competitive. As individual markets struggle, from product markets to geographic markets, Honda keeps using its White Space to bring new technologies and products to customers. It evolves its older businesses toward what works, selling big trucks when people want them where they want them and small motorcycles where demand for them is growing. It’s this ability to look to the future rather than the past, keep a sharp eye on competitors and always be at the front of new products, maintain Disruption to get into new markets and keep White Space alive so new Success Formulas develop which allows Honda’s leaders to keep the company steering toward the Rapids rather than finding itself being driven right into the Whirlpool of disaster like GM
by Adam Hartung | Jul 11, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Yesterday I blogged about reading telltales. Catching small bits of information that can help you predict a company’s behavior and longevity. But sometimes we don’t need a telltale – because the signs are as obvious as a gale force wind. That happened yesterday in my email inbox, when I received a letter from the heads of the major airlines telling me to write my legislator’s to implement and enforce greater regulation on oil traders (read about the letter and see a copy of the text here).
I’ve long been a detractor of the leaders at United, American, Delta, US Airways, Northwest, Continental and the other "major" airlines. These companies were founded by former military officers who created airlines in a regulated environment. Subsequent management has never varied far from the original Success Formula, nor the Lock-ins, choosing to believe they will somehow make money if they just do more, better, faster, cheaper. In reality, the only person who created an airline that made money was an attorney, Herb Kelleher, by founding Southwest.
Now their Success Formulas are on the brink of collapse. So they are pointing the finger at someone else. Simply put, these leaders have never been willing to Disrupt their ineffective Success Formulas and use White Space to try doing anything else. They have remained Locked-in to the hub-and-spoke systems that are highly inefficient and thus reliant on low fuel prices. They have never challenged their complex pricing formulas, nor their antagonistic relationships with employees, nor their indifference toward customers. Even when they decided to open alternative businesses (Song, Ted, Eagle) they remained Locked in to their historical strategies and tactics, requiring these services give out frequent flier miles on the programs, use the existing gates, work with existing employee work rules and maintain the historical reservation systems. These leaders never tried to do anything really different. Despite strikes, government interventions and even bankruptcies they have maintained commitment to their Lock-ins and been unwilling to implement White Space.
They of course could have done many things differently. They could have migrated to a point-to-point airline. They could have improved employee relations. They could have allowed subsidiaries to use different technologies (different planes, different reservation systems) and try different practices (like Southwest’s extensive use of fuel hedging which has kept it profitable during this fuel price spike). But that would have required some Disruptions and establishing real White Space with permission to do new things. Which never happened.
What can we now expect? One or more of these airlines will fail. This letter from the CEOs is a signal as strong as a gale force wind that they have no idea how to deal with their company problems. Lacking any viable solution, they want the government to regulate their suppliers (something they’ve tried for years with their employee unions by the way) so costs will be controlled for them. This letter is an admission they expect to fail unless someone else saves them. Of course they aren’t taking responsibility for being in this position – but they are willing to admit failure is just around the corner and likely without help from a higher power.
What will be the impact on us? A major airline failure (say United) will be a national security issue. Several cities will become isolated islands unable to physically connect with the rest of the country. 100 years ago if the railroad bypassed your town you had to move the town – and many did. What will happen to cities that no longer have air service? How about the thousands of people that use these airlines for international travel? How many Americans will be stranded abroad? How many will be unable to reach facilities in remote countries? Without internal transportation system bogged down, we would be a sitting duck for terrorists wishing to create havoc with people stuck in locations they don’t want to be.
As these airlines fail, are we ready to outsource air traffic? Like we’ve outsourced the production of steel and other products to foreign companies? Are we ready for Lufthansa to step in and take over United’s routes (and some assets) between Chicago and New York, LA, San Francisco and the other thousand cities United services? Or Swiss Air? Or Virgin? If we use foreign carriers for domestic travel, what happens to our safety systems on what has historically required domestic companies for national security?
It’s not hard to recognize the kind of Lock-in to outdated solutions this letter signed by a dozen CEOs indicates. It’s not hard to see that failure is a likely outcome. When Lee Iacocca told Congress "Guarantee my loans or all these Chrysler employees will be unemployed" he made it clear that his company would fail without help. These CEOs are saying the same thing. And it’s really unfortunate, because Southwest has never been secretive about any part of its Success Formula, and it makes money to this very day. So for the major airlines, failure is obviously more acceptable than change. And everyone will lose with that kind of thinking dominating the executive suite.
by Adam Hartung | Jun 25, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
Ever heard the phrase "the last company left making buggy whips made a fortune"? Don’t believe it. Ask the person with such a claim to name the company. Better yet, ask that person to name one company that made high profits by being the "last man standing" in their business – any business.
On Monday United announced it is laying off 12% of its pilots, 950. Of course, pilots are the tip of the iceberg. Every pilot drives many more flight attendants, mechanics, gate agents and other employees so we can expect a multiplier effect across other jobs as this action trickles down. Simultaneously, Continental has announced job cots, Delta is whacking employees using early retirement deals and American has said it is finalizing details for its planned cutbacks (read article discussing these reductions here.)
United had to move fast, because if it doesn’t act quickly enough it’s cash reserves will fall, placing it in default on its debt – and triggering a Chapter 11 filing. In other words, United is skating on the edge of extinction. But an industry guru was quoted in the above article saying "There is an inherent demand out there…. as long as you can stay in the game you’ll be fine."
This is ridiculous. The largest participants in the America’s airline industry have built businesses that cannot be profitable. In the best times, when demand was growing like crazy and fuel was cheap they could barely squeak out a profit. They have never made enough money to recover their capital investment in aircraft. Their hub-and-spoke system is simply too inefficient, ignores problems created by America’s constantly fickle weather and too costly. It was a grand theory, but it was not profitable. Couple that with bad workforce practices and total disdain for customers and you have a business model that was doomed before it began. That it lasted this long is only a testament to tenacity and unwillingness to find alternatives. (Read more about how airlines themselves predict service will decline FURTHER in Chicago Tribune article "You are now free to take a flying leap" here.)
But in reality, the entire industry isn’t unprofitable. Look at Southwest. That carrier did nothing like United or American, flying point to point, no milage programs, no pre-assigned seating, etc., . So Southwest has the highest domestic carrier customer satisfaction ratings and the highest profits. It is possible to make money as an airline, you just have to use a different Success Formula. The winner won’t be the "last man standing" as if some competitor simply outlasts all the others and is left with the spoils of war. Rather, the winner will be the competitor that figures out how to provide the service in a manner that makes customers happy and turns a profit for investors. And increasingly we can see the long-term winner won’t be one of the U.S. "majors."
Take a quick look at Virgin America. After years of the "majors" using legal fights to stop this new airline from opening, it has made its debut. And nothing like Southwest or the incumbents. It flies point to point, and it focuses on profitable routes with lots of business service rather than just being big. Although it prices low, not trying to be a "business class" airline with high fares. And it has a global reach. You can fly Virgin around the world whereas the big U.S. airlines depend on you flying one of their "partners" for some of the trip.
Virgin Airlines started in England during a horrible flying downturn and when British Airways dominated the market. No one gave it a chance because it did nothing like the traditional airlines. And Cinderalla ended up the prettiest girl at the ball. Now its leaders are doing the same as they enter the U.S. market. They Disrupted traditional thinking about how to be an Ameican airline, and developed a unique approach. Simultaneously, leadership has maintained a wary eye on how to make money while mitigating risks – this is no "race to be huge." Of course, its leader is one of the more Disruptive leaders in modern times, Sir Richard Branson, who turned his former music mail order distribution company into a varied empire of multiple profitable business across industries and markets. (Read more about the Virgin America launch in Time Magazine here.)
Of course, U.S. airline deregulation did not create a "free market." You don’t see Air Canada, Lufthansa or Singapore Airlines fly between any U.S. cities. As previously mentioned, the big U.S. airlines have fought from the 1970s to keep out these other competitors. All of them make money, and are known for more reliable service and far higher customer satisfaction. If we see United or American or Delta crumble into Chapter 11, can we expect regulators to continue protecting the local industry from offshore competitors? Would that be in our best interest? Virgin’s launch is an indication that these regulators are as tired of bad service as fliers. How will the remaining "majors" survive when they have to compete with airlines that have built profitable Success Formulas in other markets they can rapidly export to U.S. customes?
Business competition is not a game of "Last Man Standing." There are all kinds of variations competitors can employ to avoid the bloody "fight-to-the-death" battle of foolish Goliaths. As a result, multiple competitors displace the fallen gladiators, but do so more effectively and more profitably. In the end, markets transition to new competition based on new services and products. Don’t expect a protected American or Continental airline to be handed the U.S. market to exploit. Instead, begin preparing for market upheaval as these behemoths falter and fail – and new competitors are allowed to enter, changing how we think about flying. For most customers, it can’t happen fast enough.
by Adam Hartung | Jun 23, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in, Quotes
Do you have any doubt that the viability of traditional newspapers is at risk? Every newspaper in America is printing fewer pages today than a year ago (and most fewer than 2 years ago). Young people (meaning under 35 – if that’s really young) never got hooked on newspapers, and older readers are abandoning subscriptions, causing advertisers to abandon newspaper advertising – leaving the newspapers with big revenue shortfalls. As ad spending on the internet keeps growing at 100%/year, and Google explodes with revenue and higher valuations as a result, is there any doubt that the typical morning newspaper will have to undergo fundamental restructuring?
Readers of this blog probably don’t have much doubt. But read this quote from the CEO of a major Chicago newspaper – the Sun Times Media Group. "The fallout of this forced downsizing of the nation’s newsrooms is not being replaced elsewhere in our society, nor is it likely to be. Hence, with our most important asset, the newsroom, we will continue to have little competition. When the economy rebounds 12 to 18 months from now, as we believe it will, the newspapers will not only survive but somehow and in some form thrive again." (Read quote in Chicago Tribune article here.)
Give me a break. Talk about putting your head in the sand. Mr. Freidham is really saying "Hey, I’m Locked-in to what I’ve always done and I don’t want to change. Just give me some time, and probably more money, and I’m sure somehow my old Success Formula will make money again. Trust me." Effectively, he’s saying investors should ignore all market information and simply hope, literally, that somehow they will again make money.
That’s probably what the CEOs of Montgomery Wards, Polaroid, Fannie Mae, Brach’s Candy and Wicke’s Furniture were saying a few months before Chapter 11 wiped away their company existence.
Meanwhile, the Huffington Post is opening an office in Chicago. Now, traditionalists might not care about this. But truthfully Ms. Huffington and a few of her 40-odd employees represent a new kind of competitor that is far less expensive, and makes a pretty good, competitive product. Rather than newspaper journalists from the New York Times or Washington Post, who told us about Vietnam 40 years ago, we have Ms. Huffington and her cadre on television almost nightly. Especially when it comes to politics, they are considered closer to the news sources than many leading newspapers, and their reporting is considerably more timely. If you want to know John McCain or Barack Obama’s next move on a vice presidential selection keep your browser on Huffington Post rather than waiting for what the Sun Times will print tomorrow. The Huffington Post may not yet be the L.A. Times, but at a fraction of the cost they are rapidly making improvement, growing readership and advertisers, and making money in the process.
All the major newspapers could have opened web sites and become the Huffington Post. Marketwatch.com, had no advantage over the Wall Street Journal. But the newspaper leaders didn’t try to embrace the web and find a new Success Formula. Instead of opening web bureaus and giving them lots of cash to figure out how to be the next CNNMoney.com they under-invested in the web environment. They tried to make the web sites just some sort of mirror of the newspaper – without knowing how to get ad revenues for the effort. And to this day, the major newspapers are still not internally Disrupting and opening White Space to redefine themselves on the web. Successful web sites are not anything like newspapers – yet they distribute news rather effectively.
I like to read a newspaper. But I don’t read every word. I like the paper because I can scan it. If I like the headline, I grab a few words. If I like the article, I go online and find the article to read later digitally. So why don’t newspapers just print the headlines, an article abstract and on-line addresses? That’s just one idea out of probably a hundred to change how newspapers operate. Why don’t they try them? Because they don’t know how to make the on-line business profitable! No major newspaper today sells on-line ads at the same time as print ads – and they don’t know how to sell on-line advertising effectively. The publishers never Disrupted their operations, realized there is real risk in avoiding change, nor created White Space in which to learn. Now the market shift to on-line is so far advanced they are without the resources and time to learn.
Newspapers need to take action, and fast. Misplaced optimism about the future is simply dreaming – yearning for the past to return. There are things newspapers do well, and digging up stories is one of them. But in a declining print readership market, they’ll lose that capability if they don’t quickly learn how to profitably monetize it. With the Sun Times near bankruptcy due to years of mismanagement and fraud, and now Tribune Corporation sailing toward the brink due to its incredible debt load, it’s possible Chicago readers and advertisers could be without an effective local news source in just a few years! It would behoove these companies to realize the newspaper of old will never return, and pour their resources into discovering a new way to compete – Pronto! Or we won’t have anybody left doing the hard work of journalism and it will be the consumers of news that suffer most.
by Adam Hartung | Jun 9, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
In the search for better business performance there is a management doctrine that says "measure what you want to improve, and focus on the measurement." If you chart the metric, you’ll get better results is the theory. But while measuring things tends to alter outcomes, there have been many examples of how hard it can be to measure the RIGHT thing in order to get the desired outcome.
Many years ago the U.S. federal Government Accounting Office (GAO) was concerned about how much was being paid to programmers working for "beltway bandit" consulting firms. These firms were paid by the hour for programmers, and new development could take hundreds of thousands of hours of programming time. So the GAO decided to measure the lines of code per worker per hour – and even set a standard of 35 lines/hour/programmer. What was the result? Incredibly long programs. Some so long they would abort the computer before compiling and the program wouldn’t even run. What a computer needs isn’t more code – it’s more efficient code. "Good" code. Good code gets more done with fewer computer cycles, less memory and less disc space – all really important to mainframe applications like the government was buying. By measuring lines of code the GAO made outcomes worse, not better.
Now Tribune Company is doing the same thing. The company is going to measure the "content output" per writer to determine productivity (read article here.) So what would you expect? Maybe longer stories? Doesn’t this remind you of high school when teachers said "give me 1,000 words" rather than making you write something intelligent? Do the length of articles determine the value of journalism?
Tribune Company is in a mess. Like I predicted back when the Sam Zell deal to take over the company was created, the market shift in newspaper readers – and thus advertisers – was not going to reverse. Leveraging Tribune with a ton of extra debt would hasten its demise, as the newspaper-centric company would have to cut costs even more drastically than it had in the past – and would have no resources to define a new solution for delivering news and ads to customers. But Mr. Zell and his lenders looked the other way and dove into this project full of real estate developer bravado that he could do what know one else in America had done – turn around a declining subscriptions and ad revenue.
Now, with no reversal of declines in sight, Mr. Zell is looking to whack cost. And he’s looking to do it by improving the number of words written per reporter. Really. This reminds me of the "books by the pound" banners I used to see in strip malls. Only when I went in the stores the books were nothing anyone wanted to read – and were best used as fire tinder (mostly out of date textbooks and obscure overruns of academic works.) Do I want my reporting "by the pound"?
Companies deep in the Swamp, and falling into the Whirlpool, look for anything to try and save themselves. At a time when new ideas are desperately needed, the ideas generated are usually geared toward some sort of draconian notion of cost savings – like in this instance somehow quadrupling the output of words per writer. Or, as this article even discusses, counting how many pages the paper will be and using page counts to determine the "value" a reader receives! Really! Like in the internet age we all care about how thick a book is – or newspaper. We want the important news, we want it accurately, and we want it fast. What we don’t want is a bunch of stuff we won’t read and that gets in the way. There are 4 page bi-monthly newsletters that cost $1,000/year – demonstrating it’s the value within what we read – not the quantity- which determines what we will pay.
A few years ago Reuters news syndication found itself facing financial ruin. But it got creative. The company shut down all operations in England and USA (a major Disruption) and put all of their copy editors in Bangalore (creating White Space.) Today, 100% of the releases you find on the web or in print from Reuters come from Bangalore. Reuters built an entirely new Success Formula with entirely different costs for old and entirely new internet customers. Today, Reuters is smaller but doing nicely. And that’s what companies in the Swamp, facing the Whirlpool, have to do. Completely Disrupt operations and open White Space far removed and with permission to find a new Success Formula.
Tribune Company cannot survive as it formerly existed. Today, it’s doubtful the sum of the parts are worth the debt. The company has to transition to a "new media" world where the internet is everywhere and information is medium free. No one cares if it’s print, TV, radio or internet. Information is now seemless – something Mr. Zell still doesn’t understand. And he can count words or pages all he likes – but he won’t save Tribune company by trying to whack costs within the traditional Success Formula.
