by Adam Hartung | Jun 5, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
"United to park dozens of jets" (Chicago Tribune article here). "Janesville facing future without GM" (Chicago Tribune article here) [note: Janesville, WI is a 63,000 person town in southern Wisconsin employing 2,200 in a local GM truck plant]. In both instances, company management is simply lopping off its use of assets – shuttering assets on its books – because it has no profitable use for them. Imagine that, owning dozens of airplanes or complete manufacturing plants and having no profitable use for them. Not even selling them, just not using them.
Regarding United "ground dozens of its ..aircraft..as part of a sweeping round of cuts intended to help the carrier conserve cash and survive as a stand-alone company in daunting times." When journalists talking about conserving cash to survive, it tells you this is a company on the brink of failure. Imagine you’re in the desert, running out of water, no one knows where you are, and you decide to just sit and not move so you can conserve your energy and remaining water. What will the end be? Baring a miracle, you’ve decided to die on the sands.
Regarding GM "Wagoner, the chief executive of General Motors Corp., made the announcement in Delaware: Janesville and three other plants will be gone because of a dramatic market shift from large trucks to fuel-efficient cars." Now, exactly to whom was this "dramatic market shift" a surprise – and even dramatic? Fuel prices have been going up for 5 years, and hybrid cars have been the hottest ticket for 3, and the decline in large truck/SUV sales has been happening since gasoline hit $2.50/gallon. What exactly has become recently "dramatic"? How about expected? Predictable? Planned for? Obvious?
Air India, Singapore Airlines, and Lufthansa are just 3 airlines that are expanding flight capacity profitably. Toyota, Honda and Kia are all growing capacity. Explosive growth is occurring at Tata Motors. The demand for travel and cars hasn’t declined – but you’d think so if you listened to executives from United and GM. Their Lock-in to doing what they’ve always done has caused them to miss market shifts that were as predictable as – the calendar. They blame market shifts. They should blame themselves. The headlines say it all.
by Adam Hartung | Jun 2, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
We usually say we know when someone is dead. But in today’s modern world, we’ve found out that often there are people who are alive now, but we know will not survive more than a few hours or days. We see trees that have rotten roots – but look alive for another season or two before so little sap rises that no more leaves sport in spring. The arborist tells us that we might as well cut it down, before it falls in a big wind causing avoidable damage, but we keep hoping the tree will revive next year. The reality is that we tend to be very optimistic about the future even when we have no reason to be so. We want to believe things will get better right up to the very, very end.
Businesses operate that way as well. When their Success Formulas become obsolete we see signs of root rot in their lower customer satisfaction ratings, poorer performance against industry metrics, lower market share, weak reactions to competitors (especially new ones), higher prices and declining margins. But management is always saying things will get better. Even if there is no reason to believe this.
That can now be said for United Airlines. United has always been one of the "major" airlines (as if Southwest wasn’t major – but that’s not the purpose of this entry.) But as the Chicago Tribune headlined on Sunday "United up against a new reality for airlines" (read article here.) United spent 3 years in bankruptcy after the events of 9/11/01, and promised it had turned the corner when it came out of bankruptcy. But now the company is in deep trouble again with rising costs, declining ridership and no plan for how it will try to survive this very bad economy for airline travel. Customers are being hammered by rising plane ticket prices, new charges for baggage checking and the worst on-time performance ever. The employees are struggling as the company keeps trying to cut pay even more, despite the fact that no flight attendant could live on United’s new hire pay.
United developed root (or should I say route) rot a decade ago. The hub and spoke system designed during derugulation in the 1970s has proven to use lots more fuel, extend flight times for customers making layovers, and take more employees and gates (which have charges) than a point-to-point system. Likewise, a commitment to customizing aircraft for routes has led to a heterogenous and complex set of equipment that is costly to fly and maintain. Amazingly complex pricing has led customers to look at other airlines first when seeking tickets, recognizing that United’s list prices are unrealistic but the customer has no idea how to find a decent price at United when it is incredibly easy at Southwest. And rather than develop a more flexible workforce in its union contracts, United settled for arguing over pay rates leading to an unhappy workforce more focused on its bad pay than happy customers.
United had a chance to fix its problems when it launched its "low cost subsidiary" named Ted. But this wasn’t White Space to try anything new. Ted had to follow all the old United rules. Customers soon learned Ted wasn’t a bargain, it was just the south end of the UniTED mule. Then again, when the government shut down the airlines for a week in 2001 United had the opportunity to propose serious changes to its operations including route changes, renegotiating contracts with unions and vendors and simplifying its rate structure. But instead United focused on re-opening exactly as it had operated before. Which soon led to bankruptcy.
Lately we’ve heard that United needs to merge with another airline to succeed. Even the top brass at United have started to realize that simply getting bigger will not make United more successful. It could even make matters far worse. Higher fueld prices are just the last dagger into the United Success Formula causing the company to face potential failure. But the big problem is that United didn’t admit its problems, its Lock-ins to a failed Success Formula, a decade ago. Now, with the problems piling up fast, its not clear United can be saved. Despite its size, United may well go the way of Pan Am, Eastern, Braniff, Republic, Air Midwest and other failed airlines. There will remain optimists to the bitter end, but reality isn’t hard to see. United is in the Whirlpool and it’s going to take a miracle to pull the company out of it now.
by Adam Hartung | May 30, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
It was Ross Perot who made the phrase "you’ll hear a great big sucking sound" famous when he said them during his Presidential debate with Messrs. Bush and Clinton – referring to the impact he felt NAFTA would have on employment as jobs transferred from the USA to Mexico.
I’ve borrowed it today to refer to the situation at Sears (see chart here.) Hard to believe that it’s only been 3 1/2 years since Ed Lampert used his control of KMart to purchase Sears. Today the combined company is valued the same as it was then – but it’s on a fast track lower. Since the acquisition, it’s all been sucking sound around the Chicago suburbs where Sears is headquartered. Now, the most recent headline from The Chicago Tribune (read article here) says it all "A giant continues to unravel."
The amazing thing was that anyone ever believed this acqisition was going to be good for anyone. KMart had gone bankrupt, and Mr. Lampert used real estate sales (many to Sears!) during the best real estate market in 80 years to fund his takeover of the company. Somehow, people translated that experience into a big win for the struggling, dying Sears chain. Sears had been getting trounced on all sides for over a decade when Lampert took over. And neither management at Sears, nor Mr. Lampert, had any idea what they were going to do to reverse fortunes.
Smart money initially talked that Mr. Lampert would quickly repackage the Sears real estate into trusts and unload them onto the super-hot real estate investors. But he didn’t. Instead, he said he would turn around the company’s profitability. But his plan to do that was effectively doing more of what KMart and Sears had always done, only with less advertising, less marketing, less spending on merchandising, lower pay for employees, fewer open stores and more limited product lines. Uh huh.
Very quickly Mr. Lampert’s cuts produced better margins. Sales declines happened, but not as fast as the cost cuts, producing a very short-term uptick in profits and cash flow. If you sell down inventory while lowering costs you generate cash. So then the smart money then said he was turning Sears into a vast private equity firm that would milk Sears oh so adroitly of its value and invest the money in extremely high return projects – after all Mr. Lampert previously made a fortune as a hedge fund manager. But, the world was awash in liquidity and there were more hedge funds and private equity firms than deals, so the profit of such projects was declining precipitously (even Warren Buffet complained about the prices money managers were paying to do deals as he sat on his cash hoard). Meanwhile, it was Lampert’s hedge fund that had bought KMart which then bought Sears – so in practicality it was Sears that was to make the hedge fund money – not be a hedge fund. Uh huh.
Now, everyone is wondering how anyone can win at Sears. Real estate markets stink. Retailing stinks. Sears revenue per store, and number of stores, has declined for 5 years along with cash flow and profits. Sears has finally made its way from the Swamp to the Whirlpool – and thus "the great big sucking sound" that is what you hear when the last water finally swirls into the drain.
There were lots of optimistic folks all along this journey for Sears. Jim Cramer of Mad Money television fame pumped and pumped his love of Mr. Lampert. To this day the article above quotes a money manager who has recently bought 500,000 Sears shares expecting a brilliant Lampert play (although he has no idea what it will be.) We love to be optimistic. But this game is over. Companies remain in the Swamp, fighting alligators and mosquitos while making no money for investors, creating no new jobs for employees and providing no new opportunities for suppliers, only so long as they have ample resources to fund the messy swamp fights. But due to low returns, and the ongoing sale of assets to preserve the losing battle, there is no way the business can ever return to success. Woolworth’s, S.S. Kresge and Montgomery Wards are just 3 retailers that learned this the hard way. Optimism feels great, but it is unwarranted as the business heads toward its inevitable demise.
When companies are in the Swamp they are just paddling around waiting for the event that opens the drain and sucks them into the Whirlpool. They never know what that event will be – in fact almost no one does. But inevitably some event occurs which simply requires more resources than the business has and in very short order – it’s sucked away. In Sears case I’m sure Mr. Lampert will blame President Bush, Congress and the Federal Reserve for a consumer-led recession which he could not have been expected to predict 3 years ago. He’ll say his problems are their fault. Uh huh.
But in reality, Mr. Lampert could have used Disruptions and White Space to turn around Sears. He just didn’t. He left management’s old Success Formulas, believing in the power of the Sears brands (Kenmore, Craftsman, etc.) and the store locations to save the company. Uh huh. And on top of that he had ultimate faith in his own Success Formula – his financial machination skills to bleed the company of cash or forever bamboozle investors with multiple complex deals – something no one has ever done successfully. Both of these Success Formulas were out of date, and would not work. And since Mr. Lampert did not believe in Disrupting them, and creating White Space to do radically new things, this venture never had any hope.
And it still doesn’t. If your optimistic about Sears open your window and listen – I think you’ll hear a great big sucking sound coming from the mall anchored by a Sears store down the street.
by Adam Hartung | Apr 15, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Hundreds of years ago philosopher Hippocrates created an oath, and for years medical doctors subsribed to it. Dramatically paraphrased, it included the notion "Doctor, first do no harm." The objective was clear – if you go messing around with a bad situation you can make it worse. Make sure you know what you’re doing – and you know how you’re going to make things better.
We should tell modern businesspeople to swear by this same oath. Delta and Northwest airlines have announced their intent to merge and make one huge Delta (read article here). It is widely expected that very shortly United and Continental will attempt the same maneuver to create an even larger United. Now, do you think this means air travel is going to get any better? Will service improve? On-time performance? Less lost baggage? Happier gate agents and flight attendants? Better maintained aircraft?
No one believes that. Even the leading industry gurus claim the only merger benefit is theoretically this will somehow lead to lower cost – and less capacity (at a time when capacity utilization is around 80%) – which is supposed to raise prices. So we should expect basically the same sort of service, with fewer flights, and yet even more attempts to cut wages and maintenance spending to increase profits? The reality is that either (or both) of these mergers will lead to mass confusion as the companies try sorting out conflicting schedules, optimizing broken systems and negotiating new contracts.
This deal is just another effort to Defend & Extend the traditional hub/spoke airline system the major airlines have used – unprofitably – for 30 years. Things won’t get better if these companies merge – for customers, suppliers and investors they will only get worse. There’s no plan here to make a new, more profitable airline. They aren’t suddenly going to become Southwest.
Monday, Blockbuster said it wanted to buy Circuit City (read article here). Why? Blockbuster is getting killed by on-line music downloads, Netflix and On-Demand direct-to-home distribution, and pretty quickly movie downloads. Circuit City was eclipsed by Best Buy in 1990 and has been choking on the leader’s dust, barely making money ever since (despite being heralded as a "great" company in Jim Collins’ book Good to Great). As on-line sales of consumer electronics grows at over 30% per year, making life tough even for leader Best Buy, this merger is supposed to somehow make things better?
The bidder says it’s an opportunity to create a 9,300 unit group of stores – right as we start the worst consumer-led recession in 30 years! As retailers of all types are rapidly closing stores in order to avoid bankruptcy, the plan here is to get a bunch of stores under one name to sell products that are being displaced by on-line and direct-to-home models and consumers are becoming more price conscious. Right. This is nothing more than a move by Blockbuster to try Defending & Extending a retail model that has already proven to be obsolete.
The reality is that Southwest and Virgin have shown airlines that approach the industry differently can make money. Making a bigger company that uses a broken Success Formula only makes for larger losses – not a new airline. Everyone should be wary, because life will only get worse as we consolidate management of most of the system into fewer hands trying to make a broken model work. If you’re an investor, keep buying Southwest and Virgin because these mergers will provide more opportunities for the Disruptive competitors to win.
Likewise, Apple has shown us all that we’ll never go buy CDs in historical quantities. All media is quickly going digital. We don’t buy newspapers, magazines or books like we once did – we go to the internet. And very soon we won’t be buying DVDs either. New competitors are causing Blockbuster and Circuit City to faulter – and trying to make both bigger will only cause them to do worse.
These companies desperately need White Space to build new Success Formulas before they fail – and not just fail investors but customers, suppliers and the communities they serve as well. These merger efforts will not help any of them to be better competitors that offer better products with better service that meet customer needs with lower cost models. And that means they are only going to make things worse. It would be good if businesspeople could overcome their desire to "do something – anything" to save their old Success Formulas and instead only undertake actions based on plans to be better. First do no harm!
by Adam Hartung | Mar 29, 2008 | Defend & Extend, Disruptions, General, In the Whirlpool, Leadership, Lifecycle
Boy oh boy did the Chicago press decide to beat up on Motorola (chart here) this week. With the company’s announcement that Motorola does intend to split into two seperate entities – by spinning off the mobile handset business – the press decided it was time to unload. Headlines: "Pulling wings apart a risk for Motorola" (link here) – "Expert’s advice: Cut red tape and deliver" (link here) – "Motorola breakup ends comeback effort" (link here) – "Motorola must think beyond its batwings" (link here). Reading these articles, you would think the people running Motorola were dullards and miscreants with limited skills and poor business sense. But do you really believe that?
The management at Motorola is filled with very bright, hard working people. Most of them have been quite successful inside Motorola or from outside and recruited in. So the question becomes, if they aren’t stupid, how can this happen? As I’ve blogged before – leadership did a decent job of Disrupting initially, and all of Motorola opened White Space that launched new projects and products. Growth followed. But in mobile handsets leadership allowed the early success of Razr to succumb to old-fashioned notions of maximizing product revenue and profit. Management wasn’t stupid, it just listened to the siren’s song of "maximize profits by seeking market share and using volume to seek lower costs in manufacturing, sales and distribution." Who would argue with that? It made a lot of money really fast. It just left the company vulnerable to competitors – who acted fast and leapfrogged Motorola. And it allowed Defend & Extend practices, well entrenched in Motorola, to re-instill themselves.
So if management wasn’t stupid, what’s next?
First, Motorola does need to split. One business needs to keep doing the right things in DVRs, WiMax, headsets and 2-way radios. It needs to keep the funds from its success to re-invest in more White Space projects and not divert money as well as management attention into cellular handsets. The first business is Motorola – always has been – and justifies its brand image. This business is in the Rapids. This business has found ways to Disrupt its old Lock-ins, sell off busineses (like auto products) that don’t perform, bring in new acquisitions and set up White Space to find new growth markets.
The handset business needs to get out on its own – and either fail or turn around. Literally. Whereas the other part of Motorola got itself from the Swamp back into the Rapids, handsets isn’t just in the Swamp, it’s in the Whirlpool. The business would have gone into bankruptcy already if not supported by the rest of Motorola. These two businesses are in very different parts of the lifecycle, and require very different management solutions. So push it out the door and give it a chance, albeit a small one, to turn around.
The handset business needs to start over. New name, and a new leadership team willing to Disrupt abruptly. The key requirement is to so Disrupt the business that old practices are quickly abandoned – since they are what is causing the company to falter. The people, who know they are in trouble, have to see that old Lock-ins to practices like product reviews and technology stability – practices that are seen as good management – are what has gotten them into trouble and they have to be ignored. Those who have administered the best management practices – the Status Quo Police – have to be removed. Those who reinforced abiding by old practices have to go so that new best practices can be created around faster product launches and more market participation.
New handset leadership needs to very quickly give Permission for these bright people to unleash their skills. Permission has to be granted to rethink the technology, the products, the distributors — all aspects of the business. Handsets can’t win by doing what it did before, better. The business has to transform and that requires Permission to break all the rules – and White Space in which to try new things and see what works. Fast.
Great companies learn to let go early and fast. Quite simply, not all ideas pan out. Some products are huge successes, and some aren’t. Great companies keep Disruptions and White Space alive – launching new products and services. But if expectations aren’t met they cut quickly. They review why things didn’t work out as planned, and move on. Maybe too early, or too late, or wrong technology. But move on. Get over it, quit spending where its not making money. Love your launches, but don’t marry them. Keep nimble. Look at the businesses GE has entered, and exited, over the last 20 years. But Motorola, filled with truly innovative employees, spent too much energy on the "selection" process, launching too few products for the market to evaluate, and tried forcing them into success far too long. Does anyone remember Iridium (the failed effort at a satellite-based mobile phone network)? The faster the current distraction (handsets) is thrown over the wall the faster the rest of Motorola can get back to Disrupting and growing new Success Formulas in new markets.
And those in handsets have to learn to launch new products while existing products are still growing – and to let the customers decide what technologies and products are good rather than internal vetting and management. Whatever you call your company – you can’t move too fast finding a new Success Formula. With the size of ongoing losses, you’re in the Whirlpool fast on the way to extinction. It will take serious outside-the-box launches (like Apple launching itself into the music business with iPod and iTunes) to turn around your business. Only by Disrupting – recognizing the depth of your horrible situation publicly and as a team- then giving yourself Permission to overcome all the old Lock-ins and using White Space to redefine a new company can you hope to turn around.
It’s not about whether management is stupid. That is almost never the case. The issue is about managing, and overcoming, Lock-in. Those who learn to manage Lock-in by using Disruption and White Space keep themselves in the Rapids. It’s really, really easy, however, to follow the siren’s call of maximizing profits by letting Lock-in promote reduced innovation, reduced new product launches, reduced distribution experiments while maximizing sales and profits of existing products and services. Only by ignoring those calls can leadership turn around businesses by refocusing on Disruptions, giving Permission for truly different behavior and using White Space to develop new Success Formulas.
by Adam Hartung | Mar 22, 2008 | Defend & Extend, Disruptions, In the Swamp, In the Whirlpool, Innovation, Leadership, Lifecycle
A couple of weeks ago I blogged that the Chief Innovation Officer for Tribune Company – Lee Abrams – was unlikely to make much difference because he wasn’t given any White Space. He didn’t have permission nor resources to develop a new Success Formula – and as a result he would be allowed only to make minor adjustments around the existing Success Formula edges – a program which is way too little, too late for nosediving Tribune.
Recently Mr. Abrams was interviewed (read interview here), and the reported discussion leads me to be no more optimistic than I was before. While I grant Mr. Abrams with a lot of experience, good ideas and desire, he’s still without White Space and that means organizational Lock-in, and the Status Quo Police, will keep his efforts from yielding much improved results.
I was pleased to read that Mr. Abrams recognizes the difference in requirements between his success in radio and his challenges with Tribune. As he indicated, when he applied innovation to radio "what radio needed was discipline. It was all over the place and we disciplined it." That made a lot of sense for 1970s radio. Top 40 had ignited a huge growth wave, and the radio industry was in the Rapids. In the Rapids, businesses need to develop a Success Formula and become good at executing it so they can keep growing fast. Good business practices in the Rapids are all about Locking-In on the Success Formula and replicating faster than anyone else so you can grow the most and build the greatest resource base.
But after growth stalls it’s a whole different game. Once tipped into the Flats or Swamp successful innovation is about finding your way back into the Rapids. And Mr. Abrams seems to know that. When he took his new job at XM Radio a few years ago he had employees bring in memorabilia from traditional radio stations and he burned them! Similar to how he had a Chicago DJ bring disco records to the ball park and blow them up with explosives to mark the shift away from Disco programming! These actions were symbolic Disruptions – making people see that the past needed to be forgotten in search of a more successful future. Disruption is the first step to opening the mind, and organization, for a better future. Then it takes White Space, given Permission to truly develop a new Success Formula and resources to see the efforts through.
But Mr. Abrams isn’t blowing up any artifacts at Tribune. He sounds much more subdued as he looks to use the six smaller Tribune newspapers as "labs" to test things. He even says he "can’t do anything too radical right away." He’s not talking about necessary Disruptions. He’s talking about attempting some sort of evolutionary change within a horribly Locked-in and resource-starved company more focused on making debt payments than anything else.
Those 6 newspapers aren’t labs. The management in them is intent on making budget this year so they don’t have to cut more heads from the traditional business. Those managers are focused on saving their traditional business traditional ways. Mr. Abrams has no White Space there to develop a new Success Formula. Those papers have no spare resources, manpower or money, to spend on White Space projects. They want immediate cost savings or immediate revenue enhancements with no additional investment – and that means working around the edges for minor improvements that don’t run afoul of existing Success Formula Lock-in! If they see Mr. Zell offer resources to Mr. Abrams those newspaper leaders will be screaming bloody murder to Mr. Zell to give them the resources and they can be much more productive with them than any ideas being offered by Mr. Abrams. They won’t reject Mr. Abrams, but they will contend that they can do more short-term with the resources than he can! It will be tough for Mr. Zell to ignore those newspaper heads – after he’s cut their budgets for practically every line item!
Tribune desperately needs Disruption and White Space. I hope Mr. Zell finds it possible to really support his new Chief Innovation Officer by implementing some Disruptions. Things need to change in the newspapers, TV stations and radio stations FAST. The new leaders need to quickly Disrupt, so people realize change is expected. And White Space, with permission to do new things – radical things – as well as resources committed to their success is required. Give Mr. Abrams the tools to develop a new Success Formula and he might. But right now – he’s trying to hook a hose to the kitchen sink while rearranging the furniture in a house on fire.
by Adam Hartung | Mar 17, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lifecycle, Lock-in
Almost since I began this blog I’ve talked off and on about newspapers. Living in Chicago, I’ve taken more than a few pot shots at the local establishment – Tribune Company, owner of The Chicago Tribune. Don’t get me wrong, I love "the Trib," as we call it in Chicago. For decades a great newspaper. And because I’m over 49, I still like reading papers. Heck, I very frequently put links in these blogs to the Trib’s web site. Good product at a good price. In fact, in today’s economy, probably too good a product for what I have to pay as a discount subscriber and on-line reader.
Even though all of us are used to the daily newspaper – including the travelers that pick up USA Today and those who just get the Sunday paper for "the ads" – it will disappear. Or at least change form so drastically it won’t appear like it used to be. That may be hard to accept – but then again, do you remember listening to 33’s, 45’s (and if that means nothing to you don’t worry, you’re just young) and LP records; Or 8-tracks, or cassettes? And soon, even CD’s will disappear to the growingly popular MP3 player. Nowhere is it given that we deserve a daily printed newspaper, and in today’s world it’s existence is becoming less viable by the month (read CBS Marketwatch on "Death Knell for Newspapers" here.)
You may be surprised to know that newspaper readership peaked in the 1950s. But you shouldn’t. After all, radio, television and cable TV all ate into newspapers’ share as a source of entertainment and news. The internet is just the latest competitive technology – but it is the one which has pushed the industry into the Whirlpool from which it won’t return. Newspapers have used their resources in many valuable ways, but they have little to none left they can use to become the next Google or Marketwatch. Most are overleveraged (read my past missives on the debt ladening of Tribune by Sam Zell), and all are short the cash (or debt capacity) to catch up with those who invested heavily into web growth a decade ago.
Defend & Extend Management never stops believing there is some way to save a dying business. But businesses do become obsolete. Mail order catalogs were once great, but in an internet world? Printed stock prices were valuable until on-line brokers came along. Heck, I remember when we used to have television repairmen – and they even came to our house and picked up the TV then returned it after repairing! Now we throw the thing away – and I don’t know where you’d find a repair person. My parents helped make the Kerr and Ball companies a lot of money by home canning vegetables they grew in the family vegetable garden -but what is the current market for companies making quart jars and home canning lids? Would you believe that we used to have operator manned printing presses in corporations to make copies of business documents? And carbon paper for multiple copies out of typewriters? Obsolescence happens, but D&E managers never see it. They are paid to follow a "never say die" approach to markets.
Only by constantly Disrupting and maintaining White Space can we hope to keep our companies long lived. No manager has a crystal ball for the future. Predicting the demise is very hard to do. It’s smarter to keep looking for growth, and be optimistic in finding it. Constantly looking for the direction to go is far better than trying to defend a business bound to shrink. Now that even the newspaper industry’s own study group is saying the industry won’t come back investors should start thinking about where they are putting their resources. No, it may not be commonplace to take a laptop in for the "morning constitutional" – but we’re bound to lose that broadsheet sooner than most people think.
by Adam Hartung | Mar 6, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you’ve read this blog the last 2 years you know I’m no fan of Mr. Lambert and the company he runs – Sears Holdings (see chart here). I have a vested interest in watching this story, because the day KMart announced it was buying Sears I was quoted on the front page of the business section of The Chicago Tribune saying that I gave the merged company no chance of success.
Since then I’ve been right. Sears and KMart sales have declined, sales per store have declined, Sears and KMart have lost market share as retailers, and the proprietary brands (such as Craftsman, DieHard and Kenmore) have lost share. Dividends for shareholders have been nonexistent and assets have declined in market value. Thousands of employees have lost their jobs, and many vendors have lower revenue and margins. So far, there are no winners as a result of this misguided venture by Mr. Lambert.
Prior to acquisition Sears was a very troubled company. It was no longer a retail leader, and it was using all possible tricks to Defend & Extend its outdated Success Formula – to minimal avail. Then along came Mr. Lambert – himself quite Locked-in to his own outdated, industrial era Success Formula. His plans to "milk" Sears and Kmart of value to feed his hedge fund has not worked out as he would have liked (to put it mildly).
When Mr. Lambert bought Sears there was value that could have been unlocked by Disrupting and using White Space. He should have moved very fast to sell off the large real estate holdings in a red-hot real estate market. Given the disastrous situation at Sears, he should have moved fast to shut down lots of stores not competitive with vastly better operators Wal-Mart, Kohl’s, Target and J.C. Penney’s. The well known brands mentioned above could have been rapidly sold to other retailers, possibly making lucrative deals with one of the major companies. And he could have converted Sears to a much greater on-line retail company, building on the strong skills at subsidiary Lands End (while building on long ago company history in catalog retailing.)
But Mr. Lambert didn’t Disrupt, and he didn’t open White Space to quickly change Sears and Kmart. Now…… his actions are far too little and far, far too late since the likelihood Sears Holdings will ever be worth much is pretty dim. Given the sales declines, and facing a major recession, the value has slipped away and how investors will ever capture it is completely unclear. Especially as Mr. Lambert promises more of the same as he intends to cut expenses further and purchase less inventory for upcoming shopping seasons. Those tactics haven’t been working, and nothing magical is going to make them work soon.
Mr. Lambert is now blaming the horrible condition of Sears on economic conditions – "Despite the perception during the first two years that we were not focused on growing our business, we were planning to do just that in 2007…. we did not foresee the severe economic turbulence ahead." (read article on current Sears conditions, and the source of this quote, here) Give me, investors, vendors and employees a break! This is simply making an excuse for the future while refusing to acknowledge the value destroying decisions previously made! Sears has gone down, not up, ever since this acquisition was made – and that can be blamed fully on Mr. Lambert. It was his job to prepare Sears for the future, not blame the future economy for his failures. If we were back when Sears was first founded, it’s safe to say town leaders would be tar and feathering Mr. Lambert and running him out of town on a rail — but then, of course, Mr. Lambert doesn’t live in Sears’ hometown of Chicago – he’s ensconced in New York where he doesn’t feel the pain his demonstratively lousy business decisions have created.
Postscript – readers should keep in mind that it’s been only about one decade – on mere short 10 year period – since Sears was one of the 30 Dow Jones Industrial Average companies. We should all remember how very fast companies that remain Locked-in to outdated Success Formulas can move from the Flats to the Whirlpool. Sears’ fall has been swift. Don’t ever think the past can protect you into the future – let Sears remind you just how fast failulre can sweep over any business, no matter how large and previously successful!
by Adam Hartung | Feb 20, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Innovation, Leadership, Lifecycle, Lock-in
Motorola’s (see chart here) idea to spin off its mobile phone business is probably a very good thing for investors. Because that part of Motorola is a sitting duck. Motorola undertook a number of Disruptions the last 4 years, and many of its businesses have White Space doing the right things – such as launching great new products and keeping customers highly satisfied – in markets from 2-way radios to enterpise networks to digital set-top boxes.
But the mobile handheld business, well it just tried to hand onto its success with Razr for too long (read article about Motorola product competition here). Razr was good, but in today’s economy competitors around the globe see your new product and copy it as fast as possible. Then they start one-upping you, such as Nokia (see chart here) did by making lower cost phones and RIM (chart here) and Apple (chart here) did by bringing out products with even more innovation (such as Blackberry and iPod phones).
Motorola had higher cost chips, but you don’t have to be low cost to compete. Samsung used its chips to differentiate with multiple variations every month, swamping the market with "new" product even if it just barely was new. Meanwhile, Motorola introduced only 1 new product this year – the Rokr E8 – which wasn’t even new but (as the name implies) an updated Rokr which was introduced almost 3 years ago.
Now the mobile phone business is well into the Swamp (possibly even the Whirlpool some claim), while other parts of Motorola are keeping themselves in the Rapids. As the above referenced article says, previous troubles in mobile phones "stir uncertainlty and depress morale, rather than inspire Motorola’s deep pool of designers and engineers to be more innovative." Employees don’t like working in the Swamp or Whirlpool, where chronic anxiety over cost cuts, and declining investment keep the business in an also-ran status. An analyst wtih Jackson Securities said "I don’t think the people in the lab are idiots. I think creativity hasn’t been incentivized.." Employees like working in the Rapids. They know that’s where success occurs, and that’s where Motorola’s mobile phone business was in 2005 and 2006. But now that competitors have created what Ross Perot called "that great sucking sound" in mobile phones, why would anyone want to work there?
The engineers in Motorola’s mobile phone business are hard working, industrious, and talented. I know several of them, and they are world class. Their business unit’s fall from grace isn’t because of employee weaknesses or insufficient loyalty. Rather, the leaders (including Mr. Zander, CEO) made the horrific decision to try Defending & Extending their business with the Razr rather than maintaining Disruptions and White Space letting loose the talent which made and launched the Razr in the first place. This decision kept the innovation minimal, the opportunity for new products to reach market negligible and turned the business unit into a sitting duck. If this business had maintained the Disruptive behavior that got the Razr out the door, and used White Space to keep innovations flowing to market – instead of chasing market share and trying to lower costs – these engineers would be sitting pretty, rather than sitting ducks.
The competitors have been taking potshots for months. And now that we’re learning White Space disappeared in this unit, the risk is the corporation keeps trying to pump money from the better units into the duck as fast as losses pour out from competitive shots. It will be better for the employees, the investors, suppliers and customers if Motorola puts its energy into growing the businesses it has kept on course the last 4 years, and let bygones be bygones in a market Motorola created – but let get away. When you see a sitting duck, best thing is to walk away.
by Adam Hartung | Feb 17, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
We like to think that businesses succeed on the strengths of perseverence, tenacity and hard work. Yet, we know that many leaders, and their teams, follow these principles and still do not succeed. Unfortunately, too many businesses stake their claim on Defending & Extending their Success Formula "to the death" – and end up exactly there.
Sears (see chart here) is on the brink of failure, yet it is unclear the egomaniacal CEO who bought the company will give up his Success Formula to save investors, suppliers and employee jobs. (Read full Chicago Tribune article on the failing Sears turnaround here.) When Mr. Lampert took over Sears he was quick to say he was willing to give up revenue in the pursuit of better profits. Somewhere in his training Mr. Lampert built into his Success Formula that growth was not as important as short term profits – and in fact that profits could be captured in a no growth business for better investment elsewhere. But in reality, that theory just hasn’t been shown to work.
Sears cut employees, product lines, advertising, marketing and closed stores to raise short-term profits. But investors are now recognizing that these actions may well have destroyed the company. While Mr. Lampert pumped up the bottom line, he lost competitive position in large appliances – letting the Kenmore brand grow stale while Whirlpool and others grew revenues at Best Buy. And now with homebuilding on the skids, demand for these appliances is falling like an anchor. At the same time, the venerable Craftsman brand has lost share to Ryobi and other tool brands now sold in Home Depot and Loews. Mr. Lampert predicted sales for Sears products, and at Sears stores, would fall as he focused on profits. And they did! Mr. Lampert did a great job of helping competitive manufacturers and retailers gain strength while he started trying to milk his "cash cow."
Only the milk is not forthcoming. After consistently declining operating numbers, in the 2007 fourth quarter Sears profits declined 51%. So Mr. Lampert fired his hand-picked supplicant President, and announced a reorganization. Like the Captain shooting the first mate while ordering deck chair reorganization on the Titanic. And now analysist are saying that the sum of the parts at Sears (brands plus real estate) is worth less than recent market valuations – as much as 30% less!
Mr. Lampert believed in his Success Formula, and he asked investors to believe in it as well. Many did. But Mr. Lampert’s industrail era retailing Success Formula is woefully out of date – and not producing growth or positive results. He’s Locked-in, and he seems willing to take down with him anyone who will share his Lock-in. How long should investors believe in Mr. Lampert and his failed strategy? To the death? For those who think it may not happen – just consider Woolworth’s, Kresge, Montgomery Wards, KMart and Marshall Fields.
