by Adam Hartung | Nov 7, 2007 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
Today GM (see chart here) announced one of the biggest losses in corporate history. Believe it or not, GM announced a third quarter loss of $68.85 per share – double the value of the stock (read article here).
Surely you aren’t surprised. GM has sworn to its Lock-in. The company has refused to set up White Space. Leadership keeps saying it can somehow improve it’s broken Success Formula and thusly turn the company around. They’ve sold assets, including most of GMAC, to raise cash for keeping the broken Success Formula breathing – barely.
But GM has been failing for more than 20 years. Why would anyone think that changing its handling of employee health care costs would improve its competitiveness (a recent much-ballyhooed management action)? Let’s wake up and realize that GM has been going out of business for a very long time, it’s just now that people are seeing the real risk. We’d like to believe in the Myth of Perpetuity – that large companies will simply go on forever. But that’s not true. Montgomery Wards, Polaroid and Wang are just a few examples of companies that were large and once profitable but that disappeared.
When management refuses to accept that it’s Success Formula is failing it dooms the organization. If management refuses to create White Space, and use that White Space to develop new Success Formulas and migrate the organization, it assures failure. EDS, Hughes and Saturn were all projects that had the opportunity to define a new, successful GM. But GM dismantled these projects and sold assets to keep the old Success Formula on life support.
As investors, employees and suppliers if we are surprised it’s our own fault. Size is meaningless in today’s information economy. Companies can fail very fast when customers can move to new solutions with the click of a button. GM may not declare bankruptcy in the next 2 years. But if it does….. will you be surprised?
by Adam Hartung | Oct 9, 2007 | Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in
When I was a kid – way too long ago – a comedic television show named Get Smart featured a mock spy who was terrible at lying. When he would get caught telling a fib he would immediately try to change his story, and his first line was always "Would you believe?". It was clear that you couldn’t believe, or trust, this guy.
General Motors (see chart here) has apparently reached a new agreement with the UAW. And the headlines screamed "Deal Gives GM Grip On Costs" (see article here.) The Chicago Tribune article goes on to quote several industry analysts/gurus making claims that GM has now resolved the issues that caused them to fear bankruptcy just 2 years ago. For example, the chairman of the Center for Automotive Research said "I think they’re competitive on cost now. There are no excuses after this." The consensus is that GM can now refocus on products, and regain lost share.
Would you believe……. ? Does anyone remember the auto company’s situation back in the 1970s and ’80s? They all cried "foul" that they could not compete effectively with Japanese competitors who had the benefit of a very favorable Yen exchange rate. Because the dollar was stronger than the Yen, the auto companies claimed they could not compete. Well, it was only a few years before the dollar fell more than 30% against the yen. And now, following a long decline, the dollar is at an all-time low versus the Yen, which is extremely cost favorable for GM. But do we hear any auto executive saying that their competitiveness versus the Japanese has improved? Rather, attention has shifted to labor contracts.
Companies in the Swamp and Whirlpool leap from disaster to disaster. Their Success Formulas are broken, and Lock-in keeps them producing poorly. They blame poor performance on factors outside their control, because they hope the world will return to conditions which will allow their Success Formula to produce better. They want the world to evolve toward their needs, rather than they evolve toward meeting market Challenges. Good luck with that approach.
GM has seen its market share steadily erode for 3 decades. And a look at the company’s stock price chart shows that long term investors would have received no value (other than dividends) over that same long period. Shifting its health care charges under a new labor contract does not change GM’s competitiveness. GM does not design, manufacture, market and sell its products as well as its competitors. And it has not developed any new businesses with higher growth and better profits. Most of GM’s competitors now make a large percentage of their cars in the U.S. just like GM, even though they are offshore headquartered, and they are growing sales, market share and making more money.
GM needs a Disruption and White Space – like the old Saturn division once was – to design a new Success Formula. GM’s new labor contract merely extended its demise a little longer. Investors, employees and suppliers need to beware of big promises, anticipate business-as-usual, and prepare for more pain.
by Adam Hartung | Sep 22, 2007 | In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Lots of people have the idea that you can "milk" a business of cash. The notion goes that you can take a viable, but slow (or no) growth business and stop investing. Then "milk" the cash out of it. What a great idea. Too bad it doesn’t work.
Take Sears for example (see chart here). Eddie Lampert got KMart out of bankruptcy, and then bought up Sears. He quit investing in Sears, and revenues and profits dived. He told investors that was OK, because he was improving profit margins. He said he would keep flying the plane well, just at a lower altitude. But sales and profits have continued to dive even further. Just recently (see article here) Sears had to announce that profits were off yet another 40%. Margins have declined from 28.4% to 27.7T. Even though the company has been buying its own shares to prop up earnings per share, even that figure is down almost 40%. And, revenues are down (not the growth rate down, the actual revenues have again declined) by 4%. Same store sales at both Sears and KMart are down by about 4%. The President of Sears, Aylwin Lewis, said he was disappointed. Oh really?
Many investors have said not to worry about Sears slide. After all, they said Mr. Lampert would "milk" Sears of its cash to make hedge fund investments – which are supposed to be wildly profitable. Especially since that is ostensibly Mr. Lampert’s forte. But, there are now more hedge funds than you can shake a stick at. The price of deals has been bid up, and returns have fallen. So those investments haven’t paid off. Now the Sears war chest has declined by almost 50% – so much for "milking" to maintain cash.
Sears went into a growth stall, and those who ignored it have lost 27% on their equity investments. The reality is that in today’s competitive global marketplace, no one has the option to slow investing and "milk" the business. Competitors swoop in and push you down faster, and harder. Competitors find those who want to "milk" easy prey. Especially when they are as good as Target, Kohl’s and JC Penney – or as large and desperate for growth as WalMart.
When a Success Formula grows old and tired, the portfolio notion of "milk it" so you can invest in another investment is, well, hopelessy out of date. Portfolio theory is a great idea, but do you really think slow-growth, defensible cash-rich businesses exist? Let’s get real. When a Success Formula stops producing good returns management has to move fast to set up White Space and MIGRATE to a new Success Formula. That’s the only option to keep from losing everything in the Whirlpool. "Milking" is not possible. Migrating is what management has to do. By migrating to a new Success Formula companies can be reborn- like the Phoenix. But Sears has no White Space – none. Leadership keeps bleeding out cash, revenues fall, profits fall, and there’s no great saving alternative investment. With every month, that option gets farther away for Sears and its inevitable demise becomes clearer.
I posted to this blog the day Lampert announced his acquisition of Sears that the company would not resurrect. But a lot of people wanted to believe in Mr. Lampert. Better to believe in reality. Company’s have to migrate toward a new Success Formula by using Disruptions, White Space and working hard at it. Not by wishing for portfolio theory, clever transactions and efforts at "milking" to somehow miraculously create value.
by Adam Hartung | Aug 3, 2007 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
The headline in the business section of The Chicago Tribune screamed "United Doubles Up On Profit" (see article here). You would think United airlines (see chart here) was a great story of turnaround success. After all, the airline only returned out of bankruptcy about 18 months ago. And the stock has doubled from its 12 month lows. But is all well at UAL?
When we read the article we learn that profits are up largely due to United’s ongoing cost cutting programs. They keep beating up on employees to do more work for less money. And United used bankruptcy to strip down much of its pension payouts, further giving to employees (past and present) on the chin. United didn’t improve it’s performance with customers or improve its productivity and thereby improve profits. It just spent less.
Closely tied to United’s long-term profits is its charges for airplanes. And a different article (see article here), which preceded the earnings announcement by 3 days, stated that United was falling behind on its new airplane orders. United has stopped buying replacement planes, and that has helped the company lower its expenses. In other words, United is squeezing down the company to be smaller, and not reinvesting even for maintenance, much less growth. In fact, according to the article, United is so far behind on placing orders for new planes the company is at jeopardy of being able to get any replacement aircraft to keep its fleet in the air! The aircraft manufacturying industry capacity is sold out for several years into the future, and United isn’t on the list to get any new equipment.
So while United is cheering about its LAST quarter, its FUTURE prospects look bleak. UAL has literally traded its future for today. Management is de-investing in order to produce current profits, while simultaneously asking employees to sacrifice in order to keep the company alive. This is the ultimate in Defend & Extend Management, where the leadership gives up the future, and gives up its employees future, in order to defend its own decisions and actions. The United leadership team is so Locked-in to trying to present its outdated Success Formaul as capable that it is killing the company in its effort to present immediate profits.
Investors should not cheer this latest profit news. Rather, they should recognize that United has probably turned the corner from the Swamp into the Whirlpool. Without the wherewithal to purchase more airplanes, in the future there will be no airline. No matter what last quarter’s profits were.
by Adam Hartung | May 3, 2007 | Defend & Extend, General, In the Whirlpool, Lock-in
Sometimes market Challenges wipe out large numbers of businesses. As I posted in my last blog, Amazon’s approach to internet retailing of books wiped out thousands of independent booksellers, as well as most chains (anyone remember Crown Books?) When such a Challenging tsunami appears on the horizon, trying to Defend & Extend your old Success Formula simply makes no difference.
Yesterday the National Association of Recording Merchandisers met in Chicago to try and figure out how they should respond to the Challenge posted by MP3 technology. These are the people that retail CDs. Do you remember going to the "record store." Their top solution is to install machines in their stores allowing consumers to download songs onto a CD (see article here.)
Never mind that any one of us can already accomplish this task at home with an internet connection, and a computer with a CD burner. These in-store kiosks charge $.99/song (just like iTunes), then add on another $3.00 for the case and label. On top of that, the process is intentionally extended out 5 to 15 minutes to force additional time in the store and encourage shopping. So using this in-store process costs more, and takes longer than doing it in the comfort of your home. And, at the end of this you get a CD. When was the last time you saw someone on the street listening to music with a Walkman instead of an iPod or other portable MP3 player? These retailers do hope to give access to downloading songs to an MP3 player in the future, but they intend to put software on the songs so they can’t be duplicated. And the cost will remain at $.99.
Why would any music retailer think this is a good idea? Because he’s trying to find a way to Defend & Extend the Success Formula he built when music sales required a physical product. Once Locked-in, this manager is most likely to deny the depth of the Challenge, or tweak the Success Formula in hopes it will somehow work. As one retailer said "this machine…puts me back in the singles business." Oh yeah, he admitted to starting 38 years ago selling 45s (for those too young to know, those were 6 inch vinyl records with big holes in the middle.) To say he’s hoping the past will return would be an understatement.
The fact is that the percentage of people buying CDs has declined 15 percent since 2002. CD shipments in the first quarter of 2007 were down 20 percent. While digital downloading of songs keeps growing at 24%/year and greater. Trying to overlay the cost and effort of an old approach on a new solution won’t meet the market Challenge, instead it just moves the competitor another step toward the Whirlpool and disaster.
by Adam Hartung | Apr 2, 2007 | Disruptions, In the Swamp, In the Whirlpool, Leadership, Lifecycle
Imagine this: you’re in an industry that hasn’t changed much in 100 years. For the last 5 years the number of customers has been declining, as have revenues. Your long-time users are aging and younger potential users say they have little interest in your product. User interviews regularly say your business is out of date. And new technology exists which completely obsoletes your product. Would you find the answer to your dilemma in loading your company up with a HUGE amount of debt while selling off your most profitable assets?
That is of course the situation at the Tribune Company (see chart here), owner of The Chicago Tribune, The Los Angeles Times, the Chicago Cubs and 25 television stations. If you ever wanted to know when a company moves from the Swamp into the Whirlpool, this is the time for the Tribune. The Tribune Company has been horribly Locked-in to a failing Success Formula with declining results for years. Now it is going to make any alternatives impossible by cranking up the debt load while selling the Cubs and other assets that are profitable and have potential for future growth. Instead of using White Space to find a new Success Formula, which would require more understanding and success on the web, the Tribune is moving to Defend & Extend it’s dying newspaper business! (See article on company sale here.)
The Tribune’s newspaper business is in decline as readers abandon traditional print news for the web, and advertisers are following the subscribers. So not only is the company selling off the Cubs and its investments in growing targeted television, but it is adding $7Billion of new debt (and yes, it’s keeping all the old debt) in order to buy back all the outstanding equity. Yes, they are ADDING debt almost equal to the entire oustanding market value of the company ($8billion). Shades of Michael Milkin and the Junk Bond craze! What paper equity remains will be in an ESOP. But for $320million (that 4% of the new debt added) billionaire Sam Zell gets a warrant to own 40% of the equity should this ever work out. That $320M is less than 1% of the $39billion Sam just recently got for selling his REIT business – so you could say for him this represents a relatively small portfolio investment in a long shot. If Tribune survives, his $.32B becomes worth $3.2B – or 10x return (see MarketWatch article here).
And of course all of this is for a valuation that is only half what the business was worth in 2000, and only 60% of its value as recently as 2004. But that of course reflects the market Challenges which face the Tribune going forward. Challenges completely ignored in this crazy financing scheme.
Meanwhile, the employees of the Tribune now get to spend all their energy looking for yet MORE cost cuts – after 5 years of cost cutting – in order to service this staggering debt load. Just what you need in a situation where you missed the new technology boat. They now have no resources for creating and managing any White Space to find a new Success Formula. Amidst these financial machinations, the newspapers have turned over the publisher at the LATimes and several leading editors in just the last year (see latest article on editor resigning in protest here) demonstrating the disarray inside the business.
The forecast here is not hard to make. I live in Chicago and read the Chicago Tribune. It, as well as The LA Times and other Tribune-owned newspapers have a great history and many Pulitzer Prizes to their credit. But that was the past. If you are an investor, or an employee, or thinking about being a bondholder in this new enterprise I would be looking for a far better future than is promised at Tribune Company.
by Adam Hartung | Feb 9, 2007 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle
Because most companies never build a capability to internally Disrupt, and they don’t regularly implement White Space, they develope a Re-Invention Gap between what they do and what the market wants. This leads businesses to milk a Success Formula too long, and not start developing a new Success Formula until too late.
Take for example Kodak. Founded in 1881, this venerable company was synonymous with photographic film. The company grew like mad as its founder made photography cheaper, better and available to everyone. But then the market "matured" (that famous euphemism for slow growth) in the 1970s. Kodak missed the digital photography wave, and in the 1990’s was kicked off the Dow Jones Industrial Average. Kodak has recently layed off nearly 30,000 employees – reaching a smallness not seen since the 1930s (see more on layoffs here.)
Like most companies, Kodak waited too late to Disrupt and implement White Space. The company was actually a pioneer in digital photography. It holds over 1,000 patents. R&D efforts in the field were strong going back nearly 30 years. But Kodak waited to Disrupt until the film market was already long-past its peak, and the digital market was well developed and full of competitors (it was 2001 when Kodak finally introduced a digital camera line). And because the Re-invention gap between their business (film) and the market direction (digital) had become huge, the company almost didn’t survive (note Palaroid, also once a leader now no longer exists). The jury is still out on Kodak’s survivability, which has had 8 consecutive quarters of losses as it has attempted to turn itself around.
The simple fact is that companies pay too little attention to the market, and too much attention to the existing Success Formula. By trying to Defend & Extend the Success Formula, they delay the necessary Disruptions and avoid White Space. Far too many companies are stuck in the Swamp, spending all their time battling aligators and swatting mosquitos while completely forgetting their main objective was to drain the darn thing. Before they know it, they are caught in the Whirlpool spinning down the drain when competitors open the plug in the swamp where they are stuck.
To avoid being too late in reacting to market Challenges, it is critical businesses implement a program of regular Disruption. You have to practice the ability to Disrupt yourself. And regular Disruptions create openings for multiple White Space projects which breed new Success Formulas. Just look at Jack Welch at GE. GE could easily have spent the 1980s and 1990s milking their businesses. But with the aid of Neutron Jack, GE constantly Disrupted itself (some might even say "unnecessarily"), and it kept putting in place White Space projects. (remember "Destroy Your Business.com" teams that every business was required to have?) That led to an incredible string of growth and above average returns that is almost unprecedented for a company of any size. Institutionalized at GE is the notion that Disruptions are good and White Space projects are normal – and that is why the company keeps itself constantly ahead of competitors and out of the Swamp.
Don’t wait. Start Disrupting your organization today. Set up some White Space. The more you practice, the better you become. And you’d sure prefer finding yourself in the position of GE than Kodak.
by Adam Hartung | Aug 17, 2006 | Defend & Extend, General, In the Whirlpool, Lifecycle, Lock-in
Here in Chicago we have a convenience chain called White Hen. The stores have been a fixture in Chicago for 4 decades. But they are about to all disappear. That is, the remaining ones. Although the chain is being bought by the much larger 7-11 chain, there is no premium being paid for the company. On the contrary, investors are losing money on the sale. Sold in 2000 to Clark (a gas station operator) for $80million, the company went bankrupt and was acquired by management in 2002 for $45million. Now, 7-11 is paying $35million. So what happened?
During those 6 years, White Hen shrunk from 245 stores to 206 in Chicago. This may not sound like a huge problem, but for a debt-laden acquired company losing 16% of capacity is enough to drown it. In short, the management of White Hen spent too much focus on trying to generate fast profits, and not enough recognizing the need to grow. They kept trying to cut size and cost to create more profits, and in the end they simply cut cash flow and killed the company.
White Hen is a microcosm of what we see in far too many companies today. They forget that either you win, or you lose. You can’t simply "mark time" and try to tweak the profit model. Competitors today won’t let you do that, they are too smart and too capable. Today, you have to keep innovating, meeting Marketing Challenges, creating new Success Formulas — or you lose. There is no tie. You win, or you lose. And the leadership of those companies trying to follow the example of White Hen (such as Sara Lee and Sears) should take note of this example.
by Adam Hartung | Jun 5, 2006 | Defend & Extend, Disruptions, In the Swamp, In the Whirlpool, Leadership, Lock-in
I talk a lot about the deadly impact of growth stalls. Whenever companies suffer two consecutive flat or declining quarters, or a year-over-year decline, I call that a growth stall. And the results are deadly, with fewer than 10% of these companies ever achieving sustained growth of 2% again.
I’m often asked if two quarters, or year to year comparisons, aren’t too short. After all, I preach on the importance of White Space and using transformations for long-term good health. Aren’t I supporting the short-term thinking that gets leaders into trouble?
My answer is no. Leaders and managers must be impatient for results. The world moves quickly, and it takes precious little time for a company to falter and fail. Take for example Sun Microsystems. This was a high-growth tech company for 20 years and a big winner in the internet boom of the 1990s. But now the company has seen 4 consecutive years of declining revenue. It’s value has been lackluster that entire time as well. And now it has announced it is planning to cut another 4-5,000 jobs in an effort to find profitability.
Investors and managers can’t wait 4 years for improved results. In fact, they shouldn’t wait at all. If a company can’t grow, it will atrophy and eventually falter. The purpose of Disruptions is to constantly challenge Lock-In to old Success Formulas, and the purpose of White Space is to identify new opportunities that can create long-lived growth. The problem is that too many companies try to milk the Lock-in, and they wait too long before they Disrupt and seek White Space. They confuse short-term optimization of an old Success Formula with the requirement to continuously identify and develop growth opportunities ad infinitum.
When it was doing incredibly well, Sun Microsystem decided the right strategic action was to "identify its core strengths" upon the recommendation of Gary Hamel. Scott McNealy said the company’s future was "selling iron" (his macho-speak for selling computer server hardware.) As a result, Sun never moved into networking gear, like Cisco, or network software like Google. Also, Sun was pushing boxes so hard it missed the Challenge Linux placed on its own Unix software. Sun was a hot player in the center of the action, but by "sticking to its core" it wasn’t prepared when the marketplace determined it had sufficient server capacity and good a good software alternative. It’s market started collapsing. And Sun wasn’t prepared to move to the next market opportunity. The first two declining quarters led to nearly 20 declining quarters.
The best time to Disrupt and fund White Space is when your business is doing well. It is then that you can clearly evaluate new Success Formulas without the crisis of declining revenue making you "bet the company" on limited options – and do so quickly. By the time you see two consecutive bad quarters, or year-over-year revenue declines, the business is already stuck in the Swamp and well on its way into the Whirlpool. It might not look that bad, but it already has almost no hope of ever growing again.
by Adam Hartung | May 31, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
This week one of America’s great media companies jumped nearly 10% in value. The Tribune Company – owner of the Chicago Tribune, Los Angeles Times, WGN superstation, the Chicago Cubs and other great assets – announced a significant stock buyback. After falling nearly 40% over the last year, the stock made jump up. Does this signal a good time to own this venerable company?
The Tribune Company announced that it was going to borrow a lot of money, and use the proceeds to buy back its stock. It will sell some assets, but not most of them. There is no plan for a significant restructuring. Nor a big change in the business. The company said its value is understated, so it is going to borrow money, crash its debt rating, and use the money to hopefully resurrect its moribund valuation.
Will this address the issues which has caused the 40% devaluation? Let’s see, large display advertising customers, such as auto and movie studios, have moved 20 to 40% of their newspaper advertising to Google and other on-line sources. Classified ad customers are finding good service at much lower rates at CraigsList.com and Autotrader.com. In entrenched markets like Baltimore, where the Tribune operates the Baltimore Sun, the well financed Examiner paper is entering the market stealing advertisers.
The Tribune’s actions are an example of Defend & Extend Management. Management knows that the low valuation makes them a target for corporate raiders. So they load up on debt in order to keep the outsiders from trying a takeover. Meanwhile, the company strategy is to change very little. And that is unfortunate, since the marketplace has significantly shifted since the Tribune became an industry leader. Such Defend & Extend tactics will not create value for investors, and shows a much greater probability of significantly weakening a company already under attack from "new media" Challengers.
What would be good to see would be more White Space at the Tribune. Rather than a disturbance, which may well lead to complacency, a real internal Disturbance demonstrating that the company recognizes serious change is needed. And White Space that is funded, and given permission to develop a new Success Formula for the company. Since we don’t see those things, it’s unlikely the company will sustain its recent valuation improvement.
