by Adam Hartung | May 16, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you want your business to be a success, attracting employees and investors alike, there’s a simple solution. You need to both grow and earn an above average rate of return. It’s the ability to both grow and make money that is attractive. But for too many executives they see these as a trade-off. And they give up growth in the pursuit of profits.
Do you remember the advertising jingle "Nobody Doesn’t Like Sara Lee"? Well lately, a lot of people have taken to not liking Sara Lee. The company has lost about half its value since the late 1990s, and it is currently valued about where it was in the mid-1990s. Since installing a new CEO and turnaround team about a year ago the company’s investors have not be encouraged.
The new leadership has chosen to implement an aggressive asset sales campaign. Rather than Disrupt the failing business by attacking Lock-in and creating White Space to innovate new solutions, they chose to try and sell their problems to someone else. They also began closing plants as they blamed poor results on industry overcapacity. The result has been disappointing prices for these assets, as others refuse to pay high for troubled brands and businesses. The executives chose to stick with their old Success Formula, despite the poor results, claiming the payoff would be in the future.
The asset sales have continued, but the results have still not materialized. Earnings have dropped 78%, and analysts such as Morningstar are saying that Sara Lee is struggling to capture any benefits from its restructuring. Nonetheless, the new management team is convinced it can follow classic industry practices, such as changing its ad campaign on Jimmy Dean Sausage, in its jouney to find improved results. The executive team is adamant that they must stick to their original plan.
So revenues are down, employment is down, valuation is down – and earnings are down. All in the quest for a quick improvement in profits. And there is no growth, as Sara Lee is making itself significantly smaller. Profits vs. Growth is destroying Sara Lee. What they will have to do is realize that what’s needed is a Disruption, an attack on the industry Lock-ins that are driving this failing program, and implementing White Space where they can find a new solution – if they want people to once again like Sara Lee.
by Adam Hartung | Apr 14, 2006 | General, In the Whirlpool, Leadership, Lock-in
Sears held its annual meeting this week, and demonstrated that nothing insures failure like Lock-in to a failed Success Formula. (See coverage in New York Times and Chicago Tribune.) Sales are down, store concepts are failing and the Chairman said he has "no grand solution" as he hopes a "back-to-basics" program can revitalize sales. After all, the Chairman said he was "comfortable with ambiguity."
Chairman Lampert asked "A plane goes from 40,000 feet to 10,000 feet. Is that a good thing or a bad thing?" Well, the CEO said "No one likes double-digit sales declines.." Double-digit sales declines for consecutive years – hey – that’s what we would call a "free fall," and that’s a bad thing Mr. Lampert. You don’t have to be a billionaire hedge fund manager to figure out that one. Growth is your jet fuel – and you ain’t got any!
Sears stands in the middle of the ring, while in one corner is WalMart and the other is Target. Here’s a question for you Mr. Lampert, can you spell "punching bag?"
Not even Sears’ own subsidiary, Sears Canada, will agree to be bought out by the parent. And the convicted Martha Stewart has refused to let her goods be sold in Sears stores. If that isn’t repudiation…..
While the execs follow their old Success Formulas, the losers are employees and vendors. While taking their pay packages, and paying out multi-million dollar severances to former Chairman Lacy and other departing execs, they have gutted the corporate staff. They’ve laid off thousands in stores as they shut them down. And turnover of Sears managers was 35% last year (25% at Kmart) as Mr. Lampert blamed the troubles on his front-line managers and began kicking them out the door.
Sears is in the Whirlpool. "Pride goes before the fall" according to Proverbs, and there’s nothing but pride in Sears’ executive suite. Too bad they were unwilling to use White Space to find a new competitive opportunity for Sears. But that would have meant Disrupting their Lock-in, and that’s the one thing they’ve promised they won’t do.
by Adam Hartung | Apr 5, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Lifecycle, Lock-in
Newspaper stocks are getting the snot kicked out of themselves the past year. Investment analysts, industry analysts – why at this week’s industry trade show even the industry executives – are all saying that newspapers are losing readers, losing advertisers and losing their margins. Newspaper values are at unheard of lows.
So why is one of America’s billionaires starting a new newspaper in Baltimore? Philip Anshutz, of oil and telecom wealth, has been buying small newspapers in San Francisco and Washington – and now he’s starting one from scratch in Baltimore. Is he nuts?
Think about the competitive situation for a moment. The Baltimore Sun is really the only newspaper in town. It’s owned by the Tribune Company way back in Chicago. The paper has been under pressure to improve margins, so it has been cutting costs and people. It hasn’t changed its business model in decades, so it’s struggling to maintain what it used to provide. In other words, The Baltimore Sun is Locked-in to a declining Success Formula – which it is trying to Defend and Extend. With not-so-good results.
The Baltimore Sun is a target. It’s Lock-in means that this upstart new paper can see exactly how the only competitor is behaving – and can predict their behavior pretty darn well. With only one competitor to deal with, the upstart can take a focused attack. And, since the new Baltimore Examiner is just starting its life cycle it is in White Space to develop all new solutions for editorial, copy desk, graphics and advertising production, as well as printing and distribution. This new paper is able to start with very low overhead, use part-time reporters, go offshore for its editing and page layout work, and find some low-cost new printer. Whatever weaknesses exist at the Sun, they’ve made them obvious and the Examiner is in great shape to exploit them.
Newspapers are not a growing business. But that doesn’t mean the local scribner is going to be allowed an eloquent and profitable decline. When the leading competitor becomes so Locked-in, they become a target. And that provides an opportunity for a new competitor to benefit – even when the market isn’t growing 15%/year.
As a local monopoly, the Sun has no where to go but down. If they keep trying to Defend and Extend, well that’s exactly where they will end up. They are in the Swamp, and the Examiner is trying to push them into the Whirlpool. If the Sun doesn’t re-invent itself, it’s already depressed profits will evaporate. It’s a painful lesson to deal with – and it’s going to be tougher to re-invent now that a new competitor is on the scene.
by Adam Hartung | Mar 15, 2006 | General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you’ve read this BLOG for a while you know I am no fan of Sears. Since the merger of KMart and Sears the combined company has done nothing to change its competitiveness versus better managed companies like Target, Kohls and WalMart.
Today Sears stock jumped almost 13%. Oh my, should I reverse my position? After all, the company said (Marketwatch reported) it doubled fourth quarter profitability since a year ago when the companies merged. And revenues are up to $16Billion, from last year’s $5.95billion – wow! And Kmart stores eeked out a .9% same store sales increase during the holidays – the first such increase since 2001! Yeah!
Let’s see… Let’s read a bit more.. what else did they say? "Competitor’s are opening more stores and spending on promotions and marketing – which Sears Holdings isn’t" … Oh, let’s see, these results don’t compare today with combined results from a year ago… Revenues of the combined companies actually declined by 4.5%… well, well… For the year, same store sales at Sears fell 8.4%, while KMart same store sales dropped 1.2%…. oh, the solution — the management is "adjusting its apparel strategy to better meet customer demand" and therefore "expects declines will moderate"…
Those positive headlines, as they said in Oklahoma when I was young, is putting lipstick on a pig.
Sears is still Defending and Extending two completely broken Success Formulas. And the financial heads that put this deal together still haven’t internally Disrupted the operating practices, nor have they created effective White Space to develop a new, more competitive, solution (see previous BLOG on the failure of Sears Essentials). Without those two actions, these results are just financial reporting shenanigans – and those who invest in them deserve the risk they take.
by Adam Hartung | Sep 30, 2005 | In the Whirlpool, Lifecycle
American businesspeople tend to be optimistic. No one wants to project their business is declining, and they use all kinds of changing benchmarks to make it appear like their business is improving — even if it’s not.
Case in point – Kodak. From peaking near $95/share in the late 1990’s, by the time Kodak was removed from the DJIA (4/2004) it’s value had plummeted 75% to around $25. But then Kodak’s stock recovered to $35 as its executives talked about their turnaround plan. Ever optimistic, Kodak said it wasn’t too late for them to move into digital imaging. But now the stock is back down to $25. Reports about the company’s performance are horrible. Sales of conventional film fell 30% in the U.S. this year. Employment peaked at 145,000 in 1988 and now is 50,000. And $3B of "turnaround acquisitions" have raised costs more than margins. The fact is that Kodak is in the Whirlpool – and Kodak is far more likely to follow Polaroid into the history books than ever regain its lost value.
Much is likewise true at Sears. After the company was removed from the DJIA in 1999 it became much more obvious to everyone that Sears was in a non-recoverable tailspin. In 2004 real estate developers determined the company’s stores were worth more empty than as Sears stores. Nonetheless, there are those who still claim Sears Holdings will be saved by Mr. Eddie Lampert – the acquirer of the old Sears.
But, by June of 2005 Sears was forced to slash its advertising. Then in early September Mr. Lampert fired the CEO at Sears (Lacy) in a move to demonize someone and hold out hope for a Sears turnaround. And now the company is planning to cut benefits for all its retirees in another effort to save its P&L. Sears is quickly moving further into the whirlpool, destroying shareholder value with each day it invests in maintaining its old, broken Success Formula.
While "hope springs eternal from the human breast", for investors (and managers) it’s much smarter to recognize a business in the Whirlpool early and manage the exit to get as much cash as possible.
by Adam Hartung | Jun 29, 2005 | Defend & Extend, In the Whirlpool, Lock-in
Can you recognize a leadership team (and business) in the Whirlpool?
Today’s Chicago Tribune quoted UAL as saying their losses were the result of "brutal" fuel costs. If it just wasn’t for those darn high fuel prices, why they could break-even.
And if pigs could fly….
For many years United’s management has had one excuse after another as to why they couldn’t make money. Unions, too many planes, high gate costs, insufficient ridership, too much competition…. fuel costs… Their business model is broken and it can’t make money. They have no idea how to fix it. They keep trying to find a way to Defend what they’ve done and Extend it in some fashion that will save the company. But nothing works. And it won’t. Yet, they can’t seem to get the gumption to disrupt themselves and try to really do something new before everyone loses their jobs (they already wiped out the shareholders) and leave creditors owning a bunch of planes.
Why, if they could just get those pigs to fly….
by Adam Hartung | Jun 8, 2005 | In the Whirlpool
GM is cutting another quarter of its workforce. That’s really not too surprising an announcement, given what’s been made public about the company this year. What is amazing is how so few people saw it coming.
There are lots of pundits screaming about the high cost of health care in each GM care. Or talking about how the pension plan is too expensive. And of course some simply say GM designs me-too product, or doesn’t produce to enough quality. But in fact, none of that is the real issue.
In 1980 Chairman Roger Smith of GM saw that GM’s future was in jeapardy. He undertook a series of actions to help GM move from a large, cash rich car company into new growth markets of IT, electronics and avionics – while creating a new division that would compete with Japanese producers like a Japanese producer. He saw that GM needed to expand its markets and be more than a "car company." GM needed to learn how to do new things.
No one expects GM to regain its glory. The amazing thing is that this bullet has been flying at GM for the entire period. Like a 5 mph bullet.
GM couldn’t get out of the way. It’s desire to remain locked into its old business model, at the risk of complete failure and the destruction of thousands of jobs and billions in shareholder wealth, was greater than its willingness to explore new opportunities. GM had visions – but it never learned how to address its lock-in.
Now GM is moving faster than ever toward the Whirlpool. Slashing jobs and creativity as fast as it can. All in a last ditch effort to dodge that 5 mph bullet. Ever heard the phrase "too little, too late"? It’s obvious that after this long, the executives simply don’t know what else to do. Creativity and innovation have atrophied and disappeared from what was once an innovative and growing company.
But, executive after executive since Smith has retrenched GM to its old business. And pundit after industry expert has pushed GM to be a "better" car company. And year after year, GM has struggled. Now, 20+ years later GM is finally tilting into the Whirlpool
by Adam Hartung | Nov 27, 2004 | Defend & Extend, Disruptions, In the Whirlpool, Leadership, Lifecycle
Does anyone think KMart + Sears = a better company? It doesn’t look that way. Most experts say the company is worth nothing more than it’s inventory value plus the real estate. Too bad, for both companies started as tremendous innovators in American retailing.
Kmart pioneered the discount store concept. And Sears pioneered the retail catalog, store credit, private label tools and appliances, and lifetime warranties. Both companies saw tremendous growth during their cycles of innovation.
Was it inevitable that they would both be relegated to below average returns? Absolutely not. Both simply stopped innovating. They turned to defending and extending what they already knew, while other competitors attacked them with new innovations.
But why not change the game now? The bankruptcy of KMart opened the door to new options – including the acquisition of Sears. If the two chains view this latest action as a chance to simply defend and extend their outmoded businesses, they will both simply die off. But if they view this as a major disruption to their business, and realize success will not come from chasing the two entrenched leaders (Wal*Mart and Target), they have the chance to create substantial value for their investors, employees and customers.
The new company needs to open its organization to innovation. The new CEO, coming from restaurants, should eschew the conventional merchandisers and strike out for something new. With the stock worth no more than the real estate, he has nothing to lose and everything to gain.
We haven’t yet heard the new CEO make any claims about the future. If he heads down the road of putting Craftsman in KMart and Martha Stewart in Sears – with great goals of a turn-around – run for the hills! Investors should sell the stock and employees find new jobs. But if he creates a new company that innovates away from the old business and toward something brand new he has a chance of creating a new company that could produce great returns.
The fate of KMart and Sears is not cast in concrete. But the leadership must act quickly while the cement is still wet! They must use this disruption to create something new — not defend and extend "the best parts" of what’s already not working.
by Adam Hartung | Oct 18, 2004 | Defend & Extend, In the Whirlpool
Blockbuster’s competitors are making it difficult for the company to make strides toward profitable growth. Netflix, the leading online DVD rental business, just announced a price cut in an attempt to double the size of its business (a bad move, but that’s another story…). And Blockbuster, in order to not be under-cut, dropped its own prices in response.
This is the problem with Defend and Extend management. While Blockbuster is busy fending off competitors to its current business, it is consuming scarce investment dollars and organizational attention that cannot be applied to meeting the real threat, which is video on demand.
Even if Blockbuster succeeds against Netflix, how will they out duel Wal-Mart on price in this space? And now Amazon.com is rumored to be getting into the market, and Netflix may find a deep-pocketed buyer. Can Blockbuster keep this up indefinitely? Of course not. Instead of chasing around after paper-thin margins in a business that has no future, the company needs to wake up to the reality that it doesn’t have a Success Formula that can win in the long run and act now to reinvent it.
by Adam Hartung | Oct 14, 2004 | Defend & Extend, In the Whirlpool
What do you think; does Blockbuster’s Success Formula have a chance of being saved? The company IS innovating and CEO Anitoco’s recent investor tour was centered around convincing shareholders that the company has a plan to reinvigorate the business… but really, who are they kidding (besides themselves)?
Blockbuster’s innovations are clever and will certainly put some more dollars on the top-line (at least temporarily). These include increasing game rentals (competing with stores such as Gamestop), allowing people to trade-in their old movies, a subscription service to allow people to keep movies indefinitely (to compete with Netflix). Ultimately, the company is saying that it is changing its business from “a place you rent a movie to a brand where you rent buy or trade movies and games, used or new, in-store or online.”
We don’t think its going to be enough. Why? Because there are too many alternatives for renting movies, but the really big show-stopper is a disruptive technology: video on demand. Blockbuster claims that it has certain advantages over video on demand such as a two-month lead on getting new movies. But even this is based on the assumption that movie theaters fear cannibalization of retail sales. And that can change overnight.
Blockbuster’s actions won’t work over the long-term because they aren’t addressing the challenge. In essence they are just extending the old business model which is to have lots of brick and mortar retail outlets providing entertainment-related products for home use. It’s the lock-in to all the real estate that’s killing the company. What will happen when sales drop precipitously due to the rising popularity of streaming video that can be downloaded in the comfort of your home? It’s inevitable.
What else could they do? Stop investing in their dead business model–the current business model is in the Whirlpool and has no future. Instead it can start selling off valuable real estate and use the money to experiment with leading-edge business concepts. What would you do if you were CEO?
