by Adam Hartung | Oct 1, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Web/Tech
Summary:
- HP and Nokia have lost the ability to grow organically
- Both need CEOs that can attack old decision-making processes to overcome barriers and move innovation to market much more quickly
- Unfortunately, both companies hired new CEOs who are very weak in these skills
- HP’s new CEO is from SAP – which has been horrible at new product development and introduction
- Nokia’s new CEO is from Microsoft – another failure at developing new markets
- It is unlikely these CEO hires will bring to these companies what is most needed
Leo Apotheker is taking over as CEO of Hewlett Packard today. Formerly he ran SAP. According to MarketWatch.com “HP’s New CEO Has a Lot To Prove,” and investors were less than overwhelmed by the selection, “HP Shares Slip After CEO Appointment.” Rightly so. What was the last exciting new product you can remember from SAP, where Apotheker led the company from 2008 until recently? Well?
SAP is going nowhere good. Its best years are way behind it as the company focuses on defending its installed base and adding new bits to existing products It’s product is amazingly expensive, incredibly hard and expensive to install, and primarily keeps companies from doing anything new. Enterprise software packages are like cement, once you pour them in place nothing can change. They reinforce making the same decision over and over. But increasingly, that kind of management practice is failing. In a fast-changing world software that can take 4 years to install and limits decision-making options doesn’t add to desperately needed organizational agility. And during the last 10 years SAP has done nothing to make its products better linked to the needs of today’s markets.
So why would anyone be excited to see such a leader take over their company? If Apotheker leads HP the way he led SAP investors will see growth decline – not grow. What does this new CEO know about listening carefully to emerging market needs? The move to install SAP in smaller companies hasn’t moved the needle, as SAP remains almost wholly software for stodgy, low-growth, struggly behemoths. What does this CEO know about creating an organization that can moving quickly, create new products and identify market needs to position HP for growth? His experience doesn’t look anything like Steve Jobs, under who’s leadership Apple’s value has increased multi-fold the last decade.
Unfortunately, the same refrain applies at Nokia. Just last week I pointed out in “Another One Bites the Dust” that Nokia was at grave risk of following Blockbuster into bankruptcy court. Although Nokia has 40% worldwide market share in mobile phones, U.S. share has slipped to about 8% this year. In smartphones Nokia has nowhere near the margin of Apple, even though both will sell about the same number of units this year. Nokia once had the lead, but now it is far behind in a market where it has the largest overall share. And that was the problem which befell Motorola – #1 for 3 years early in this decade but now far, far behind competitors in all segments and a very likely candidate for bankruptcy when it spins out a seperate cell phone business.
According to the New York Times in “Nokia’s New Chief Faces a Culture of Complacency” Nokia had a very similar product to the iPhone in 2004 but never took it to market. The internal organization made the new advancement go through several rounds of “review” and the hierarachy simply shot it down in an effort to maintain company focus on the popular, traditional cell phones then being offered. Rather than risk cannibalization, the organization focused on doing more of what it had done well. Eschewing innovation for defending the old products is shown again and again the first step toward disaster. (Would your organization use layers of reviews to kill a new idea in a new market?)
Meanwhile, when an internal Nokia team tried to get approval to launch the smart phones management’s responses sounded like:
- We don’t know much about this technology. The old stuff we do.
- We don’t know how big this new market might be. The old one we do
- We can’t tell if this new product will succeed. Enhanced versions of old products we can predict very accurately.
- We might be too early to market. We know how to sell in the existing market.
Even though Nokia had quite a lead in touch screens, downloadable apps, a good smartphone operating system and even 3-D interfaces, the desire to Defend & Extend the old “core” business overwhelmed any effort to move innovation to market. (By the way, do these comments in any way sound like your company?)
The new CEO, Mr. Elop, is from Microsoft. Again, one of the weakest tech companies out there at launching new products. Microsoft had the smart phone O/S lead just 3 years ago, but lost it to maintain investment in its traditional Windows PC O/S and Office automation software. And again you can ask, exactly how excited have people been with Microsoft’s new products over the last decade? Or you might ask, exactly what new products?
Both HP and Nokia need CEOs ready to attack lock-in to old technologies, old business practices, old hierarchies and old metrics. They need to rejuvenate the companies’ ability to quickly get new products to market, learn and improve. They need experience at early market sensing of unmet needs, and using White Space teams to get products out the door and competitive fast. Both need to overcome traditional management approaches that inhibit growth and move fast to be first into new markets with new products – like Apple and Google.
But in both cases, it appears highly unlikely the Board has hired for what the companies need. Instead, they’ve hired for a stodgy resume. Executive who came from companies that are already in bad positions with limited growth prospects. Exactly NOT what the companies need. We can only hope that somehow both CEOs overcome their historical approaches and rapidly attack existing locked-in decision-making. Otherwise, this will be seen as when investors should have sold their stock and employees should have begun putting resumes on the street!
by Adam Hartung | Sep 30, 2010 | Defend & Extend, In the Whirlpool, Lifecycle
Summary:
- Outsourcing has been very popular
- Outsourcing removes management options
- Outsourcing creates Lock-in, and makes it harder to deal with market shifts
- Most organizations see long-term performance deteriorate as a result of outsourcing
Outsourcing has been extremely popular – ever since the early 1990s. We know it has led to a lot of jobs moving out of the USA. Outsourcing manufacturing has exploded employment in China and other parts of Asia. Outsourcing information technology has exploded employment in India and parts of Eastern Europe.
Economists tell us that outsourcing has driven down the cost of everything from the clothes and household items we buy at WalMart to the cost of social marketing, ad creation and even telephone services.
But has it helped businesses be more successful? As outsourcing popularity reaches 2 decades – both domestic and offshore – we now have a lot more insight. And what we can see is that almost all outsourcing has been bad for the company that uses it! As things change, outsourcing has left them stuck competing the old way and further removed from market needs.
As my Sept. 29 column in CIOMagazine “Outourcing for the Right Reasons” (also published in ComputerWorld online under the same title) points out, the vast majority of outsourcing was done for the wrong reason. And the result has been deteriorating performance for those who outsourced.
Most companies outsourced to cut cost. The problem is, this has led to even worse lock-in than normal. Where organizations had options when they controlled the function – from manufacturing to janitorial serivces to help desks to datacenters – there were options to make changes. But when something is outsourced the contract takes away most options. The die is cast, usually for years into the future —- regardless of what might happen in the world!
Outsourcing can be used to create flexibility. But, honestly, how often have you seen it used that way? In well over 90% of cases the outsourcing is intended to cut cost – and lock-in operations. It is meant to remove options from the management discussion. Once outsourced, there is no consideration as to undertaking those efforts again. And if the outsourcing is done when business results are poor, the intent is to never revisit doing those things again. Under the banner of “outsource everything that’s not core” the management team is left with nothing to manage – except “core”!!! But if core has limited value, how do you now create a healthy business? How do you move to meet shifting needs?
Outsourcing has been a tidal wave for 15 years. Things might be cheaper, but has it made business performance better? Take a hard look at your company – and you may well realize it hasn’t helped you be a better competitor. When you outsource, how often are competitors able to equally outsource and match your short-term cost reductions? Things might be a penny cheaper, but the business is likely much less flexible, more vulnerable to market shifts, and far more locked-in to doing what it always did!
If you are seriously considering outsourcing, ask some simple questions:
- Am I doing this because I want to simplify my life, or offer the market something new?
- Am I doing this so I can “focus” on my “core” business?
- How will this advantage me versus competitors? Would emerging competitors do this?
- Can competitors do what I’m doing? Can this lead to a price war?
- How will this make me more competitive in 10 years?
- How will this make me more connected to markets?
- How will this make me more flexible to deal with shifting markets, and how will I exploit this flexibility?
- Am I doing this because I’m desperate to cut costs?
- What could I be doing instead of outsourcing to be more competitive?
by Adam Hartung | Sep 26, 2010 | Current Affairs, In the Rapids, Leadership, Openness, Web/Tech
Summary:
- Apple is worth more than Microsoft today, even though Microsoft is larger, because it has better growth prospects
- Apple is closing in on the most valuable company in the world – Exxon
- Exxon’s value is stalled because it has no growth markets
- Exxon once developed, then abandoned, a growth business called Exxon Office Systems
- Apple’s value may eclipse Exxon, which has almost 8 times the revenue, because its growth prospects are so bright
- Profitable growth is worth more than monopolistic market share – or even huge revenue
We all know that over the last 10 years Apple has moved from the brink of bankruptcy to great success. Apple has been able to dramatically increase its revenues, growing at double-digit rates for several years. And Apple now competes in markets like mobile computing and entertainment where its hardware and software products are demonstrating a leading position as users migrate toward different platforms (iPods and downloadable music or video, iPads and downloadable video or text, iPhones and downloadable apps of all sorts).
Because of this profitable growth, Apple’s market value now exceeds Microsoft’s. An accomplishment nobody predicted a decade ago.
As this chart from Silicon Alley Insider shows, Apple’s profitable revenue growth has allowed its value to soar. Even though Microsoft is larger, and dominates its market of PC operating systems and office automation software, its value has stalled due to lack of growth. Because Apple is in very large, emerging markets with successful products it is generating a very high valuation.
In fact, Apple’s market cap is closing in on the most valuable company in the world – Exxon:
Source: Silicon Alley Insider
Exxon and Apple have nothing in common. Exxon is a petroleum company. It’s growth almost all from acquisition. You could say it’s nonsensical to compare the two.
But for those of us with long memories, we can remember in the early 1980s when Exxon opened Exxon Office Systems. As the price of crude oil, and its refined products, hit record highs Exxon made record profits. Leadership invested a few billion dollars into creating a new business intended to compete with IBM and Xerox – leading office equipment companies of the time. But, when the price of crude oil fell Exxon abandoned this venture – by then already achieving more than $1B/year in revenue. All the suppliers and customers were left in the lurch, and the employees were left looking for new jobs. Within weeks Exxon Office Products disappeared.
Exxon abandoned its opportunity for growth into new markets in order to “focus” on its “core” business of oil exploration and production, oil refining, and marketing of petroleum products. As a result, Exxon – augmented via its many acquisitions across the years – is now the world’s largest “oil” company as well as the world’s highest market capitalization company. But it has no growth. And thus, its value is totally dependent upon the price of oil – a commodity. Over the last 2 years this has caused Exxon’s value to decline.
At $43B in 2009, Apple has nowhere near the revenue of Exxon’s $310B. But what Apple has is new markets, and growth. Someday we’ll run out of oil (long time yet, to be sure). What will Exxon do then? But in the case of Apple we already know there will be future revenues from all the new products for a long time after the Mac has run its course and disappeared from backpacks. It’s that willingness to seek out new markets, to develop new products for emerging markets and constantly push for new, profitable revenues that makes Apple worth so much.
Could Apple become the world’s most valuable company? Possibly. If so, it won’t be from industry domination. That sort of monopolistic thinking drove the industrial era, and companies like AT&T as well as Exxon — and Microsoft. What’s worth more today than monopolism is entering new markets and generating profitable growth. It’s what once made the original Standard Oil worth so much, and it initially made Microsoft worth more than any other tech company. Too many of us forget that profitable growth, more than anything else, generates huge value and wealth. And that’s true in spades in 2010!
by Adam Hartung | Sep 23, 2010 | Current Affairs, In the Rapids, Leadership, Openness, Travel
Summary:
- Most people misunderstand the way toward building a valuable company
- Richard Branson has developed massive wealth by finding and entering growth markets
- Success comes from developing new solutions that fulfill unmet needs – not maximizing performance of core capabilities
- Virgin is now moving into luxury hotels, a market being ignored by most investors, with new products that fit still unmet needs
Very few people are as wealthy as Richard Branson. But few people can manage like he does.
Branson started out selling records via mail-order in Britain. Over the years he got into retailing, international airlines, domestic airlines, mobile telephony, international lending (amongst other businesses) – and now his company is investing $500milion in hotels and hotel management. According to Bloomberg.com “Branson’s Virgin Group to Invest $500million in Hotels.”
Despite all we hear about how impossible it is to be an entrepreneur in Europe, Sir Branson has done quite well, building a wildly successful, profitable company. Although he didn’t follow conventional wisdom. Instead of “sticking to his core” Sir Branson has built a company that invests in opportunities which are highly profitable – regardless of the industry or market. He doesn’t grow by doing more of the same better, faster or cheaper. Instead, he takes advantage of shifting markets – getting into businesses with opportunities and exiting those that don’t earn high rates of return.
During last decade’s building boom there were a lot of high-end hotels built. Now, with the economy not growing, excess capacity has made it difficult for these to cover the mortgage. Bankers don’t want to refinance – they want out of the buildings. Occupancy has been so low that many traditional name brands, such as Ritz Carlton or Intercontinental, have been forced to abandon properties. As a result, several hotels have closed, and the property offered for sale at a fraction of original construction cost. With most investors shying away from all things real estate, prices have plummeted. Some hotels, nearly new, have sold for the value of underlying land.
And now Virgin enters the market. Although Virgin has no background in real estate or hotel management, it is clear that there is demand for luxury goods and luxury travel — if someone can make it attractive and affordable. By purchasing premier properties at a fraction (literally 10-25% of their initial cost) Virgin will be able to offer hotel guests a superior experience at an attractive price! Management sees an unmet need by high-income, well educated “creative class” customers. By getting into the market Virgin will learn, just as it did in airlines, how to meet customer expectations in a way that allows for highly profitable delivery when meeting a currently unmet need.
While some would say that if the current competitors, steeped in experience and tradition, can’t succeed Virgin should not think it can. But a Virgin executive rightly says “If you look at Virgin’s history, we have come into markets with big powerful players, where customers are generally satisfied but not in love, and we have been able to cut through that.” Well said. Virgin doesn’t do what competitors do – it develops a solution that locks competitors into their position while positioning Virgin to meet the untapped market.
Even though this opportunity is available to everyone, almost no companies are interested in buying these undervalued hotels. “It’s not our business.” “We don’t know how to operate hotels.” “We don’t invest in real estate.” “I’m too busy taking care of my current business to consider something new.” “What if we’re wrong?” These are all things people say to stop themselves from taking action to enter new opportunities with high rates of return. The magic of Virgin is its willingness to overcome Lock-in to its existing business, look for market opportunities, and then (as Nike advertises) Do It!
by Adam Hartung | Sep 22, 2010 | Current Affairs, Defend & Extend, Film, In the Whirlpool, Leadership, Lifecycle, Lock-in, Music, Web/Tech
Summary:
- Video retailer Blockbuster (and competitor Hollywood Video) are now bankrupt
- Video rentals/sales are at an all time high – but via digital downloads not DVDs
- Nokia, once the cell phone industry leader, is in deep trouble and risk of failure
- Yet mobile use (calls, texts, internet access, email) is at an all time high
- These companies are victims of locking-in to old business models, and missing a market shift
- Commitment to defending your old business can cause failure, even when participating in high growth markets, if you don’t anticipate, embrace and participate in market shifts
- Lock-in is deadly. It can cause you to ignore a market shift.
According to YahooNews, “Blockbuster Video to File Chapter 11.” In February, Movie Gallery – the owner of primary in-kind competitor Hollywood Video – filed for bankruptcy. It’s now decided to liquidate.
The cause is market shift. Netflix made it possible to rent DVDs without the cost of a store – as has the kiosk competitor Red Box. But everyone knows that is just a stopgap, because Netflix and Hulu are leading us all toward a future where there is no physical product at all. We’ll download the things we want to watch. The market is shifting from physical items – video cassettes then DVDs – to downloads. And both Blockbuster and Hollywood Video missed the shift.
Blockbuster (or Hollywood) could have gotten into on-line renting, or kiosks, like its competition. It even could have used profits to be an early developer of downloadable movies. Nothing stopped Blockbuster from investing in YouTube. Except it’s commitment to its Success Formula – as a brick-and-mortar retailer that rented or sold physically reproduced entertainment. Lock-in. And for that commitment to its historical Success Formula the investors now will get a great big goose egg – and employees will get to be laid off – and the thousands of landlords will be left in the lurch, unprepared.
As predictable as Blockbuster was, we can be equally sure about the future of former powerhouse Nokia. Details are provided in the BusinessWeek.com article “How Nokia Fell from Grace.” As the cell phone business exploded in the 1990s Nokia was a big winner. Revenues grew fivefold between 1996 and 2001 as people around the globe gobbled up the new devices. Another example of the fact that when you enter a high growth market you don’t have to be good – just in the right market at the right time.
But the cell phone business has become the mobile device business. And Nokia didn’t anticipate, prepare for or participate in the market shift. From market dominance, it has become an also-ran. The article author blames the failure, and decline, on complacent management. Weak explanation. You can be sure the leadership and management at Nokia was doing all it possibly could to Defend & Extend its cell phone business. The problem is that D&E management doesn’t work when customers simply walk away to a new technology. It may take a few years, and government subsidies may extend Nokia’s life even longer, but Nokia has about as much chance of surviving its market shift as Blockbuster did.
When companies stumble management sees the problems. They know results are faltering. But for decades management has been trained to think that the proper response is to “knuckle down, cut costs, defend the current business at all cost.” Yet, there are more movies rented now than ever – and Blockbuster is failing despite enormous market growth. There are more mobile telephony minutes, text messages, remote emails and mobile internet searches than ever in history – yet Nokia is doing remarkably poorly. It’s not a market problem, it’s a problem of Lock-in to a solution that is now outdated. When the old supplier didn’t give the market what it wanted, the customers went elsewhere. And unwillingness to go with them has left these companies in tatters.
These markets are growing, yet the purveyors of old solutions are failing primarily because they stuck to defending their old business too long. They did not embrace the market shift, and cannibalize historical product sales to enter the new, higher growth markets. Because they chose to protect their “core,” they failed. New victims of Lock-in.
by Adam Hartung | Sep 19, 2010 | In the Rapids, Leadership, Openness
Summary:
- Richard Branson has built a wildly successful Virgin company on very unconventional “secrets to success”
- Most business leaders follow management theory than is built on myth
- Virgin has been wildly successful, even over the last decade when many companies have suffered, by being agile and market oriented
- It’s time to throw out traditional management, and its myths, for a different approach.
In my speaking and blogging I regularly comment on what great results have been achieved Virgin under Chairman/CEO Richard Branson. The founder, and the company, both started quite humbly. Even though nobody can easily define exactly what business Virgin is in, it has done very well. So I was pleased to read at BNet.com “Richard Branson: Five Secrets to Business Success“:
- Enjoy what you are doing. Really.
- Create something that stands out
- Create something of which you and your employees are proud
- Be a good leader – which he defines as listen a lot, ask questions, heap the praise. Don’t fire people, help them to be happy
- Be visible. Get out into the market and listen, listen, listen.
I am struck at how this is nothing like the recommendations in most management books. Let’s see what Richard Branson didn’t say:
- Sacrifice. Work hard. Be diligent. Be tough. Cut out anything unnecessary
- Find one thing to be good at and excel – search for excellence
- Know your core competency, and maximize it’s use. Avoid things that aren’t “core”
- Make sure everyone is “on the bus” doing the one thing you want to do. Get rid of anyone else
- EXECUTE! Optimize your business model. Focus on execution
- Cut costs. Run a tight ship. Tighten your belt.
- Focus on results. Run the business by the numbers
- Focus on quality – implement Six Sigma and/or TQM and/or LEAN processes
- Outsource anything you don’t absolutely have to do
- Hire the “right” leaders (or employees)
Business if full of myth. And we now know that many gurus have been recommending actions for years that simply haven’t produce long-term positive results. The companies considered “great” by Jim Collins have fared far more poorly than average. Most of the companies Tom Peters considered “excellent” have not made it to 2010 in good shape – if they even survived! Most of the 10 myths were things that simply sounded good. They appeal to the American way of training. But they haven’t helped those companies which applied these ideas succeed.
Sir Richard Branson has created businesses from selling recordings to bridal shops, international banking, traditional airlines and even a business flying people into outer space. By all the traditional recommendations, he and his company should have failed. It followed none of the recommendations for hiring, firing, focus or execution. Yet he has created billions in personal fortune, billions for investors and given thousand of people very rewarding places to work. By all counts, he and Virgin have been a success.
It’s time to give up our management myths, and learn to compete in today’s rapidly shifting market. It’s now more about listening to the market and managing an agile organization than “focusing on core” or “execution.”
by Adam Hartung | Sep 15, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Web/Tech
Summary:
- There is a lot of value to recognizing early trends, and acting upon them
- That Apple is as popular as Dell for computers among college students is a trend indicator that Dell’s future looks problematic, while Apple’s looks better
- It is hard to maintain long-term value from innovations that defend & extend an historical market – they are easily copied by competitors
- Long term value comes from the ability to innovate new product markets which are hard for competitors to copy
- Dell is a lousy investment, and Apple is a good one, because Dell is near end of life for its innovation (supply chain management) while Apple has a powerful new product/market innovation capability that can continue for several years
I can think of 3 very powerful reasons everyone should look closely at the following chart from Silicon Alley Insider. It is very, very important that Apple is tied with Dell for market share in PCs among college students, and almost 2.5 times the share of HP:
Firstly, it is important to understand that capturing young buyers is very valuable. If you catch a customer at 16, you have 50 to 60 years of lifelong customer value you can try to maintain. Thus, these people are inherently worth more than someone who is 55, and only 10 to 20 years of lifetime value. While we may realize that older people have more discretionary income, many loyalties are developed at a young age. Over the years, the younger buyers will be worth considerably more.
When I was 15 popular cars were from Pontiac (the GT and Firebird) Oldsmobile (Cutlas) Dodge (Charger and Challenger) and Chevy (Camaro.) Thus, my generation tended to stay with those brands a long time. But by the 1990s this had changed dramatically, and younger buyers were driving Toyotas, Hondas and Mazdas. Now, the American car companies are in trouble because a generational shift has happened. Market shares have changed considerably, and Toyota is now #1. Keeping the old buyers was not enough to keep GM and Chrysler healthy.
That for a quarter as many college students want a Mac as want a PC from Dell says a lot about future technology purchases. It portends good things for Apple, and not good things for leading PC suppliers. Young people’s purchase habits indicate a trend that is unlikely to reverse (look at how even the Toyota quality issues have not helped GM catch them this year.) We can expect that Apple is capturing “the hearts and minds” of college students, and that drives not just current, but future sales
Secondly, it is important to note that Dell built its distinction on price – offering a “generic” product with fast delivery and reasonable pricing. Dell had no R&D, it outsourced all product development and focused on assembly and fast supply chain performance. Unfortunately, supply chain and delivery innovation are far easier to copy than new product – and new market – innovation. Competitors have been able to match Dell’s early advantages, while Apple’s are a lot harder to meet – or exceed. Thus, it has not taken long for Dell to lose it’s commanding industry “domination” to a smaller competitor who has something very new to offer that competitors cannot easily match.
Not all innovation is alike. Those that help Defend & Extend an existing business – making PCs fast and cheap – offer a lot less long term value. Every year it gets harder, and costs more, to try to create any sense of improvement – or advantage. D&E innovations are valued by insiders, but not much by the marketplace. Customers see these Dell kind of innovations as more, better, faster and cheaper – and they are easily matched. They don’t create customer loyalty.
However, real product/market innovations – like the improvements in digital music and mobile devices – have a much longer lasting impact on customers and the markets created. Apple is still #1 in digital music downloads after nearly a decade. And they remain #1 in mobile app downloads despite a small share in the total market for cell phones. If you want to generate higher returns for longer periods, you want to innovate new markets – not just make improvements in defending & extending existing market positions.
Thirdly, this should impact your investment decisions. SeekingAlpha.com, reproducing the chart above, headlines “Are 2010 Apple Shares the new 1995 Dell Shares?” The author makes the case that Apple is now deeply mired in the Swamp, with little innovation on the horizon as it is late to every major new growth market. It’s defend & extend behavior is doing nothing for shareholder value. Meanwhile, Apple’s ability to pioneer new markets gives a strong case for future growth in both revenue and profits. As a result, the author says Dell is fully valued (meaning he sees little chance it will rise in value) while he thinks Apple could go up another 70% in the next year!
Too often people invest based upon size of company – thinking big = stability. But now that giants are falling (Circuit City, GM, Lehman Brothers) we know this isn’t true. Others invest based upon dividend yield. But with markets shifting quickly, too often dividends rapidly become unsustainable and are slashed (BP). Some think you should invest where a company has high market share, but this often is meaningless because the market stagnates leading to a revenue stall and quick decline as the entire market drops out from under the share leader (Microsoft in PCs).
Investing has to be based upon a company’s ability to maintain profitable growth into the future. And that now requires an ability to understand market trends and innovate new solutions quickly – and take them to market equally quickly. Only those companies that are agile enough to understand trends and competitors, implementing White Space teams able to lead market disruptions. Throw away those old books about “inherent value” and “undervalued physical assets” as they will do you no good in an era where value is driven by understanding information and the ability to rapidly move with shifting markets.
Oh, and if you feel at all that I obscured the message in this blog, here’s a recap:
- Dell is trying to Defend its old customers, and it’s not capturing new ones. So it’s future is really dicey
- Dell’s supply chain innovations have been copied by competitors, and Dell has little – if any – competitive advantage today. Dell is in a price war.
- Apple is pioneering new markets with new products, and it is capturing new customers. Especially younger ones with a high potential lifetime value
- Apple’s innovations are hard to duplicate, giving it much longer time to profitably grow revenues.
- You should sell any Dell stock you have – it has no chance of going up in value long term. Apple has a lot of opportunity to keep profitably growing and therefore looks like a pretty good investment.
by Adam Hartung | Sep 14, 2010 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, Leadership, Lifecycle, Lock-in
Summary:
- Success Formulas age, losing their value
- To regain growth, you have to identify with market trends – not reinforce old Lock-ins
- KFC is losing sales due to a market shift, but its response is not linked to market trends
- KFC’s plan to invest heavily in its old icon is Defend & Extend management
- Market to what it takes to regain new customers, and lost customers, not what your current customers (core customers) value
- The Status Quo Police have driven a very bad decision at KFC – more poor results will follow
- You have to market toward future needs, not what worked years ago.
Who’s Colonel Sanders? According to USAToday, in “KFC Tries to Revive Founder Colonel Sanders Prestige” 60% of American’s age 18 to 25 don’t know. For us older Americans, this may seem amazing, because we were raised on advertising that promoted the legend of a cooking Kentucky Colonel who “did chicken right” creating the recipe for what became today’s enormous Kentucky Fried Chicken (KFC) franchise. But it’s been a very, very long time since “the Colonel” left KFC in the 1980s, declaring that the chain, then owned by Heublein, didn’t make chicken so “finger lickin’ good” any longer. Were he alive today, the famed Colonel – who became a caricature of himself before death, would be an astounding 120 years old! Now most people don’t have a clue who’s picture that is in the red logo – if they notice there’s even a picture of someone there.
KFC is the largest chicken franchise, with 15,000 stores. But size has not been any help as the chain has lost its growth. Last quarter’s same-store sales fell 7%. A clear sign a deadly growth stall has started that bodes badly for the future! People have stopped going to KFC outletd. So management needs to do something to bring new customers into the stores – in American and globally. In a remarkable display of defending the Status Quo, leadership’s recommended solution for this problem is to put a heavy marketing blitz into “educating” consumers about the Colonel, and the oompany’s history!
Are we to believe that knowing about some long dead company founder will drive customers’ decisions where to eat lunch or dinner next week? Or next year?
I don’t know why people are eating less KFC, but it’s a sure bet it’s NOT because the Colonel has faded from the limelight. Times have changed dramatically. Everything from the acceptance of fried food, to concerns about chicken raising, to menu variety, to store appearance, and alternative competitive opportunities have had an impact on sales at KFC. What KFC needs is to understand these market trends, recognize where consumers are headed with their prepared food purchases, and position the company to deliver what consumers WANT this year and in the future. If KFC finds the trend – even if it’s not chicken – it can regain its growth. KFC needs to give the market what it wants – and is that a heavy education about a dead icon?
KFC is trying to turn back the clock. It is looking internally, historically, and hoping that by promoting the Colonel it can regain the glorious growth of previous decades. KFC leadership is remaining firmly committed to its old and clearly tiring Success Formula (the one that is producing declining sales and profits.) So it is holding fast to its menu, its preparation methods, its store appearance, its “brand” image and now even its iconic founder that is irrelevant to this current generation and any international consumer!
Does anyone really think reviving the Colonel – a white haired senior
citizen in his heyday -will create double digit growth? Or bring in
those young people between ages 18 and 25? There’s not one shred of
market input which says this is the way to grow KFC. Only a belief that
somehow future success will come from an attempt to replay what worked
when the Success Formula was created over 40 years ago.
In a telling quote from the article “KFC’s trying to paint a new picture — actually asking its core consumers to paint it for them.” The marketers are actually hoping a contest to re-sketch the lost icon will drive people to “reconnect” with the franchise. What’s worse, clearly they are hoping to appeal to the “core” customers – current customers – rather than find out why lost customers left, and what new customers might want to encourage a switch to KFC. They are “focusing on their core” rather than figuring out what the market wants.
Add on top of this that management has admitted it expectsmost (possibly all) future growth to come from international expansion, and you really have to question how focusing marketing on the Colonel makes any sense. Why would people in Europe, South America, India, China or elsewhere have any connection to a character more attuned to America’s civil war than today’s global economy and international high-energy brand images?
This is the kind of decision that is driven by a strong Status Quo Police. Of all the options, from changing the menu and name, to developing a new icon, to creating a new image for the alphabet soup that is KFC (most young people don’t even relate KFC to the original name – and international customers have no connection at all) – all the things that could be based on market trends – leadership went down the road of doing more of the same.
It’s a sure bet we’ll be reading about further declines in KFC over the next year. There will be a big store closing program. Then a quality program to improve customer service and cleanliness. Layoffs will happen. Some kind of lean program to tighten up the supply chain and cut costs. Revenues will probably decline another 15-25%. Exactly what McDonald’s did about 6 years ago when it sold Chipotle’s to “refocus on its core.” Management will talk about how its “core” customers relate well to the Colonel, and they are sure if given time the marketing will return KFC to its old glory.
And the only people who will enjoy this are the Status Quo Police. For the rest of us, it’s watching another great company fall victim to its past, rather than migrate toward a better, high growth future.
Read my Forbes.com column “Fire the Status Quo Police” for more insight to how consumer branded companies hurt long-term viability by maintaining brand status quo rather than migrating with market trends.
by Adam Hartung | Sep 7, 2010 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Web/Tech
Summary:
- Not even dominant industry leaders are immune to decline from market shifts
- It’s easy to focus on what made you great, and miss a market shift
- Competitors drive market shifts, not customers – so pay attention to competitors!
- AOL lost industry domination to competitors with new solutions, and now new technologies, even though it executed its Success Formula really well
- You can become obsolete really quickly when fringe competitors introduce new solutions
- Do more competitor analysis
- Keep White Space teams experimenting with emerging solutions and competing in shifting markets
Do you remember when AOL (an acronym, and updated name, for America On-Line) dominated our perception of the internet? Fifteen years ago AOL was one of the leading companies introducing Americans to the wonders of the web. Providing dial-up access (remember that?) AOL offered users its own interface, and a series of apps that helped its customers discover how the world wide web could make their lives easier – and better. At its peak, AOL had over 30 million subscribers! AOL was so commercially strong, and investors were so optimistic, that a merger with powerhouse publisher Time/Warner, which already owned CNN and HBO, was organized so AOL’s young leader, Steve Case, could take the helm and push the company forward into the digital frontier.
Along the way, something went very wrong. In an example of what happened to AOL and its products, as seen below, after pioneering Instant Messaging as an internet application AOL’s AIM user base has declined precipitously – by more than 50% – in the last 3 years:
Source: BusinessInsider.com
Of course, the same thing that once drove AOL growth is now apparent somewhere else. New markets are emerging. Instead of using PCs with instant messaging, most people today text via their mobile device! Texting isn’t just a youthful activity. According to Pew Research, on PewInternet.org in “Cell Phones and American Adults” 72% of American adults now text – up from 65% a year ago. 87% of teens text. And I’m willing to bet a lot of those teens don’t even have an instant messaging account – on any platform. The amount of “instant messaging” has grown dramatically – just not using “instant messaging” software. It’s now happening via mobile device texting.
Where AOL once dominated the landscape for digital communication, it is now becoming almost insignificant. But it wasn’t because AOL didn’t know how to execute its strategy. AOL was an industry leader, with savvy management, and a blue-ribbon Board of Directors. AOL even bought Netscape in its effort to remain the best server and client technology for a proprietary internet platform.
AOL became obsolete because the market shifted – while AOL tried holding on to its initial Success Formula. AOL did not shift as the market shifted, it has remained Locke-in to its early Identity, original Strategy and all those product Tactics that once made it great! AOL didn’t do anything wrong. It just kept doing what it knew how to do, rather than recognizing the impact of competitors and changing markets.
Shortly after AOL emerged as the market leader, competitors sprang up. First they offered dial-up access, often more cheaply. Eventually dial-up was replaced with high-speed internet access from multiple providers. Instead of using a proprietary interface, competitors Netscape and Microsoft brought out their own internet browsers, making it possible for users to surf the web directly and easily. Instead of using an AOL directory to find things, search engines such as Ask Jeeves, Alta Vista and Yahoo! Search came along that would find things across the web for users based upon their query. Email alternatives emerged, such as Hotmail and Yahoo! Mail. Eventually, one piece at a time, all the proprietary packaged products that AOL provided – including instant messaging – was offered by a competitor. And the value of the AOL packaging declined. As competitor products improved, for most users being an AOL subscriber simply had little advantage.
And now entirely new apps are coming along. As the market quickly shifts to mobile data and applications, devices like smartphones and tablets are replacing PCs. And the apps that made internet companies rich and famous are poised for decline – as users shift to the new way of doing things.
Whether the currently popular internet companies will make the next step, or end up like AOL, will be determined by whether they remain stuck on defending & extending their “core” business, or if they can shift with the market. There is no doubt that the amount of “instant messaging” is skyrocketing. It’s just not happening on the PC. Like many tasks, the demand is growing very fast. But it is via a new, and different solution. If the company sees itself as providing a PC type of internet solution, then the company will likely decline. But, alternatively, the leadership could see that demand is exploding and they need to shift – with the market – to the new solution environment to maintain growth.
Whether you are the market leader or not, you know you don’t want to end up like AOL. Once rich with resources, and a commanding market lead, AOL is now irrelevant to the latest market trends – and growth. AOL stuck to what it knew how to do. It has not shifted with changing market requirements – including changes in technology. For your company to succeed it must be (1) aware of competitors and how they are constantly changing the market – especially fringe competitors, and (2) enlisting White Space teams that are participating in the new markets, learning what works and how to migrate to capture the ongoing growth.
Postscript: I want to thank a pair of colleagues for some great mentions over the weekend. Firstly, to FMI Daily for posting to its readership about my blog on The Power of Myth. Secondly, a big thank you to Management Consulting News for referring its newsletter readers to this blog as notable, and my recent posting on the failure of Fast Follower strategy. I encourage readers to follow the links here to these sites and sign up for future information from both!!
by Adam Hartung | Sep 4, 2010 | Books, Defend & Extend, In the Swamp, Leadership, Lock-in, Religion
Summary:
- When we don’t know what works, we create myths to describe what might work
- Much of business theory is little more than myth
- “Good to Great” has been a best seller, but it is not helpful for good management
- To grow business today requires abandoning management myths and aligning with changing market needs
Good to Great by Jim Collins has been a phenomenal business best seller. Almost 10 years old, it has sold millions of copies. It continues to be featured on end caps in book stores. That it has sold so well, and continues selling, is a testament to a much better book by the legendary newsperson Bill Moyers with Joseph Campbell, “The Power of Myth.” (Original PBS 2001 TV show available on DVD, or get the new release this month.)
When we don’t understand something we develop theories as to how it might work. These theories are based upon what we know, our assumptions, and our biases. They could be right, or they might not. Only testing determines the answer. However, sometimes the theory is so powerfully connected to our beliefs that we don’t want to test it – don’t feel the need to test it. And if the theory hangs around long enough, people forget it wasn’t tested. What easily happens is that “logical” theories (based upon assumptions and beliefs) that don’t explain reality become myth. And the myth becomes very comforting. Over time, the myth becomes part of the assumption set – unchallenged, and actually used as a basis for building new theories.
For example, the founder of modern medicine – Galen – didn’t understand the circulatory system. So he thought blood was oxygenated by invisible pores. As time passed it became impossible to challenge, or even test, this theory. Eventually, blood letting was developed as a medical practice because people thought the blood stored in the affected area had gone bad. It was several hundred years before Harvey, through careful testing, proved there were no invisible pores – and instead blood circulated throughout the body. Millions had perished from blood letting because of a myth. Bad theory allowed to go unchallenged and untested. It just sounded so good, so acceptable, that people followed it. Dangerous practice.
Thomas Thurston now gives us great insight to the popular myth developed by Jim Collins in Good to Great. Published by Growth Science International (http//growthsci.com) “Good to Great: Good, But Not Great” Mr. Thurston puts Mr. Collins thesis to the test. Is it a usable framework for predicting performance, and do followers actually achieve superior performance? In other words, does the advice in Good to Great work?
Mr. Thurston’s conclusions, quoted below, are quite clear, and mirror those of academics and lay people who have studied the storied Mr. Collins’ work:
- Even with the copious guidelines set forth by Collins, sorting CEOs into each category proved a highly subjective process. The classification scheme was ambiguous
- Level 5 leadership was difficult to categorize with reliability and consistency
- Our sample [100 well known firms] did not reveal any statistically significant difference in the performance of firms led by Level 5 and Not-Level 5 leaders. Performance in each category was approximately the same.
- Level 5 leadership classifications were, in practice, highly subjective and not predictive of superior firm performance.
- In other words, our results concluded that one can not predict whether a firm will perform good, great or bad based on its having a Level 5 Leader.
We like myth. It helps us explain what we previously could not explain. Like early Greek gods helped people explain the complex world around them. But, when we build our behaviors on myth it becomes extremely dangerous. We depend upon things that don’t work, and it can have serious repercussions. Mr. Collins glorified Circuit City and Fannie Mae in his book – yet now one is gone and the other in disrepute. Meanwhile his list of “great” companies have been proven to perform no better than average since his publication.
In Good to Great Mr. Collins offers a theory for business success that is very appealing. Be focused on your strengths. Get everybody on the bus to doing the same thing. Make sure you know your core, and protect it like a hedgehog protects its home. And make sure all leaders follow a Christ-like approach of humbleness, and leader servitude. It sounds very appealing – in an Horatio Alger sort of way. Work hard, be humble and good things will happen. We want to believe.
But it just doesn’t produce superior performance. There are no theories that have identified “great” leaders. Success has come from all kinds of personalities. And, despite our love for being “passionate” and “focused” on doing something really “great” there is no correlation between long-term success and the ability to understand your core and focus the organization upon it. Thousands of businesses have been focused on their core, yet failed.
What we need is a new theory of management. As the Assistant Managing Editor of the Wall Street Journal, Alan Murray, wrote in “The End of Management,” industrial era management theories about optimization and increased production do not help companies deal with an information era competitiveness fraught with rapid change and keen demands for flexibility.
Increased flexibility and success can be assured. If companies make some critical changes
- Plan for the future, not from the past. Do more scenario planning and less “core” planning
- Obsess about competition – and listen less to customers
- Be disruptive. Don’t focus on optimization and continuous improvement
- Embrace White Space to develop new solutions linked to changing market needs
This does work. Every time.
update links on Thomas Thurston 5/2014:
http://startupreport.com/thomas-thurston-on-innovation-malpractice-and-the-dangers-of-theory-via-startupreport-com/
http://newsle.com/person/thomasthurston/2870934#reloaded
http://thomasthurston.com/
