by Adam Hartung | Oct 4, 2009 | Books, Defend & Extend, In the Rapids, In the Whirlpool, Lifecycle, Web/Tech
Do you remember when AOL dominated the internet? In the early 1990s most people who used the internet actually were AOL clients. They bought their internet access, via dial-up modems, from AOL. Their interface (browser) was from AOL. And most of the sites – and navigation – was driven by AOL. AOL was the "monster" of the web. And it created enormous value for investors from this leadership position. It's value stormed to over $160billion!
Chart from Silicon Alley Insider
But as we can see, once acquired by Time Warner AOL tried to Defend & Extend its position. These actions pushed AOL into the Swamp, an undefendable position in the rapidly growing internet world. Defending its position proved impossible, as people found better and lower cost solutions for accessing and using the web. Now AOL is in the Whirlpool, fast disappearing – an historical anecdote about early internet days.
Apple has only about 2% market share in mobile phones. On the one hand, this could appear nearly immaterial. But if we look at usage, we see a very different story
Chart courtesy Silicon Alley Insider
iPhone application growth, which is clearly becoming logarithmic, demonstrates a change in the marketplace. People are clearly using these devices for more than making calls. Unlike AOL, which tried to hold people into their environment – or even Motorola's RAZR which tried to dominate sales of phones with pricing – Apple isn't trying to Defend & Extend a market position. Apple is creating a market disruption by changing how mobile devices are used. Promulgating applications increases demand for the iPhone (and iTouch) as not just phones but as replacements for laptops and other internet devices. Possibly ereaders like Kindle. This pulls people toward Apple's devices, which will generate strong future growth. By constantly bringing out new uses, Apple disrupts the market for phones, computers and internet access devices. Positioning its own products to be big winners as demand continues growing, and keeping Apple in the Rapids.
PostScript –
I was pleased to see a recent Wall Street Journal article "What Kills Great Companies: Inertia." The message of Lock-in as a source of business problems keeps spreading. This time Gary Hamel talks about some of the sources of Lock-in he sees. Reads like he bought a copy of "Create Marketplace Disruption"!
by Adam Hartung | Oct 1, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
In "Why Apple Can't Sell Business Laptops" Forbes gives the case to be pro-Dell. The author points out that Dell has 32% of the computer market within companies that have more than 500 employees. He then explains this happens because Dell makes machines that are constantly the next generation beyond the previous laptop – a little better, a little faster, a little cheaper. Comparing the new Lenovo Z to the Mac Air, the author concludes that anyone who sits in a corporate office, with a lot of corporate IT requirements, who wants the next small laptop would find it easiest to fit the Dell product into their work.
He's right. Which is why investors, employees, suppliers and customers should worry.
Everything described is Lock-in. Dell has focused on big IT departments, and sells products which cater to them. Dell is listening to its dominant customers. Each quarter Dell gets more dependent upon these customers – and walks further out on the PC gangplank when servicing their needs.
But, large corporations are laying off more workers than any other part of the economy. Both in absolute numbers and as a percentage of employment. They are not the "growth engine" or the companies that will lead us out of this recession. And while Dell caters to these customers, Dell is missing major shifts that are happening in how people use computers. Shifts that are already demonstrating the market for traditional laptop technology is waning.
In PC technology, people are moving away from laptops and toward netbooks. By far, netbooks have overtaken laptops as users shift how they access the web and get work done. Additionally, people are moving away from traditional computing platforms for lots of things, like email and web browsing (to name 2 big ones), and using instead mobile devices like Blackberry and iPhone. Apple appears to be very careful to not chase the netbook curve, instead appearing to advance the mobile device curve with future iPhones and a possible Tablet product.
As Dell keeps getting closer and closer to its "core" customers, its customer and technology (traditional PC) Lock-ins are making it increasingly vulnerable. When users simply stop carrying laptops, what will Dell sell them? When corporations move applications to cloud computing, and users no longer need their "heavy" laptop, where will that leave Dell?
The Forbes writer made the big mistake of measuring Dell by looking at its past – and glorifying its focus. But this points out that Dell is really very vulnerable. Technology is shifting, as are a lot of users. The author, and Dell, should spend more time looking at the competition — including solutions that aren't laptops. And they should spend more time building scenarios for 2015 to 2020 — which would surely show that having a better "corporate laptop" today is not a good predictor of future competitiveness for changing user needs.
Apple keeps looking better and smarter. Instead of going "head-to-head" with the PC makers, Apple is helping users migrate to mobile computing via different sorts of devices with better connectivity (the mobile network) and lighter interfaces. They are providing applications that support a wider variety of user needs, like GPS as a simple example, which make their devices addictive. They are pulling people toward the future, rather than trying to hold on to historical computing structures. As the shift continues, eventually we'll see corporate IT departments make this shift – just as they shifted to PCs from mainframes and minicomputers throwing IBM and DEC into the lurch. As this shift progresses, the winners will be those with the solutions for where customers are headed. And Dell doesn't have anything out there today.
by Adam Hartung | Sep 29, 2009 | Current Affairs, Defend & Extend, Disruptions, General, In the Swamp, Leadership, Lock-in, Web/Tech
Last week was big news for technology. Hewlett Packard announced it was killing the EDS brand name, pushing to make HP more of an integrated solutions company (like IBM). And Dell bought Perot Systems to launch itsfirst push into services. According to Washington Technology "HP, Dell Know They Have to Change or Die." The article talks about the dramatically shifting marketplace (love that language!), and how these two hardware oriented companies are trying to avoid the Sun Microsystems finality by getting into services. The author says the companies must "adapt or die," and "there's no sitting still." He goes on to say "it may take years," but he thinks they will transition and eventually be successful. His success forecast hinges on his belief that they must change to survive – and that will be sufficient motivation.
I love the awareness of shifting markets, and the recognition that shifts are demanding changes in these former leaders. But I don't agree with the conclusion that future success is highly likely. Because even with big acquisitions and name changes – HP and Dell haven't laid the groundwork to change. They have taken some rifle shots, but they haven't followed The Phoenix Principle and that means the odds are less than 10% they will successfully transition.
Lots of companies have tried to transition via acquisition. Heck, GM once bought EDS (and Hughes Electronics) – and look what it did for them. Just because a company buys something doesn't mean they'll change. McDonald's bought Chipotle, and then sold it despite double digit growth to fund acquisition of additional McDonald's. Just because a company needs to change its Success Formula to succeed – or even survive – is a long way from proving they will do it.
Neither HP or Dell show they are building a company for the future. Unfortunately, they look to be chasing a model built by IBM in the 1990s. Taking action in 2009 to recreate "best practices" of 15 – 20 years ago is far from creating a company positioned for success. There is no discussion of future scenario planning from either company – about technology use or changing business practices. No description of their scenarios for 2015 and 2020 – scenarios that would demonstrate very high growth and payoff from their action. To the contrary, all the discussion seems to be defensive. They are getting into services – finally – because they realize their growth has slowed and profits are declining. It's not really about the future, it's action taken by studying the rear view mirror.
Additionally, there is no discussion of any Disruptions at either company. To change organizations must attack old Lock-ins. Embedded processes – from hiring and reviews to product development and resource allocation – all exist to Defend & Extend past behavior. If these aren't attacked head-on then organizations quickly conform any potential change into something like the past. In the case of these companies, lacking a clear view of what future markets should look like, they have opted to forgo Disruptions. Mr. Gerstner attacked the sacred cows around IBM viciously in his effort to transition the company into more services. But the CEOs at HP and Dell are far less courageous.
And there's no White Space here for developing a new Success Formula aligned with market needs as they are emerging. Instead of creating an environment in which new leaders can compete in new ways, these businesses are being instructed on how to behave – according to some plan designed by someone who clearly thinks they are smarter than the marketplace. Without White Space, "the plan" is going to struggle to meet with markets that will continue to shift every bit as fast the next 2 years as they did the last year.
I have very limited expectations that these actions will increase the performance of either company. I predict organic growth will slow, as "integration" issues mount and "synergy" activities take more time than growth initiatives. They will not see a big improvement in profits, because competition is extremely severe and there is no sign these companies are introducing any kind of innovation that will leapfrog existing competitors – remember, mere size is not enough to succeed in today's marketplace. They will largely be somewhat bigger, but no more successful.
It's easy to get excited when a company makes an acquisition off the beaten path. But you must look closely at their actions and plans before setting expectations. These companies could make big changes. But that would require a lot more scenario planning, a lot more focus on emerging competitors (not the existing, well known behemoths), much more Disruption to knock back the Lock-in and White Space for building a new Success Formula. Without those actions this is going to be another acquisition followed by missed expectations, cost cutting and discussions about size that cover up declining organic growth.
by Adam Hartung | Sep 18, 2009 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership, Lifecycle, Openness, Web/Tech
This week The Economist reviewed the innovation processes at Google. In "Google's Corporate Culture – Creative Tension" the magazine overviews several recent innovations, and actions senior leaders are taking regarding innovation management.
While Mr. Anthony recently chastised Google for its "immature" innovation management in a Harvard Business School blog post, and somewhat The Economist does as well, for not producing more revenue from its innovations – nobody can refute that the company released yet 3 more very important innovations this week – an updated Chrome web brower, new software that allows viewing on-line newspapers in a more natural way (Fast Flip) and Google Wave for collaborative project development. For most companies any one of these would be vaunted to market on piles of ad and PR sending. Products less significant cause Microsoft to throw their Marketing/PR machine into overdrive. But innovative launches are frequent enough at Google that you can completely miss some of them. Even when they continue to change whole industries – like Google has been doing to newspaper publishers and continues.
The best line in the article says that senior Google leadership is very actively trying to counter "the conservatism that can set in as companies mature." The good news is that even though it has 20,000 employees, Google is not "mature." Thankfully, it remains in the Rapids of growth. Size does not equal "maturity." That word is more applicable to companies that begin truncating ideas and activities to optimize their existing business. This is the direction Scott Anthony recently proposed on his HBS blog. And it gets companies into serious trouble.
Instead, Google is working hard to keep ideas from being truncated by hierarchy or people who are focused on narrow opportunities. Senior leaders are making themselves available to everyone in order to make sure ideas get attention – rather than vetted. Through this they are giving permission for ideas to be developed, even when many in the company aren't supportive. This top-level focus on granting permission to new ideas which are unconventional is a CRITICAL component of innovation success. Second, they aren't relying on a priority process for funding (something Mr. Anthony recommends). Instead they are making ample dollars available for ideas to push them to market quickly – and see if the innovation is accepted by the market or needs more work.
By personally engaging at the top levels in this process, Mr. Schmidt and his team are being Disruptive. They aren't allowing structural impediments like strategy formulation, hiring practices, tight IT systems, large historical investments or internal "experts" to Lock-in Google to its past. This is demonstrably exceptional behavior that pushes Google into new markets and growth. Then, by focusing on granting permission – even for things the "organization" may not initially support – and adding resources from outside normal resource allocation systems they are doing the 2 things necessary to keep White Space alive and thriving at Google.
Google has been growing, even in this very tough economy. More importantly, it has not slowed down its releases of innovation on the marketplace that can generate future growth. Mobile phones using its Android software are just now getting to market, and offer (along with other innovations) potentially very large revenue gains in new areas. With smart phones and Kindle-like e-readers to outsell PCs in late 2010 Google is squarely positioned to be part of the "next wave" of personal digital productivity (along with Apple.) And this can be explained by the company's willingness to remain Disruptive and push White Space projects — even with 20,000 employees.
by Adam Hartung | Sep 17, 2009 | Current Affairs, General, Leadership, Lifecycle, Openness
How many cars do you own? Odds are, it's at least 1 more than you need. There are more licensed vehicles in the USA than there are licensed drivers – so it's clear America is loaded with cars. Now it looks like a permanent shift is developing, to less auto ownership, and it will change competition significantly.
In places as far ranging as Detroit/Ann Arbor, Chicago and San Francisco increasingly people are opting for a new approach to transportation. Take the bus and train – yes. Take a cab – sometimes. And for a lot of folks they are joining car-sharing companies. According to Freep.com, "Service Lets Users Borrow a Car Whenevery they want." Pay a flat annual fee, as low as $30 to $150, then you rent a car in your neighborhood for as little as $8.00/hour. Right. No monthly insurance fee, no gas charge, no parking bills. You rent cars when you need them, and only as long as you need them.
To those of us, mostly older, this may seem heretical. How can you give up your car? It's long been a status symbol. What you drive is supposed to say something about who you are. But this is getting turned upside down. People, lots of people, are renting by the hour and they want something very cheap and easy to park. Cars have a place, but not in your personal parking spot at an enormous cost.
Implications are powerful. Firstly, recognize that the USA is increasingly an urban country. Every election we are reminded that while most the people live in cities, the electoral map is by state. Thus, a President can be elected while losing the popular vote! Just like the tendency across the globe, as agriculture makes less and less importance to the economy people gravitate to major urban centers. Likewise, as manufacturing jobs move offshore from America, people shift to office work which is more centralized in urban areas than the former "factory towns." These demographic trends have been developing for over 30 years, and show every sign of accelerating – not decreasing.
Thus, watching what the "early movers" are doing in urban areas is really important. We have to develop our scenarios about the future, and we can see that what happens in cities is becoming even more important than it was just a couple of decades ago. And in cities, people are opting not to buy cars. Nor even rent them for a day or two. Nor are they relying on ever more costly taxis. They are going for hourly rentals they can preschedule.
GM, Chrysler and Ford are getting very little of this business because the renters, 80%, prefer small hybrids. Hertz and other big rental car companies were being shut out, because their model was the daily rental — largely from an airport location for a traveling business person or vacationer.
In a real way, this shows all the signs of a classic Clayton Chrstensen "Disruptive Innovation." An unserved, or underserved, customer who cannot obtain personal transportation is able to get it. An unconventional solution, perhaps, but it's working. What does that tell us? As the business grows expect the leaders to develop better and better solutions, leading to more and more people accessing the solution. This is how we get to a very large market shift – not from the people currently served suddenly changing, but rather from the underserved market creating a new solution which gets improved and refined until it meets the needs of the majority of customers – who shift much later – but cut the legs out from under old Success Formulas. Meaning we could get back to families having one car (circa 1948) and when a second is needed they rent by the hour – even in the suburbs!! With insurance costs often topping $100/month for a second car, plus the cost to license and maintain it, it's less clear that multi-car ownership is as beneficial as it once was. If a viable new solution comes along – well it just might work!
This, of course, is not a good thing for auto companies dependent on a demand rebound to fix their recent woes. Their "good case" scenarios have people returning to adding to their personal fleets, while also returning to new car acquisition every 2 or 3 years. If instead buyers go the direction of less ownership and less frequent purchases it will be impossible for these companies to repay the government loans.
Markets shift. Often quickly and violently. Far too oten, we ignore these shifts. Because they look so different, so odd, that we believe it must be a short term phenomenon. We expect that things will soon get "back to normal." We have future scenarios – they are extensions of the past. But in the post-millenial global economy people are starting to do a lot of things differently. They aren't trying to return to old patterns. They are developing new ones. And if you want to compete, it's becoming crystal clear you have to change your assumptions about the future, your scenarios of the future and your approach to markets. Before you get left so far behind you fail.
by Adam Hartung | Sep 16, 2009 | Current Affairs, Defend & Extend, In the Rapids, Innovation, Leadership, Openness
Is Google a company who's growth and innovation worry you? Not me. Which is why I was disturbed by a recent blog at Harvard Business School Publishing's web site "Google Grows Up." In this article Scott Anthony, a consultant and writer for HBS, says that he thinks Google has been immature about its innovation management, and he thinks the company needs to change it's approach to innovation. Unfortunately, his comments replay the core of outdated management approaches which lead companies into lower returns.
No doubt Google's revenues are highly skewed toward on-line ad placement. But with the market growing at more than 2x/year, and Google maintaining (or growing) share it's not surprising that such high revenues would dwarf other projects. Google created, and has remained, in the Rapids of growth by leading the market. From its Disruptive innovation, offering advertising through products like Google AdWords to people who previously couldn't afford it or manage it, allowed Google to lead a market shift for advertising. And ever since Google has implemented sustaining innovations to maintain its leadership position. That's great management. No reason to worry about a lot of revenue in ad placement today, with the market growing. Not as long as Google keeps breeding lots of new, big ideas to help grow in the future.
But Mr. Anthony flogs Google for its "unrestrained" approach to innovation. He recommends the company push hard to implement a process for innovation management – and he uses Proctor & Gamble as his role model – in order to curtail so many innovations and funnel resources to "the right" innovations. Even though he's obviously flogging his consulting, and pushing that all "good management" requires some significant stage gate management of innovation – he couldn't be more wrong.
Firstly, P&G is far from a role model for innovation. As recently discussed in this blog, the company recently said one of its major innovations was cutting prices on Tide while introducing less a less-good formulation. As commenters said loudly, this is not innovation. It's merely price cutting – taking another step on the demand/supply curve of price vs. performance. It doesn't change the shape of the curve – it doesn't help people get a far superior return – nor does it bring in new customers who's needs were not previously met.
In a Wall Street Journal article "P&G Plots Course To Turn Lackluster Tide," the CEO freely admits the company has had insufficient organic growth. Additionally, his big future opportunities are to "reposition Tide," to cut the price of Cheer by another 13% and to use Defend & Extend practices to try pushing the P&G Success Formula into other countries. Like people in China, India and elsewhere are in need of 1.5 gallon containers of laundry detergent sold through enormous stores which have big parking lots for all those cars to lug stuff home. None of these ideas have helped P&G grow, nor helped the company achieve above-average returns, nor demonstrate the company is going to be a leader for the next 10 years in new products, new distribution systems or new business models for the developed or developing world.
This urge to "grow up" is a huge downfall of business thinking. It smacks of arrogance and superiority by those who say it – like they somehow are "in the know" while everyone else is incapable of making smart resource allocation decisions. In "Create Marketplace Disruption" I provide a long discussion about how introducing "professional management' causes companies to enter growth stalls. The very act of saying "gee, we could be more efficient about how we manage innovation" immediately applies braking power well beyond what was imagined. If Mr. Anthony were worried about Google managers leaving to start new companies in the past (like Twitter) he should be apoplectic at the rate they'll now leave – when it's harder to get management attention and funding for new potentially disruptive innovations.
Google is doing a great job of innovating. Largely because it doesn't try to manage innovation. It maintains robust pipelines of both disruptive, and sustaining, innovations. Google allows everybody in the company to work at innovation – providing wide permission to try new things and ample resources to test ideas. Then Google lets the market determine what goes forward. It lets the innovators use supply chain partners, customers, emerging customers, lost customers and anybody who can provide market input guide where the innovation processes go. As a result, the company has developed several new products — such as new network applications that replace over-sized desktop apps, and a new, slimmer mobile operating system that expands the capabilities of mobile devices —- and we can well imagine that it may be coming close to additional revenue breakthroughs.
Unfortunately, Mr. Anthony would like readers, and his clients, to believe they are better at managing innovation than the marketplace. However, all research points in the opposite direction. When managers start guessing at the future their Lock-ins to historical processes, products and market views consistently causes them to guess wrong. They over-invest in things that don't work out well, and investing for really good ideas dries up. All resource allocation approaches use things like technology risk, market risk, cost risk and revenue risk to downplay breakthrough ideas. Management cannot help but "extend the past" and in doing so over-invest in what's known, rather than let ideas get to market so real customers can say what is valuable.
Google is doing great. In a recession that has put several companies out of business (Silicon Graphics and Sun Microsystems are two neighbors) and challenged the returns of several stalwarts (Microsoft and Dell just 2 examples) Google has grown and seen its value rise dramatically. To think that hierarchy and managers can apply better decision-making about innovation is – well – absurd. It's always best to get the idea surfaced, push for permission to do things that might appear crazy at first, and get them to market as fast as possible so the real decision-makers can react, and give input, to innovation.
by Adam Hartung | Sep 15, 2009 | Current Affairs, General, In the Whirlpool, Leadership, Lock-in
The Real Blindness Behind The Collapse
Adam Hartung,
09.14.09, 05:00 PM EDT
The exact same failing brought down Wall Street, Detroit and Main Street's real estate speculators.
"Too big to fail" is a new phrase in the American lexicon, born in the economic crisis that gave us a bankrupt Lehman Brothers and the shotgun marriage of Merrill Lynch with Bank of America.
Nobody really knows what it means, except that somehow in the banking
world, central bankers can decide that some institutions–like AIG, Citigroup, JPMorgan Chase and BofA–are so big they simply have to be kept alive.
This is the first paragraph in my latest column for Forbes. There is much EVERY business leader can learn from the collapse of Lehman. Learn about risk, and about how to succeed in a shifting marketplace. Please give the Forbes article a read – and put on a comment! Everybody enjoys reading what others think!
by Adam Hartung | Sep 11, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
Stealing language from FDR, September 11, 2001 is a day that will go down in infamy. Dramatic shifts happened in the world resulting from the horrific attacks on American civilians in New York, Pennsylvania and D.C. . But can we say that most organizations have reacted effectively to those shifts?
Few industries were more affected by the attacks than the airline industry. Shut down for a week, revenues plummeted immediately and were hard to win back from a frightened public. But if ever there was an industry of needing to push the "reset button" on how things worked it was airlines. All the major players (except Southwest) had struggled with profitability, many declaring bankruptcy. Some never emerged (like PanAm, Eastern, Braniff). Mergers had been rampant as companies tried to expand into greater profits – unsuccessfully. Customer satisfaction had been on a straight southeasterly direction, lower and lower, ever since deregulation. Here was a collection of businesses for which nothing was going right, and in dire need of changing their business model.
The shut down and economic downturn provided a tremendous opportunity for the airlines to change their Success Formula. The government allowed unprecedented communication between companies, and unions were ready to make changes, to get the air traffic system working again. A sense of cooperation emerged for finding better solutions, including security. Market shifts which had been happening for a decade were primed for new solutions – perhaps implementing operational methods proven successful at Southwest.
Unfortunately, everybody chose instead to extend Lock-ins to old practices and bring their airline company back on-line with minimal change. Instead of using this opportunity to Disrupt their practices, taking advantage of a dramatic challenge to their business, and use White Space to try new approaches – to a competitor every single airline re-instituted business as usual. To disastrous results. Quickly profits went down further, customer satisfaction dropped further and in short order all the major players (except Southwest) were filing bankruptcies and hoping some sort of merger would somehow change the declining results.
The airlines' problems were not created by the events of 9/11/01. But on that day long-developing market shifts become wildly apparent. The airlines, and other industries like banking, had the opportunity to recognize these market shifts, admit their impact on future results (not good), and begin Disrupting old practices in order to experiment with new solutions that better fit changing market needs. None did. It wasn't long before America was mired in another long and expensive military conflict, and an extended deep recession. For most businesses, things went from bad to worse.
Leaders need to recognize when external events pose the opportunity to Disrupt things as they've been – Disrupt the status quo – and start doing things differently. These prime opportunities don't happen often. Reacting with reassurances, and efforts to get back to the status quo as quickly as possible prove disastrous. This is an emotional reaction, seeking a past sense of stability, but it creates additional complacency worsening the impact of market shifts already jeopardizing the future. Instead, one of the most critical actions leaders can take is to leverage these market challenges into a call for Disruptions and use White Space to implement new solutions which meet market needs.
If only the airlines had done that perhaps they could operate on-time, let customers check luggage without a charge, provide quality meals on long flights and internet access on all flights, and provide a reliable service that customers enjoy. If they had sought to find a better solution, rather than Defending & Extending what they had always done, airline customers would be in a far better shape. And that's a lesson all leaders need to learn from the events of 9/11 – use challenges to move forward, not try reclaiming some antiquated past.
To read how GM ended up bankrupt by refusing to recognize opportunities for changing to meet shifting market needs download the free ebook "The Fall of GM."
by Adam Hartung | Sep 8, 2009 | Current Affairs, Defend & Extend, Food and Drink, General, In the Swamp, Leadership, Lock-in
When they can't figure out how to grow a business, leaders often turn to acquisitions. This despite the fact that every analysis ever done of public companies buying other public companies has shown that such acquisitions are bad for the buyer. Yet, after no new products at Kraft for a decade, and no growth, "Kraft shares fall on Cadbury bid, Higher offer awaited" is the Marketwatch.com headline.
Some analysts praise this kind of acquisition. And that's when we can realize why they are analysts, in love with investment banking and deals, and not running companies. "Kraft is demonstrating its operational and financial strength" is one such claim. Hogwash. After years of cost cutting and no innovation, the Kraft executives are worried they'll get no bonuses if they don't grow the top line. So they want to take a cash hoard from all those layoffs and spend it, overpaying for someone else's business which has been stripped of cost by another CEO. After the acquisition the pressure will be on to cut costs even further, in order to pay for the acquisition, leading to more layoffs. It's no surprise that 2 years after an acquisition they all have less revenue than projected. Instead of 2 + 1 = 3 (the expected revenue) we get 2 + 1 = 2.5 as revenues are lost in the transition. But the buyer will claim revenues are up 25% (.5 = 25% of the original 2 – rather than a 12.5% decrease from what the combined revenues should be.)
With rare exceptions, acquisitions generate no growth. Except in the pocketbooks of investment bankers and their lawyers through deal fees, the golden parachutes given to select top executives of the acquired company, and in bonuses of the acquirer who took advantage of poorly crafted incentive compensation plans. These are actions taken to Defend & Extend an existing Success Formula. The executives want to do "more of the same" hoping additional cost cutting (synergies – remember that word?) will give them profits from these overpriced revenues. There is no innovation, just a hope that somehow they will work harder, faster or better and find some way to lower costs not already found. Kraft investors are smart to vote "no" on this acquisition attempt. It won't do anybody any good.
Simultaneously we read in MediaPost.com, "Del Monte To Hike Marketing Spend 40%." If this were to launch new products and expand the Del Monte business into new opportunities this would be a great investment. Instead we read the money is being spent "to drive sales of Del Monte's core brands and higher-margin businesses." In other words, while advertising is off market-wide Del Monte leadership is attempting to buy additional business – not dissimilarly to the goals at Kraft. By dramatically upping the spend on coupons, shelf displays and advertising Del Monte will increase sales of long-sold products that have shown slower growth the last few years. Del Monte may well drive up short-term revenues, but these will not be sustainable when they cut the marketing spend in a year or two. Nor when new products attract customers away from the over-marketed old products. Lacking new products and new solutions such increased spending does not improve Del Monte's competitiveness.
You'd think after the last 10 years business leaders would have learned that investors are less and less enamored with financial shell games. Buying revenues does not improve the business's long term health. A cash hoard, created by cutting costs to the bone, is not well spent purchasing ads to promote existing products – or in buying another business that is already large and mature. Instead, companies that generate above-average rates of return do so by developing and launching new products and services.
You don't see Google or Apple or RIM making a huge acquisition do you? Or dramatically increasing the marketing budget on old products? Compare those companies to Kraft and you see in stark contrast what generates long-term growth, higher investor returns, jobs and a strong supplier base. Disruptions and White Space lead these companies to new innovations that are generating growth. And that's why even the recession hasn't shut them down.
by Adam Hartung | Sep 3, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership
I never cease to be startled by the optimism of businesspeople. Why would anybody buy a newspaper company these days? Yet, Crain's reports "Sun Times Sale Appears Near." It's believed the buyers are a group of independent investors, no media experience, led by Mesirow Financial Group.
Ever heard the term "smart money?" This is definitely not "smart money." Just like Cerberus was none to clever to spend billions buying Chrysler a couple of years ago. Shortly before it went bankrupt. Too often, those with lots of money to invest become full of hubris. They believe their experience allows them to "fix" any business. This almost always involves cost cutting – such as letting go any sort of R&D, product development, advertising, marketing and often sales. Assets are sold to raise cash and incur one-time write-offs (with tax deductions) and get rid of depreciation charges. These financiers believe they can "fix" any business if they are "tough" enough to cut enough costs, and get the remaining employees "focused" on specific segments with specific products.
Only we're finding out that just doesn't work. This sort of "company flipping" was prevalent in the early 2000s. But it added no value, and it wasn't long before market investors quit playing. The value of these cost-stripped businesses, with no growth potential, dropped like a stone. Without growth, the business just keeps on shrinking.
Tribune Corporation, parent of newspaper Chicago Tribune, has already filed bankruptcy. But it is expected to wipe out bondholders (lots of it the employee pension plan), and come out of bankruptcy. To a market which in which fewer and fewer people read newspapers, and fewer and fewer advertisers are buying ads. There is too much competition today for too few subscribers, and too few advertisers, in newspapers. Sun Times Media has no major on-line presence, nor television stations. So how will these investors make a return on their acquisition investment?
They won't.
It's hard to give up in business. It's hard to believe that there just isn't demand for buggy whips any more. It's hard to believe that the last remaining buggy whip manufacturers are so competitive, unwilling to give up, that they don't make much profit. We are romanced into believing that "if you really want to be a blacksmith, there's a way to make money at it." We want to believe that somehow if we work hard enough, if we're smart enough, we can "fix" any business. But when the market has shifted, and demand drops, the smart leaders know to say "no." They take their investing to where customers and demand are growing so they can make a much better rate of return.
Invest in the Rapids. Not the Swamp. Companies in the Swamp almost always end up in the Whirlpool. It's hard to think Sun Times Media isn't already there – what with their negative cash flow and very small cash hoard. Unless you know exactly how you're going to add growth to a troubled business, it's best to simply walk away.
