by Adam Hartung | Apr 1, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Lifecycle, Lock-in, Web/Tech
How many of these company names do you remember — Sperry Rand? Burroughs? Univac? NCR? Control Data? Wang? Lanier? DataPoint? Data General? Digital Equipment/DEC? Gateway? Cray? Novell? Banyan? Netscape?
I'm only 50, yet most of these companies were originated, became major successes, and failed within my lifetime. Now, prepare to add a couple more. In the 1980s Silicon Graphics set the standard for high-speed computing, using their breakthrough technology to open the door on graphics. There never would have been a PS3 or Wii were it not for the pioneering work at SGI. The company invented high speed graphics calculating methods that allowed for "real-time" animation on a computer, as well as "color fill" and "texture mapping" – all capabilities we take for granted on our computer screen today but that were merely dreams to early GUI users. But now SGI has disappeared according to the Cnet.com article "First GM, Now Silicon Graphics. Lessons Learned?" The company that expanded the high-speed computing market most on SGI's early lead was Sun Microsystems, building the boxes upon which the first all-computer animated movie was made – Toy Story. But 2 weeks ago we learned Sun will most likely soon disappear into the bowels of IBM ("Final Chapter for Sun Micro Could be Written by IBM" at WSJ.com)
When Clayton Christensen wrote The Innovator's Dilemma he said academics like to talk about the tech industry because the product life cycles are so short. Actually, he would have been equally accurate to say their company life cycles were so short. For business academics, looking at tech companies is like cancer researchers looking at white lab mice. Their lifespan is so short you can rapidly see the impact of business decisions – almost like having a business lab.
What we see at these companies was an inability to shift with changes in their markets. They all Locked-in on some assumptions, and when the market shifted these companies stayed with their old assumptions – not shifting with market needs. Like Jim Collins' proverbial "hedgehog" they claimed to be the world's best at something, only to learn that the world put less and less value in what they claimed as #1. Either the technology shifted, or the application, or the user requirements. In the end, we can look back and their lives are like a short roller coaster – up and then crashing down. Lots of money put in, lots spent, not much left for investors, vendors or employees at the end. They were #1, very good (in fact, exceptional), and met a market need. Yet they were unable to thrive and even survive – because a market shift emerged which they did not follow, did not meet and eventually made them obsolete.
Today we can see the same problem emerging in some of the even larger tech companies we've grown to admire. Dell taught everyone how to operate the world's best supply chain. Yet, they've been copied and are seeing their market weaken to new products supplied by different channels. Microsoft monopolized the "desktop", but today less and less computing is done on desktops. Computing today is moving from the extremes of your hand (in your telephone) to "clouds" accessed so serrendipituously that you aren't even sure where the computing cycles are, much less how they are supplied. And software is provided in distributed ways between devices and servers such that an internet search engine provider (Google) is beginning to provide operating systems (Android) for new platforms where there is no "desktop." As behemoth as these two companies became, as invincible as they looked, they are equally vulnerable to the fate of those mentioned at the beginning of this blog.
Of course, their fate is not sealed. Apple and IBM both are tech companies that came perilously close to the Whirlpool before finding their way back into the Rapids. When businesses decide their best future is to Defend & Extend past strengths they get themselves into trouble. To break out of this rut they have to spend less time thinking about their strengths, and more about market needs. Instead of looking at similar competitors and figuring out how to be better, they have to look at fringe competitors and figure out how to change with emerging market requirements. And just like they disrupted the marketplace once with their excellence, they must be willing to disrupt their internal processes in order to find White Space where they can create new market disruptions.
Today, with change affecting all companies, it is important that leaders look at the "lab results" from tech. It's important to recognize past Lock-ins, and assumptions about continuation (or return to) past markets. Markets are changing, and only those that take the lead with customers will quickly return to profitability and emerge market leaders. It's those new leading companies that will get the economy growing again, so waiting is really not an option.
by Adam Hartung | Mar 31, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Whirlpool, Leadership, Quotes
Readers of this blog know I've been very pessimistic about the future of GM for well over 2 years. And I've long extolled the need to change top management. I'm passing along some quotes from Professor Rosabeth Moss Kanter at the Harvard Business School in "Why Rick Wagoner Had to Go" at Harvard Business School publishing's web site.
"It was only a matter of time before GM's Rick Wagoner would have to go, and the board with him. I am surprised he lasted this long, a fact that also shows weakness on the board side…. In this tough economic environmnet, if you wait too long to envision and implement transformational changes you are out of the game. That holds for every industry under attack because of obsolete business models, including newspapers and big pharma…. New leaders at the top can bring a novel perspective, unburdened by the need to justify strategies of the past, and not stuck in a narrow way of thinking…. Companies finding themselves in a downward spiral need fresh views, not just redoubled efforts to do the same thing while waiting for the recession to end….. Now is the time for every company to do what GM failed to do fast enough and imaginatively enough: rethink everything. What…. takes you into the future, and what is just legacy, continued out of sentiment?"
Thanks Professor Kantor, I agree completely. GM was stuck Defending & Extending its old Success Formula, and as a result performance deteriorated to the point of failure. And it's not just GM. As the good professor points out, media companies that remain tied to newspapes have the same problem. Today the Sun Times Group, publisher of the Chicago Sun Times declared bankruptcy ("Sun Times Files for Bankruptcy" Marketwatch.com). There is no longer a major newspaper in Chicago that is not bankrupt. And this blog has covered how big pharma has stayed too long at the trough of old inventions, missing the move to biologics.
Things are bad. "All 50 states in recession for first time since the 1970s" is one of two Marketwatch.com headlines, "Global Economy to Shrink in 2009, World Bank Says." The downturn is expected to be 1.7% globally, a disaster for small and emerging economies. This is killing global trade (down 6.1%) and whipsawing countries like Russia – moving from growth last year of over 6% to a decline this year of over 4%! This is the stuff that has led to revolutions!
The only way out of this situation is for organizations to listen to the good professor, and not try to do more of the same. Markets have shifted – permanently. Management actions that are designed to weather short-term downturns, mostly by cost-cutting and conserving resources, don't work when markets shift. Instead, businesses have to develop new Success Formulas that get them out of the Whirlpool's spiral and into the Rapids of Growth. To do this requires planning based upon future senarios, not what worked before. Obsessing about competitors globally to develop new solutions. Not fearing, but rather embracing Disruptions that allow for trying new things in White Space where you have permission and resources to really develop new solutions. These 4 steps can turn around any organization – if you don't wait too long.
by Adam Hartung | Mar 30, 2009 | Current Affairs, Defend & Extend, General, In the Rapids, In the Whirlpool, Leadership, Quotes, Television
"This is the future of media. Whether in print, over the air or online — the delivery mechanism isn't as important as the unique, rich nature of the content provided." That's what the Tribune Corporation's COO, Randy Michaels, said in "Tribune Merges Conn. paper, stations" as reported on Crain's ChicagoBusiness.com. After filing bankruptcy, and seeing both newspaper subscribers and advertisers hacked away dramatically, Tribune is merging together all operations – newspaper and 2 TV stations – in Hartford, CT. They are cutting costs again.
We can hope Mr. Michaels means what he says, but excuse me if I'm doubtful. Despite the rapid acceleration of on-line news readership, and the fact that in most major markets Tribune has one or more TV stations as well as a newspaper, Tribune has never consolidated it's news operations or its advertising sales force. This is sort of remarkable. Going back at least 5 years, it made sense when gathering the news, or talking to an advertiser, to discuss how you could maximize his value for ad money spent. That meant a sharp company would have laid out programs showing how they could give advertisers access to eyeballs from all sources. But instead, at Tribune each station had its own salesforce, each newspaper, and each on-line edition of the newspaper. There was little effort to give the customer a good value for his spend – and no effort to discuss how he could transfer dollars between media to be a big winner. Even though Tribune was an early investor in the internet, it has not learned from its investment and migrated to a new Success Formula.
At a time when advertisers are unclear about how to justify their spending, a sharp media company would be explaining how many eyeballs in are in each format, the demographic profiles and the cost to reach those eyeballs. A company that really is "media independent" would have a big advantage over one trying to sell only the legacy products, because it isn't learning from the marketplace how to offer the best product at the best price and make a profit.
And Tribune had better move quickly. Arianna Huffington has announced the launch of the "Huffington Post Investigative Fund," as announced on the website HuffingtonPost.com. This is her effort to create a pool of investigative journalists for on-line sites who will do the kind of work we historically expected newspapers to do. She is throwing in $1.75million, and asking others to put up additional money. Thus giving this White Space project not only permission to figure out a "new age" model for investigative reporting, but hopefully the resources with which to experiment and learn. Whether this project will succeed or not is unclear, but that it is intended to make on-line news (and her website) more powerful and successful is clear. With each step like this, and this one she took all over the airwaves Monday discussing on multiple television stations, the case against quality of on-line news declines – and increases the on-line competition for eyeballs with television, radio and newspaper formats.
What we'd like to see is an announcement that the Tribune project in Hartford is a White Space project intended to figure out the Success Formula for future media. As we come ever closer to the "Max Headroom" world, depicted in the 1980s of a future where there is 24×7 news around all of us all the time, what no one knows for sure is how the profit model will work. Those who experiment first, and learn the fastest, will be in a strong position to be the leader.
Unfortunately, the Tribune announcement does not look like White Space. The Tribune leadership has still not Disrupted its grip on the old Success Formula. The project in Hartford looks more like a cost-saving effort, trying to defend the old newspaper, than a learning proposition. The project seems to lack the permission to do whatever is necessary to succeed (like perhaps stop printing), and it has no resources coming its way with which to experiment as it keeps trying to maintain all 3 of the legacy business units. Rather than a learning environment, this looks more like an effort to save 3 troubled businesses by cost saving - a Defend practice that doesn't work when markets shift and new competitors are trying all kinds of new things.
by Adam Hartung | Mar 28, 2009 | Current Affairs, In the Whirlpool, Leadership, Lifecycle, Quotes, Web/Tech, Weblogs
"If you don't read the newspaper you are uninformed. If you do read the newspaper you are misinformed." — Mark Twain
"All I know is what I read in the newspaper. That makes me the most ignorant man alive." —- Will Rogers
What both these great writers understood was that when you get most of your news from one source, you get only what that source chooses to tell you, and only a single interpretation of the news. Since newspapers began there has been controversy about bias in news reporting. Many famous newspapers were considered "conservative" or "liberal" based upon the political opinions of the owners. The reality is that when a newspaper reporter tells you a story, what you read – down to the word choices - is affected by the opinions and feelings of the author, as well as those of the editor and perhaps even the publisher.
The great breakthrough of the internet is you aren't restricted to a single (or possibly) two sources. You can find articles about anything from a political speech to an automobile accident published by 5, 10 maybe hundreds or thousands of sources. And for many news items the internet provides you not only multiple opportunities to read how the "facts" are told, but you can find multiple articles that interpret those facts. This plethora of coverage means that internet readers have the opportunity to be as selective, or as broad, as they choose. And it means that the ability of publishers to "control the direction" of a story is dramatically diminished. Readers, by looking across multiple sources, can determine as a group which "facts" they find accurate, and which "interpretation" they find most genuine. Because of the internet, news coverage is "democratized" in a way that has never before been possible.
Newspapers provided a method of informing the public for a very, very long time. But they have an internal weakness they cannot overcome – the printing means that only one version of a story is told and it can only be economically told once per day. The distribution method makes newspapers an "event" that occurs at "deadline", and the cost is high enough that there's only enough advertising to support the printing and distribution of one newspapers in most markets. When you get down to the printing – the "paper" in "newspaper" – it has limits that create a weakness.
The internet is disruptive because it overcomes the limitations of printing. It is available 24×7 not just to read, but to be updated and current with the latest information. A person anywhere can read input from multiple sources. The internet makes up-to-the-minute news coverage of everything available to people in rural, remote locations as quickly as it does those "on the scene", thus opening an interest in world or very local events to everyone on the planet, regardless of location. And this means this "no cost distribution" (not no cost of fact acquistion, or interpretation, or writing – just distribution) allows the internet to do what economist Joseph Schumpeter called "creatively destroy" the old value in newspapers.
Those who bemoan the loss of newspapers need to spend more time on the internet. There are so many sources for so much news that we are today the best informed society in the history of mankind. The financial problems at newspaper publishing have not diminished the quantity or quality of news coverage. Those are higher than ever. And the businesses that jump into this market, by developing networks to access the most/best news and interpretation at the lowest cost – while delivering it in a format that is easy for readers to find and absorb – will be successful. And it will be harder than ever for those trying to create the news (such as politicians and political pundits) to decry "bias" in a world where all opinions are available to everyone.
by Adam Hartung | Mar 26, 2009 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Quotes
Clayton Christensen is a Harvard Business School professor who first described in detail how "disruptive" innovations shift markets, allowing upstart competitors to overtake existing companies that appear invulnerable. I just found a 4 minute video clip "Clay Christensen's Advice for Jamie Dimon" at BigThink.com. In this clip the famous professor tells the story about how the big "banks" allowed themselves to be overtaken by "non-banks" – and then he offers advice on what the big banks should do (Jamie Dimon is the Chairman and CEO of J.P.MorganChase, and an HBS alumni.)
Dr. Christensen lays out succinctly how banks relied on loan officers to find good loan candidates, and make good loans. But increasingly, borrowers were classified by a computer program, not by loan officers. Once the qualification process was turned into a computer-based Q&A, anybody with money could get into the lending business – whether for credit cards, or car loans, or mortgages, or small business loans, or commercial loans. Losing control of each of these lower-end markets, the bankers had to bid up their willingness to take on more risk to remain in business while also chasing fewer and fewer high-quality borrowers. The result was greater risk being taken by banks to compete with non-banks (like GMAC, GE Credit, Discover Card, etc.) What should they do? Dr. Christensen says go buy an Indian or Chinese phone company!!!
Hand it to Dr. Christensen to make the quick and cogent case for how Lock-in by the banks got them into so much trouble. By trying to do more of the same in the face of a radically shifting market (people going to non-banks for loans and to make deposits), they found themselves taking on considerably more risk than they originally intended. Rather than finding businesses with good rates of return, they kept taking on slightly more risk in the business they knew. They favored "the devil you know" over the "the devil you don't know." In reality, they were taking on considerably more risk than if they had diversified into other businesses that were on far less shaky ground than unbacked mortgages.
This is Strategic Bias. We all like to remain "close to core" when investing resources. So we keep taking on more and more risk to remain in our "core" — and for little reason other than it's the market and business we know. Because we know the business, we convince ourselves it's not as risky as doing something else. In truth, markets determine risk – not us. Because we assess risk from our personal perspective, we keep convincing ourselves to do more of what we've done — even when the marketplace makes the risk of doing what we've done incredibly risky —- like happened to Citbank, Bank of America and a host of other banks.
And in great form, the professor offers a solution almost nobody would consider. His argument is that (1) these banks need to go where demand is great, go to new and growing markets, not old markets, and loan demand cannot be greater than in emerging markets. (2) To succeed in the future (not the past) banks have to learn to compete in emerging markets because of growth and because so many winning competitors are already there, and (3) you want to enter businesses that are growing, not what necessarily your traditional business or what you are used to doing. He points out that the traditional "banking" infrastructure is nascent in emerging markets, and well may not develop as it did in the western world. But everyone in these places has phones, so phones are becoming the tool for transactions and the handling of money. When people start doing everything on their phone (remember the rapidly escalating capabilities of phones – like the iPhone and Pre) it may well be that the "phone company" becomes more of a bank than a bank!!
Who knows if Clayton is right about the Indian phone company? But his point that you have to consider competitors you never thought about before is spot on. When markets shift they don't return to old ways. It's all about the future, and banking has changed, so don't expect it to return to old methods. Secondly, you have to be willing to Disrupt old Lock-ins about your business. If the "loaning" of money is now automated, banking becomes about transaction management – not making loans. You have to consider entirely different ways of competing, and that means Disrupting your Lock-ins so you can consider new ways of competing. Thirdly, you don't just sit and wait to see what happens. Get out there and participate! Open White Space projects in which you experiment and LEARN what works. You can't develop a new Success Formula by thinking about it, you have to DO IT in the marketplace.
Big American banks have tilted on the edge of failure. More will likely fail – although we don't yet know which the regulators will put under or keep afloat. What we can be sure of is that the market conditions that put them on the edge will not revert. To be successful in the future these organizations have to change. Probably radically so. So if they want to use the TARP money effectively, they had better take action quickly to begin experimenting in new markets with new solutions.
Gotta hand it to Professor Clayton Christensen, he's made a huge improvement in the way we think about innovation and strategy the last few years. His ideas on banking are well worth consideration by the CEOs trying to bring their shareholders, employees and customers back from brink.
by Adam Hartung | Mar 24, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Weblogs
"Senator proposes nonprofit status for newspapers" was the headline at Marketwatch.com today. Senator Benjami Cardin, a democrate from Maryland, has proposed allowing newspapers to convert to 501(c)(3) status so their subscription and advertising revenue woujld be tax exempt, while contributions to run the papers would be tax deductible. This would allow some newspapers to stay afloat.
Let me share with you a response I received from a fellow reader of this blog:
"I watched Chris Mathews and had the same feeling. As they spoke I had visions of chiefs of Bethlehem, U.S. Steel, etc. sitting around a table in the 60s going 'continuous casting, those Japanese, that's not going anywhere.'
How can they say investigative reporting is going to be dead – there are a million reporters out there working for passion and curiosity. As a matter of fact, if I was going to be paid for a year to chase a story, seems to me a strong incentive to create a story when there really wasn't one.
I loved the way they were holding the paper and saying how people will miss the periphery articles. People will be limited to their feeds and be exposed to the rest of what's going on. I look at it as if I read an article in a newspaper that is just one take of the situation. With the internet I can drill down to get additional information and opinions. Plus get immediate commentary from experts."
Lots of people are getting "subsidy happy" these days. Money to banks, money to car companies, money to newspapers. What we must realize is that these short-term subsidies should be targeted at stopping a worse calamity. Nothing more. Sort of trading off company subsidies against even higher costs for unemployment, uninsured health care, and the costs of letting companies fail short-term. The reality is that none of these subsidized companies are sustainable as they are. The market has shifted, and their Success Formulas no longer produce positive results. They will burn up the subsidy money, as we've already seen happen at GM, and soon ask for more.
When markets shift, new competitors emerge to thrive. Provided we don't get in their way by propping up bad competitors too long with subsidies. In banking, we saw the unregulated institutions on a global scale start doing all sorts of financial services. While some of these are reverting back to regulated banks in the U.S. today so they can receive subsidies, globally we have seen the emergence of immense banks that are outside U.S. regulation. These institutions can borrow and lend globally, and are creating a new approach to financial services. We can't prop up an uncompetitive Citigroup against giant global banks making profits offshore. Likewise, globalization of manufacturing now means that good, low cost cars can be produced in Korea, China and India – making rates of return on higher cost labor in the USA, Germany and Japan harder to obtain. Additionally, many of these offshore competitors (in particular Japanese and Korean) have demonstrated they can deliver proifts on far lower volumes, thus requiring faster launch cycles and more niche products to succeed. GM lacks the manufacturing cost structure (in short-term line costs as well as labor) and the new product introduction processes to survive against these competitors. In newspapers consolidating the reporting into a daily made sense when you needed vast and costly infrastructure to print and deliver the news – no longer requirements in a web-enabled news marketplace.
Economists can make strong arguments for subsidies to help short-term dislocations. Such as helping companies in New Orleans to get back up and running due to a hurricane. That is a short-term problem not related to a market shift. But arguments for subsidies offered during market shifts are strictly "public policy" efforts trading off one policy cost for another. They cannot "save" a business. The company and its employees must use the subsidy to change their Success Formula as fast as possible, so they can compete with some product in some market where they can grow — without need for a subsidy
TARP and its other stimulus products are intended to keep some air in some parts of the boat so it doesn't sink entirely. But they aren't fixing the ship. That requires new competitors emerge that are attuned to current market needs, and have Success Formulas that produce profits based upon future markets. As the economist Schumpeter said 70 years ago, we rely upon these new entrepreneurs to give us the creative new solutions that create growth in the wake of the destruction of old businesses unable to keep up with shifting markets. Let's hope we don't spend all our money trying to keep the old battleship afloat, because we'll need some to help the newer, faster, more agile competitors grow with solutions that meet current and future needs.
by Adam Hartung | Mar 20, 2009 | Current Affairs, General, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Travel, Web/Tech
"Xerox chops earnings outlook as sales slide" is the headline on Marketwatch.com. Do you remember when Xerox was considered the most powerful sales company on earth? In the 1970s and into the 1980s corporations marveled at the sales processes at Xerox – because those processes brought in quarter after quarter of increasing profitable revenue. Xerox practically wiped out competitors – the small printing press manufacturers – during this period, and "carbon paper" was quickly becoming a museum relic (if you are under 30 you'll have to ask someone older what carbon paper is – because it requires an explanation of something called a typewriter as well [lol]).
But today, do you care about Xerox? If you have a copier, you don't care who made it. It could be from Sharp, or Canon, or anybody. You don't care if it's Xerox unless you work in a "copy store" like Kinko's or run the copy center for the corporation – and possibly not even in those jobs. And because desktop printers have practically made copiers obsolete, you may not care about copiers at all. In short, even though Xerox invented the marketplace for widespread duplicating, because the company stayed in its old market of big copiers it has seen revenue declines and has largely become irrelevant.
"U.S. airline revenue plunges for another month" is another Marketwatch.com headline. And I ask again, do you care? The airlines were deregulated 30 years ago, and since then as a group they've never consistently made money (only 1 airline – Southwest – is the exception to this discussion.) The big players in the early days included TWA, Eastern, Braniff, PanAm – names long gone from the skies. They've been replaced by Delta, American and United – as we've watched the near collapse of US Airways, Northwest and Continental. But we've grown so used to the big airlines losing money, and going bankrupt, and screaming about unions and fuel costs, that we've pretty much quit caring. The only thing frequent travelers care about now is their "frequent flier miles" and how they can use them. The airline itself is irrelevant – just so long as I get those miles and get my status and they let me board early.
When you don't grow, you lose relevance. In the mid-1980s the battle raged between Apple's Macintosh and the PC (generically, from all manufacturers) as to which was going to be the dominant desktop computer. By the 1990s that question had been answered, and as Macintosh sales lagged Apple lost relevance. But then when the iPod, iTunes, iTouch and iPhone came along suddenly Apple gained a LOT of relevance. When companies grow, they demonstrate the ability to serve markets. They are relevant. When they don't grow, like GM and Citibank, they lose relevance. It's not about cash flow or even profitability. When you grow, like Amazon with its Kindle launch, you get attention because you demonstrate you are connected to where markets are headed.
Is your business obsessing about costs to the point it is hurting revenue? If so, you are at risk of losing relevance. Like Sara Lee in consumer goods, or Sears in retailing, even if the companies are able to make a profit – possibly even grow profits after some bad years – if you can't grow the top line you just aren't relevant. And if you aren't relevant, you can't get more customers interested in your products/services, and you can't encourage investors. People want to be part of Google, not Kodak.
To maintain (or regain) relevance today, you have to focus on growth. Cutting costs is not enough. If you lose relevance, you lose your customer base and financing, and you make it a whole lot easier for competitors to grow. While you're looking internally, or managing the bottom line, competitors are figuring out the market direction, and proving it by demonstrating growth. And that's why today, even more than before, it is so critical you focus planning on future markets for growth, obsess about competitors, use Disruptions to change behavior and implement White Space to experiment with new business opportunities. Because if you don't do those things you are far, far too likely to simply become irrelevant.
[note: Thanks for feedback that my spelling and grammar have gotten pretty sloppy lately. I'm going to allocate more time to review, as well as writing. And hopefully pick up some proofreading to see if this can improve. Sorry for the recent problems, and I appreciate your feedback on errors.]
by Adam Hartung | Mar 19, 2009 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, In the Whirlpool, Leadership, Lock-in
"Nobody doesn't like Sara Lee." That was the jingle I still remember from my youth. For years we heard this on the TV, as we were coaxed to buy the delictable productss, frozen, refrigerated and fresh, offered by Sara Lee. But today, unfortunately, almost nobody likes Sara Lee anymore. Oh – the products are great – it's the company, primarily its leadership, that's a disaster.
It's tough to make money on food. After all, everyone has the same cost for the ingredients. And in the developed world, there's more than enough food to go around. For the last 50 years, to make money on food required adding to the product so it had more value. Such as freezing frozen potatoe slices rather than selling whole potatoes so french fries are more convenient - raising price and margin. Or adding preservatives and vitamins so the bread lasts longer than the other guy's, and may be a touch better for you. Or the biggest addition, advertising so you imbue the food with all kinds of personality elements urging customers to identify with the product. If you want to make money selling food, you have to taste better, prepare faster, sell cheaper and hopefully give me more value in myself — or else I'll by the generic product and kill your margin. And for a number of years, Sara Lee knew how to do this fairly well.
But then, Sara Lee stumbled. It quit launching new products and new brands. It's quality and branding was matched by competitors from Entenmann's to Little Debbie. Without innovation, the frozen, refrigerated and fresh pies, sausage and other products saw margins shrink. So Sara Lee hired a bright exec from PepsiCo to fix up the company named Brenda Barnes. Since then, the story has really gone downhill.
Ms. Barnes focused on her "problem," a low stock price, rather the market challenges Sara Lee faced. She built a 5 year plan to turn around Sara Lee. But his plan had no innovation involved. No plans for growth. Just the opposite, she intended to sell many assets to raise cash. And then use that cash to buy shares. And through this process, she would "prop up" the company stock to the benefit of shareholders. The company would be smaller – but she said it would be worth more – in some kind of weird economics. But, this stock ploy had worked for other industrial companies, she said, so it would work for Sara Lee. Since then, according to the chart at Marketwatch.com, Sara Lee stock has gone from 21 to 7! While the CEO wants to blame the tough economy for her performance, the chart shows that this "strategy" has been a dead loser since the day it was announced. Things have been downhill since long before banks trimmed their lending.
Now, in her latest move, the CEO wants to sell some more businesses. But in an FT.com article "Sara Lee Searches for Sell-off Suitor" there aren't any buyers for remaining businesses. As one analyst commented "it's a rather tired portfolio." That's a polite way of saying "when you don't innovate your business, why would someone want to buy it?" As another analyst said "it's not a very good business." Increasingly, instead of buying these product lines competitors realize they would prefer to compete against them, growing sales organically and profitably — without the headaches and cost of acquisition.
So, because the sale side of the strategy isn't working, we read in Crains ChicagoBusiness.com "Sara Lee to put stock repurchases on hold." After buying shares at $20, $18, $15, the CEO has decided not to buy shares when they are $7 – in order to conserve cash! Maybe if she had spent money on growing the business, expanding products and new business lines, using White Space to innovate new profitable opportunities the stock wouldn't be down to $7 with little interest on the part of any buyers.
Ms. Barnes tried to implement an industrial strategy when it can no longer work. Sara Lee brands aren't some kind of asset that will always go up in value. You can't just expect sales and profits to rise because you do more of the same, and cut costs. The world is highly competitive, and you have to prove the value of your business every day. Customers are demanding, and competitors are ready to steal them away in a heartbeat. You can't prop up the stock by trying to reduce the number of shares, unless you're ready to get down to $1 of revenue and 1 share left valued at $1. What good is that?
Sara Lee could have behaved very differently in 2005 – and CAN behave very differently now. The company clearly needs a new CEO that is ready to develop scenarios of the future which indicate what innovations could have high value. Instead of talking about what Sara Lee used to be, the CEO and management team needs to define what Sara Lee will be in 2015. And by obsessing about competitors, describe how Sara Lee can be a big winner. Then there needs to be Disruption in order to allow the company to consider the new business opportunities, and White Space with permission and resources to rebuild the Success Formula into one that can make above-average rates of return and grow! If Sara Lee will take these actions the company still has time to meet market challenges. But if it doesn't act fast, after 4 years of decline and a very shifted market, nobody's going to have any Sara Lee to nibble on sooner than Ms. Barnes is admitting.
by Adam Hartung | Mar 18, 2009 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, Innovation, Leadership, Web/Tech
We hear people say that eventually there will be no PC. Did you ever wonder what "the next thing" will look like that makes the PC obsolete? For most of us, working away day-to-day on our PC, and talking on our mobile phone, we hear the chatter, but it doesn't ring for us. As customers, all we can imagine is the PC a little cheaper, or a little smaller, or doing a few new things. And same for our phone. But, for those who are making the technology real, imagining that next way of getting things done – of improving our personal productivity the way the PC did back in the early '80s – it is an obsession.
I think we're getting really close, however. In what Forbes magazine headlined "Apple's Explosive iPhone Update" we learn that Apple is dramatically enhancing what it's little hand held device can do. USAToday hit upon all the new capabilities of the iPhone in its article "Apple iPhone software prices may rise," but these are just the capabilities us mere users can see. On top of these, Apple has provided 1,000 new Application Programming Interfaces (APIs). These allow programmers all kinds of opportunities to do new things with the iPhone (or iTouch). We all know that the netbook direction has small devices doing spreadsheets, presentations and documents – and that is, well, child's play and not the next move to personal productivity. You have to go beyond what's already been done on these machines if you want to get new users – those that will make your product supercede and obsolete the old product. And these APIs open that world for programmers to do new things on the iPhone and iTouch.
So go beyond your PC and phone with your thinking. With just one of the new offerings, Push, your iPhone could recognize your location (via GPS), know you are walking in front of a Pizza Hut (example) and ring you that this store will give you $2.00 off on a lunch pizza. Right now. And it'll create that magical bar code so the minimum wage employee at the register can scan your phone to get the price right when you check out. Or link your phone via bluetooth to your heart rate monitor in your running watch and automatically email the result to your cardiologist for the hourly profile she's building to determine your next round of pills – with a quick ring and reminder to you that you best slow that walk down a little if you want to get positive, rather than negative, impact. Or you get an alert that UBS just posted on the web a new review of GE (in your stock portfolio) and your phone automatically forwarded it to your broker at Merrill asking him for a comment and executed a stop-sell order at $.30 below the current market price via the on-line ML order application. By the way, you were supposed to turn at the last corner, but you were so busy listening to your alert that you missed the intersection so the GPS is re-orienting you to the destination – especially since there is construction on the next street and the sidewalk is closed – as per the notice posted by Chicago Streets and Sanitation this morning.
What makes this interesting is that it's the device, plus the open APIs, that make this stuff real and not just fairy dreams. That makes you wonder if you really want to lug around that 7 pound laptop, now that you get the newspaper, magazines and your books from Amazon all on the iPhone as well. And when you're delayed at O'Hare you can download last night's episode of Two-and-a-half Men and watch it on the screen while you wait to board. The laptop can't do everything this new device can do – and the new thing is smaller, and cheaper, and easier. This is all getting very real now. And with Google and Palm close on Apple's heals, it's now a big race to see who delivers these applications.
Does your scenario of the future have all this in mind? Are you planning for this level of productivity? Of information access? Of real-time knowledge? Are you thinking about how to use this capability to improve returns so you can explode out of this recession in 2010? Do you think you better take some time now to check?
In the meantime, IBM wants to buy Sun Microsystems according to the Marketwatch.com article "IBM May get Burnt." Talk about "other side of the coin." Why would anybody want to buy a company with declining sales? In IBM's case, probably to eliminate a competitor. Now that is typical 1980s industrial thinking. "So last century" as the young people say. The financial services and telecom industries are "soft" – to say the least. IT purchases are lowered. IBM and Sun are big suppliers. So IBM can buy Sun and hope that it will get rid of a competitor, and then raise prices. And that is typical industrial era – circa Michael Porter and his book Competitive Strategy – thinking. Lots of people are probably saying "why not, sounds like a good way to make money."
At least one problem is that this is no cheap acquisition. Ignoring integration problems, even though Sun is down – a huge amount down – the acquisitions is still over $6billion. Sure, IBM has that in cash. But what happens in information businesses is that competition never goes away. With budgets low, what sorts of PC servers (maybe from HP) running Linux are coming out that the customers will compare with Unix servers – and push down prices even if IBM has no Unix server competition? What opportunities for outsourcing applications to offshore server farms, running Chinese or Korean-made boxes with Linux, taking the business away from IBM exist? Or what applications will be eliminated by banks and telcos that need to axe costs for survival now that markets have shifted? You don't get to "own" an information-based business, and you don't get to control the pricing or behavior of customers. IBM needs to wake up and realize that it's investment in Sun within 2 years will be washed away.
We should be heading forward, not backward. Especially during this recession. Those companies that deliver new products that exceed old capabilities will be winners. Those that seize this opportunity to Disrupt markets – like Apple is doing – will create platforms for growth. Those that try applying industrial practices will find themselves looking in the rear view mirror, but never find that lost "glory land" that disappeared in the big recession of 2008/09. As investors, we need to keep our eyes on the growing companies building new applications, rather than the ones trying to regain yesterday.
by Adam Hartung | Mar 11, 2009 | Current Affairs, General, Leadership, Lifecycle, Lock-in
All businesses hurting in today's economy must significantly change if they want to improve their performance. In the early 1900s the world saw the advent of several new machines ushering in the industrial era. But, the economy was based on agriculture – and largely the "family farm." As the industrial era expanded landowners tried to Defend & Extend their old business models by leveraging up the family farms – borrowing more and more money to plant "fencerow-to-fencerow" as it was called. Borrowers overworked the land, and with all the debt piled on when a glitch happened (a combination of drought and falling commodity prices from expansion) the mountain of debt collapsed. The beginnings of the Great Depression hit the farmers in the 1920s. The coming of the industrial revolution made old Success Formulas based on land ownership and agriculture obsolete – and no amount of debt could defer the shift forever. It took 10 years (into the 1940s) to fully transition to the new economy, and when we did Ford, GM and other industrial giants overtook the land barrons of the earlier era.
I was reminded of this today when discussing scenario planning with Diane Meister, Managing Director of Meridian Associates in Chicago. Today she sees the deteriorating Success Formulas in her clients. Companies that keep trying to apply Industrial era Success Formulas in what is now an information economy. When they aren't prepared for big shifts – it can be devastating. But those who do prepare can improve position quickly. She told me how one of her clients had an excellent business selling toys to FAO Schwartz and other top toy chains. But Meridian could see that the growth of Target created a viable scenario for a big shift in how toys would be distributed. She implored her client to prepare for possibly the failure (note – failure – not just weakness) of several big toy chains. Good thing she did, within 2 years most of her client's retail distribution was bankrupt. Only by using scenarios to prepare for a big market shift were they able to survive – in fact come out a leader – due to the big shifts happening in retail as a result of the change in markets. (Don't hesitate to contact her firm at the link – good stuff!)
As we transition into the information economy, big changes are going to happen to all businesses. The source of value, and competitiveness, has changed. Today the Allstate Insurance's CEO was quoted in Crain's "Insurer's Should Have Federal Regulator." And in an article at Marketwatch.com, "Dimon Backs Regulation", the CEO of J.P. Morgan Chase told the U.S. Chamber of Commerce he backs additional mortgage regulation. Both of these leaders are looking forward, and recognize that markets have shifted. New regulations will be critical to success. Their future scenarios show it will take a different approach to be a global competitor in 2015 – to be a winner in the global information economy that won't support industrial era Success Formulas.
Not everyone gets it. Also at Marketwatch.com in "AT&T Chief Sounds Alarm", the AT&T CEO decries rising health care costs and worries system changes will hurt his competitiveness. Wake up! What sort of scenario is he using that expects America to keep the current health care system – and the current employer-paid insurance? Even insurance companies now recognize the system is broken and needs change. In no other country are health care costs "baked in" to the cost of a company's P&L. Think about it – even where there is national health care (Britain, France, Canada, Germany, etc.) the companies don't carry the cost as a line item they must recoup via sales and margin. Elsewhere, the cost of health care is born by society through taxes. The reality is that any American company trying to compete has a whole host of incremental costs on its shoulders because we ask employers to pay in order to keep personal income taxes low. Until we change the whole basis of how America chooses to insure its population, employers are being forced to carry costs not seen by offshore competitors. In a global marketplace – this sort of "yesterday thinking" will not survive. Employers should be leading the charge for national health care – just so they can get the issue out of their plethora of problems and off the backs of their P&Ls!
Those that don't change will end up out of the game. Because they didn't do effective scenario planning, that considered the rise of "upscale discounters," FAO Schwartz (mentioned earlier) and Zany Brainy's failed — not even a Tom Hanks movie could keep customers coming in the doors. Markets are merciless in taking down companies that can't globally compete on what's important. We can prop up GM for a short time, but no country can afford to try to keep its people working (avoid unemployment costs) and insured by pumping money into a dysfunctional car company that isn't competitive. Sears has ignored the trends, and is one of the "walking dead." Once the world's greatest retailer, it built what was for years the world's tallest building (now 2nd). But now Crain's has reported in "Willis will get Sears Tower naming rights" that soon the great building the great retailer built in its home town of Chicago will likely be renamed for a London insurance company. Of course, Sears sold the building years ago in its effort to subsidize its failiing retail business – and hasn't even been a tenant in the building for decades. It won't be long before no one even remembers Sears. Sears remained Locked-in to what it once was, and ignored scenarios about a different future that would require change.
The world has shifted. If your scenarios for the future expect a return to old practices – well, that isn't going to happen. If you want to be a leader in the next economy, you better start building new scenarios TODAY!
error correction - in yesterday's blog I inadvertently said I was "not" twittering. Talk about a badly mistaken typo! I meant the opposite. I am twittering and hope you all hook up so we can tweek each other.
