by Adam Hartung | Mar 9, 2009 | Current Affairs, Defend & Extend, General, In the Rapids, In the Swamp, In the Whirlpool, Innovation, Science
The headlines scream for an answer to when markets will bottom (see Marketwatch.com article from headline "10 signs of a Floor" here) . But for Phoenix Principle investors, that question isn't even material. Who cares what happens to the S&P 500 – you want investments that will go up in value — and there are investments in all markets that go up in value. And not just because we expect some "greater fool" to bail us out of bad investments. Phoenix Principle investors put their money into opportunities which will meet future needs at competitive prices, thus growing, while returning above average rates of return. It really is that simple. (Of course, you have to be sure that other investors haven't bid up the growth opportunity to where it greatly exceeds its future value — like happened with internet stocks in the late 1990s. But today, overbidding that drives up values isn't exactly the problem.)
People get all tied up in "what will the market do?" As an investor, you need to care about the individual business. For years that was how people invested, by focusing on companies. But then clever economists said that as long as markets went up, investors were better off to just buy a group of stocks – an average such as the S&P 500 or Dow Jones Industrials. These same historians said don't bother to "time" your investments at all, just keep on buying some collection (some average) quarter after quarter and you'll do OK. We still hear investment apologists make this same argument. But stocks haven't been going up – and who knows when these "averages" will start going up again? Just ask investors in Japan, where they are still waiting for the averages to return to 1980s levels so they can hope to break even (after 20 years!). These historians, who use the past as their barometer, somehow forgot that consistent and common growth was a requirement to constantly investing in averages.
When the 2008 market shift happened, it changed the foundation upon which "constantly keep buying, don't time investing, it all works out in the end" was based. Those days may return – but we don't know when, if at all. Investors today have to return to the real cornerstone of investing – putting your money into investments which will give people what they want in the future.
Regardless of the "averages," businesses that are positioned to deliver on customer needs in future years will do well. If today the value of Google is down because CEO Eric Schmidt says the company won't return to old growth rates again until 2010, investors should see this as a time to purchase because short-term considerations are outweighing long-term value creation. Do you really believe internet ad-supported free search and paid search are low-growth global businesses? Do you really believe that short-term U.S. on-line advertising trends will remain at current rates, globally, for even 2 full years? Do you think Google will not make money on mobile phones and connectivity in the future? Do you think the market won't keep moving toward highly portable devices for computing answers, like the Apple iPhone, and away from big boxes like PCs?
When evaluating a business the big questions must be "is this company well positioned for most future scenarios? Are they developing robust scenarios of the future where they can compete? Are they obsessing about competitors, especially fringe competitors? Are they willing to be Disruptive? Do they show White Space to try new things?" If the answer to these questions is yes, then you should be considering these as good investments. Regardless of the number on the S&P 500. Look at companies that demonstrate these skills – Johnson & Johnson, Cisco Systems, Apple, Virgin, Nike, and G.E. – and you can start to assess whether they will in the future earn a high rate of return on their assets. These companies have demonstrated that even when people lose jobs and incomes shrink and trade barriers rise, they know how to use scenario planning, competitor obsession, disruptions and white space to grow revenue and profits.
You should not buy a company just because it "looks cheap." All companies look cheap just prior to failing. You could have been a buyer of cheap stock in Polaroid when 24 hour kiosks (not even digital photography yet) made the company's products obsolete. Just because a business met customer needs well in the past does not mean it will ever do so again. Like Sears. Or increasingly Motorola. Or G.M. These companies aren't focused on innovation for future customer needs, they prefer to ignore competitors, they hate disruptions and they refuse to implement White Space to learn. So why would you ever expect them to have a high future value?
Why did recent prices of real estate go up in California, New York, Massachusetts and Florida faster than in Detroit? People want to live and work there more than southeastern Michigan. For a whole raft of reasons. In 1920 the price of a home in Iowa or Kansas was worth more than in California. Why? Because an agrarian economy favored the earth-rich heartland over parched California. In the robust industrial age from 1940 to 1960, the value of real estate in Detroit, Chicago, Akron and Pittsburgh was far higher than San Francisco or Los Angeles. But in an information economy, the economics are different – and today (even after big price declines) California homes are worth multiples of Iowa homes. And, as we move further into the information economy, manufacturing centers (largely on big bodies of water in cool climates) have declining value. The market has shifted, and real estate values reflect the shift. Unless you know of some reason for lots (like millions) of health care or tech jobs to develop in Detroit, the region is highly over-built — even if homes are selling for fractions of former values.
We seem to have forgotten that to make high rates of return, we all have to be "market timers" and "investment pickers." Especially when markets shift. Because not everyone survives!!!!! All those platitudes about buying into market averages only works in nice, orderly markets with limited competition and growth. But when things shift – if you're in the wrong place you can get wiped out!! When the market shifted from agrarian to industrial in the 1920s and '30s my father was extremely proud that he became a teacher and stayed in Oklahoma (though the dust storms and all). But, by the 1970s it was clear that if he'd moved to California and bought a house in Palo Alto his net worth would have been many multiples higher. The same is true for stock investments. You can keep holding on to G.M., Citibank and other great companies of the past — or you can admit shift happened and invest in those companies likely to be leaders in the information-based economy of the next 30 years!
by Adam Hartung | Mar 6, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
"U.S. Unemployment Rate Jumps to 25 Year High" is Crain's headline today (see article here). "Payrolls sink 651,000; jobless rate soars to 8.1%" headlines MarketWatch (see article here). It's the fourth consecutive month job losses exceeded 600,000 we are reminded, as 4.4 million becomes the latest tally of those losing jobs in this recession. Those unemployed plus those with part-time-only work has risen to 14.8% of the population – a number that the labor department says may reach 1930s proportions. There are fewer people working full time in the USA today than in 2000 – a combination of the "jobless recovery" followed by a whopping recession.
I remember 25 years ago when the unemployement numbers were this high. I was graduating business school, and there was a real fear that not all graduates would find a job (a horrible situation at a place like HBS). The economy was in terrible shape after several years of economy micro-rule under President Carter. A stickler for detail, and a workaholic, Carter had implemented complex regulations to control prices of oil and other energy products, as well as most agricultural products and commodities. The oil price shocks, combined with runaway printing of money by a highly accomodative Federal Reserve during the 1970s, had sent the American economy into "stag-flation" where growth was abysmal and inflation had skyrocketed.
In 1982, things didn't look good. And the Reagan-led republicans introduced an amazing set of recommendations to break out of the rut America's economy was in. A bold experiment was set up, to test whether "supply siders" were right and if we put our resources into creating supply (capacity) would demand follow and drive up the economy. The big test was a combination of historical tax cuts combined with increased federal spending on defense projects run by industry (in other words, changing from giving money directly to people through welfare or government jobs and instead giving money to businesses to build things – infrastructure and military.)
No one knew if it would work. Smaller government and lower taxes had been a political mantra for various political parties since the days of Benjamin Franklin. But what most Americans believed when they elected Ronald Reagan was that what had recently been tried was not working – it was time to try some new things.
Today is 2009, and while unemployment rates may look similar – not much else is like 1982. Then, marginal federal income tax rates were 80%, and most states relied heavily on "revenue sharing" money from the feds back into states to pay for many progroms – like roads and schools. Today, top rates are in the low 30s, and states have jacked up (from 2x to 10x) sales taxes, property taxes and even state income taxes to cover the loss of federal dollars. Interest rates on home mortgages were 14% to 18% in 1982 – and that was on a variable rate loan with 20% down – because you couldn't get a bank to offer a 30 year mortgage (for fear of inflaction wiping out the loan's value) and no one offered low-downpayment loans. There was a housing shortage, but people struggled to afford a home with interest rates that high! And materials cost (due to inflation) was driving up construction costs more than 12-15%/year. Today mortgages are available at 5% fixed for 30 years, and the prices of homes are dropping more than 10% annually while empty properties seem to be everywhere begging for buyers at discounted prices.
The signs of an impending collapse have been pretty clear for the last few years. First, there was the "jobless recovery." While the economists kept saying the economy was doing well, the fact that there were no new jobs was quite obvious to a lot of people. There was even considerable surprise at how robust the economy was, given that it had no job creation. But it didn't take long for several economists to recognize that the source of growth was largely a considerably more indebted consumer. From the government (federal, state or municipality) to the individual. Those who did have jobs were taking advantage of low interest rates to purchase. On metrics debt/person, debt/GDP, debt/earnings dollars, debt/payroll dollars were all hitting record high numbers as lower quality debt (lower quality because there was increasingly less earnings behind each loan) provided the economic fuel. The economic research team at no less a conservative stalwart than Merrill Lynch was predicting as early as 2006 big problems – and a revisting of 650 on the S&P 500.
Although the economy in 2005-2007 looked nothing like that of the late 1970s, it was pretty clear that a declining economy and high unemployment were soon to come. The 1980s solution, which unleashed the longest running bull market in history, dealt with the problems of the 1970s. But, as the decades passed increasingly the 1980 tools had less and less impact on sustaining growth. Cutting marginal tax rates on dividends when marginal rates on income is already at 30% has far less impact than halving tax rates on everyone! Lowering SEC regulations on capital market access for new hedge funds has less impact than deregulating pricing and labor costs for whole industries like airlines and trucking! What worked well in the past, and became Locked-in to the American economy, simply had lower marginal impact. Year after year of Lock-in produced weaker and weaker results. And opened the doors for aggressive competitors to copy those practices unleashing prodiguous competition for American companies – in places like Asia, India and South America.
All Locked-in systems become victim to these declining results. It's not that the ideas are bad, they just get copied and executed by aggressive competitors who catch up. Markets shift and needs change. People that once focused on buying a new car start focusing on how to retire. People that once wanted great schools want better parking. People that wanted cheaper and better restaurants want cheaper and better health care. The old approaches aren't bad, but trying to do more, better, faster, cheaper of the same thing simply has declining marginal benefit. Results slowly start declining, until eventually they fail to respond to old efforts at all.
Comparing our unemployment rate today to that in 1982 is an interesting historical exercise. We can see similar outcomes. And what's similar about the cause is that Lock-in to outdated practices led to declining performance. That the practices were about 180 degrees apart isn't the issue. Debating the merits of the practices in a vacuum – as if only one set of practices can ever work – simply ignores the pasasage of time and the fact that different times create different problems and require different solutions. The successful practices that fired a tremendously successful business community and stock market in the 1960s ran out of gas by the 1980s. Now, the practices of the 1980s have run out of gas in the competitive global economy of 2009. In both instances, those leading the economy – the companies, economists, banks, regulators – stayed too long with a set of Locked-in practices.
Today we need new ideas. To overcome rising unemployment requires we look to the future, not the past for our recommendations. We must start obsessing about competitors in China, Hong Kong, Singapore, Brazil, Argentina, Sri Lanka, Thailand and India – competitors we belittled and ignored for too long. We must be willing to Disrupt old practices to try new things – and use White Space to experiment. The Missile Defense Shield (mid-80s) turned out to be a project that wasn't appropriate for its time – but that we tried it gave a shot in the arm to all kinds of imaging and computing technologies which helped improve business. Those kinds of experiments are critical to figuring out how we will create jobs and economic growth in a fiercely competitive global economy where value is increasingly based on information (and neither land nor fixed assets - which dominated the last 2 long waves of growth for America).
by Adam Hartung | Mar 4, 2009 | Current Affairs, In the Rapids, Innovation, Openness, Web/Tech
I teach college classes on innovation, as well as speak regularly on the topic. And I am frequenty asked how to determine whether new products are sustaining innovations, or disruptive ones. In 2008, the most common product I was asked about was the iPhone. To me the answer was obvious. As a phone, the iPhone was sustaining. But, as a new platform from which to do a multitude of things that went way, way beyond phone use it had the potential to be very Disruptive. For those reasons, it's initial (if expensive) ability to be sustaining, coupled with it's long-term potential to be Disruptive (and therefore wildly inexpensive), made iPhone look like an easy product to introduce yet really important as time and applications progressed. It was easy to predict the iPhone as a product that would make a big difference in the marketplace.
So far, I've not been disappointed. Today, Apple announced an iPhone application allowing it to behave like a Kindle (read article here). The Amazon.com launched Kindle was the most successful new product of 2007 and 2008 Christmas seasons, selling out production and selling in greater volumes than the initial launch of the iPod. Kindle offers the opportunity to read anything digitally – from the morning newspaper (why have a paper if you can get the info digitally), to magazines to books. Literally thousands of publications and hundreds of thousands of books. When I had to buy a Kindle device to gain this access, I had to deliberate. Yet another device to carry? But now that I can get this "library" access on a device which can also deliver internet access, text messaging, mass messaging on twitter, my PDA services and telephone connectivity — well this is pretty amazing. It keeps demonstrating the iPhone as a device not like any other device in the market — a game changer – that can bring in new users to each of the individual markets it serves by offering such strong cross-market delivery.
Just 3 months ago tech reviewers felt that "netbooks" were the next "hot" item. These downsized, book-sized laptops gave basic computer performance at a very low price. And analysts chided Apple for not participating. Forbes seemed to chide Apple recently with a headline that the company was living in denial (see article here). But a closer read shows that the headline was tongue-in-cheek. Forbes too recognized that Apple has a product in the netbook class – but it does a whole lot more – and its called the iPhone. Meanwhile, Apple doesn't intend to lose value on Macs by chasing downmarket with the larger platform.
I've told many audiences that sustaining innovations – those that do the same thing but a little better – create 67% of incremental revenue. They feel comfortable, and are easy to launch. And because they give revenue a shot, we justify doing more and more of these product variations and simple derivatives. But, disruptive products produce 85% of incremental profits. Variations and derivatives are easy for competitors to knock-off, and their value is short-lived (if they produce any value at all). Disruptive products are hard to imitate, and produce long-term profits. The iPod disrupted the music business, and now years later it still has the #1 market share as an MP3 device (despite a market attack from behemoth Microsoft with Zune) and iTunes remains #1 in music downloads even though Apple produces no music. iPod and Mac make money because they cannot be easily imitated. And the same is proving true for iPhone. It is more than it looks, and it has lots of opportunity to keep growing.
Apple demonstrates every day that even in very tough economic circumstances, if you go to where the market is headed YOU CAN GROW. You don't have to sit back and bemoan the lack of credit or the change in markets. You do need to have a clear view of where markets are headed, with vivid scenarios allowing you to track behavior and target. You also have to be obsessive about competition, and realize you must relentlessly take action to remain in front. And you can't fear Disruption as you use White Space to enter new markets and test new products. That's why Apple stock is flat in 2009, while almost everyone else has gone down in value (see chart here).
by Adam Hartung | Mar 3, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
Sears has been heading for the end of its game for several years. It's in the Whirlpool now, and we can be sure it won't come out. We can go back to when Sears dropped its catalog to see the first sign of putting costs before customers, and completely missing how competitors were changing and leaving Sears without an advantage. But the next big hurt happened when customers found out they could get credit for purchases from banks – via credit cards like MasterCard and Sears – that made it unnecessary to get a line of credit from Sears, or a Sears credit card (which eventually became Discover.) Increasingly, what made Sears stand out became difficult to find. And Sears lost market share year after year to the discounters (KMart, Target and Wal-Mart) as well as lower-priced soft goods retailers (J.C. Penney and Kohl's) and then DIY retailers that offered mowers and tools (Lowe's, Home Depot and Menards).
Why anyone would shop at Sears became a lot less clear – yet Sears kept trying to do more of what it had always done in its effort to stay alive. So hedge-fund jockey Ed Lampert swooped in and bought Sears with lots of hoopla about turning it around. But his approach was to do less of the same, not more, and he had no ideas for how to be more competitive. As he cut inventory, and cut costs, and closed stores it became easier and easier for customers to shop somewhere else. Sears was shrinking, not growing, and all the focus on the bottom line, in an effort to manage earnings rather than the business, just kept making Sears less relevant to customers, investors, vendors and employees.
Sales keep declining – down some 13% in the recent quarter (see article here). Increasingly, Sears is looking for distinction by going further down the credit quality spectrum. It's most promising "bright spot" was an increase in lay-away. Lay-away, for those not accustomed to the concept, is when people who can't get credit at all offer to put down 30-50% of the value of an item (say $100 on a $300 washer) and ask the retailer to hold it (literally, hold it in the back room) until the customer can come up with the rest of the money. Sometimes buyers will come in multiple times dropping off $10 or $20 until they come up with all the money for the washer, or a new suit, or a dress, or some tools. Only people that can't get credit at all buy on lay-away. For retailers it has the downside of increasing inventory as they wait for payment. It's the bottom-of-the-barrel for retailers that can't keep up with merchandise trends, and often requires they raise prices to cover the cost of increased inventory holding.
Increasingly there is little else Sears can do. The company has closed another 28 stores, and sales in stores remaining open the last year have declined on average more than 8% for each store (see article here). Net income has plunged 93%. Five years ago, about when Mr. Lampert took over the company, it was worth just about what it is worth today (see chart here). At that time, investors were thinking Sears (which had recently been de-listed as a Dow Jones Industrial Average component) might not survive. But those investors had a lot of dreams about Mr. Lampert turning around the company. They saw the shares increase 6-fold as analysts talked-up Mr. Lampert and his supposedly "magic touch." But all that value has disappeared. Mr. Lampert would like to blame the economy for his lack of success, but reality is that the economy only made more visible the Lock-in Sears has maintained to its outdated business model and the complete lack of Disruption and White Space Mr. Lampert has allowed during his personal direction of the company. Sears has had no chance of success as long as it remained Locked-in to a retail business model tied to the 1960s. And as retail crashed in 2008/2009 it's made obvious the complete lack of need for Sears to even exist.
Note: I was delighted with responses I received from many readers about their views on newspapers. Mostly folks told me they found the value gone, or dissipating quickly, from newspapers. Although there is still ample concern about where we'll find high-quality journalism once they disappear. Folks seem less confident in broadcast and network television – and wholly uncertain about the quality control of on-line news sources. I think we're all wondering how we'll get good news, and aware that there is bound to be a period of market disruption as the newspapers keep declining. But please keep your eyes open, and let myself and all readers know what quality news sources you find on the web. Keep the comments coming. During these periods is when new competitors lay the groundwork for new fortunes. I'd watch HuffingtonPost.com, and don't lose track of the big on-line investments News Corp. has made.
Likewise, please give me some comments (here on on the blog or via email) about where you are shopping today! Have readers all become Wal-Mart single-stop shoppers? With retail sales numbers down almost everywhere, where do you concentrate your shopping? Are you doing more on-line? Are you finding alternatives you favor during this recession. Let's share some info about what we see as the future of retailing. There are a lot of execs out there that seem in the dark. Maybe we can enlighten them!
by Adam Hartung | Feb 28, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Weblogs
In my last blog I commented about the failure of the newspaper in Denver, and discussed how we'll all have to start relying increasingly on news from additional sources – such as blogs. Then I went on to comment about how easy it is for a business to miss a market shift – just as the newspapers have. They could have invested more in .com sites and bloggers for the last decade – but didn't because they kept thinking their market would return to the old ways of behaving.
I would like YOUR COMMENTS. This blog tends to be my rants about all the things I see wrong in industries and companies – with the occasional catch of someone doing something right. But I would really enjoy hearing more about what all of you think. So, building on the newspaper blog, I would really enjoy having people comment along a couple of tracks:
- How do you get your news? Are you still using newspapers a lot, or not? Do you think newspapers will remain important, or not? If you're starting to use the web more for news – where do you find information that is valuable? Where do you get important news?
- Do you think your business is soft – or do you think perhaps your market is shifting and therefore will require
changes in your Success Formula to be successful in the future? How much of your business issues are due to the market, and how much are do to market shifts? Could you be in the position newspapers were in 2000 without admitting it?
I look forward to hearing from you. Please comment here on the blog, you don't have to register. Or send me your comments via email.
by Adam Hartung | Feb 27, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
The Rocky Mountain News has folded up shop. After 150 years, no more newspaper in Denver, CO. (read article here). This is newsworthy because of the size of Denver, but the trend has been obvious. The newspaper's owner (Scripps) closed the Albuquerque Tribune and Cincinnati Post last year. And this is just the beginning. Hearst has already said it may well have to close the San Francisco Chronicle within weeks. Tribune Company, parent of The Chicago Tribune and Los Angeles Times has filed for bankruptcy, as has Philadelphia Newspapers which publishes the Philadelphia Inquirer and Philadelphia Daily Journal. The American Society of Newspaper Editors has cancelled its annual convention for 2009 (read article here.)
Just as I predicted in this blog months ago, when Sam Zell leveraged up Tribune in his buyout, the odds of any particular newspaper surviving is not very good. It was 3 years ago when I was talking to the CFO at the LATimes about the future of newspapers. He felt sure that cost cutting would get the company through "a tough stretch" and then things would get better. When I asked him if he was planning to increase spending in LATimes.com or other on-line media to make sure his projection was true – he asked me what the .com had to do with the paper. He felt the paper would soon recover. Even though there were no indicators that subscriptions would reverse trend and start growing, and even though advertisers were literally saying they never intended to return on-line ad spending back to newspapers, he felt sure the paper would succeed. When I asked why, he said "if we don't report the news, who will? Bloggers??????" and with that exasperation he reinforced in his own mind that there was no option to a successful city newspaper so no need for further discussion. He could not imagine a "democratized" newsworld without editors and publishers that controlled content and writers that were limited by that control.
February 6 I gave a speech in Chicago about growth strategies in this economy. One attendee asked me "what newspapers do you read?" As I formulated my answer, my discussion with the old LATimes CFO came to mind. "I don't read newspapers any more" I had to admit. Good thing I wasn't running for vice-president! But I realized that I'd quit reading newspapers and now picked up most of my alerts from bloggers! I am signed up to various web sites, including blogs, which send me ticklers all day long and aid my web searching for news. I get more information, faster today than ever before – and reading a newspaper seems like such a waste of time! And if that's my behavior, at age 50, I'm a joke compared to people under 30 who can use the web 10x faster than me with their better tool use.
The newspapers are going the way of magazines. That is clear. When we all started watching TV, LOOK, LIFE and The Saturday Evening Post lost meaning. Not all magazines disappeared, but the general purpose ones did. Now, even those have little value. In a connected, 24×7 world newspapers simply quit making sense a decade ago. It just took longer for everyone to realize it. While the newspapers would like to blame the recession for their failure, that's simply not true. The world shifted and they became obsolete – an anachronism. People today consume more news than at any time in history – including pre-recession years like 2007. The recession has not diminished the demand for news or journalism. And advertisers are reaching out for customers just like before. But neither readers nor advertisers are going to newspapers. The action is now all on the web – which continues growing pages at double digit rates every quarter!
So where will you get your news? If you read this blog, you likely already get most news from the web. And others will also do so. Increasingly, editors that have strong opinions (be they conservative or liberal) will have less influence on what is reported. Those who can find and report the news will themselves determine what's out there to be found – and they will capture that value themselves. To use 1990s language, Bloggers are "disintermediating" publishers. And with Google able to push ads to their sites (be they on computers or handhelds), these journalists will be able to capture the ad value themselves. If you want to see the new aggregator of the future, go to www.HuffingtonPost.com. Or www.Marketwatch.com for business info. By ignoring traditional printing and distribution, they can produce multiples of the news content of old aggregators, invest in technology to keep it updated in real time 24×7.
While people are bemoaning the decline of newspapers, take heart in the benefits. How much less newsprint will be created, reducing the demand for pulp from trees? How much less recycling of old newsprint will be required? What benefits to the ecology will come? How much more access will you have to find out all sides of various issues – rather than the point of view taken by the local newspaper publisher who mostly dictated what you used to hear about an issue? How much better educated will you be? Why, given the benefits of on-line news, would anyone want to go back to newspapers?
Bemoaning the loss of newspapers is like bemoaning the decline in rail travel – it may have romantic remembrances of a previous time, but who would ever want to give up their car and wait on trains again? As you look at YOUR business – do you blame the recession for troubles when in fact there's been a market shift? Have things "softened in the short-term," or have customers moved on to seeking new solutions that better fit their needs? It's easy to act like the LATimes CFO and project a return to old market conditions. But will that really happen? Or has the market you're in shifted, leaving you with a weak future? Will you act like Sam Zell and "double down" on a business that the market is shifting away from?
In today's economy, we can all too easily let hope for a return to the good old days keep us from using more realistic explanations. If so, we can end up like those who made kerosene for lamps (expecting electricity to be too hard to install), coal for heating, and passenger cars for trains. Be careful how easily you may think that tomorrow will look like yesterday – because most of the time it won't.
by Adam Hartung | Feb 18, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lifecycle
Yesterday Crain's Chicago Business reported that Kraft expects its sales volume to fall 5% this quarter (read article here). Kraft lost market share to competitors in 75% of its businesses! Do you suppose the demand for food is declining? How about the demand for groceries? To the contrary, reports have been that people are eating less at restaurants – leading to the failure of a few chains, and the closing of several units by others – and eating more at home. We've been led to believe that sales of frozen foods and basics are up due to the poor economy and movement toward thrift. If so, why would the purveyor of many basics and frozen food say volume is expected to decline more than the economy is contracting? Why would it be losing share?
The Chicago-area Kraft executives would like to blame this good management decisions to close unprofitable lines. But do you believe that? Why would any business voluntarily cut revenues in this kind of economy? This rings more as an excuse than a real explanation of the problems within Kraft.
What we know is that Kraft has been woefully short on new products for a decade. What was the last new product you remember from Kraft? In fact, it was only a couple of years ago Kraft was selling growth businesses to "consolidate" its business behind its largest brands – like Velveeta and Mac & Cheese. Then the company raised prices last year, blaming rising commodity costs, opening the door for branded and private label competitors. Kraft is a company with very old products, and higher prices, and no indication of any innovation.
You would think with the economy moving its way, Kraft could capitalize. But when companies hit a growth stall, they lose the ability to capitalize. As they focus on optimizing old products, brands and business practices they increasingly become out-of-step with the marketplace. As markets shift, they miss shifts as they maintain internal focus on the old processes which once produced good returns, but deteriorated. The more they focus, the bigger the gap between what they do, and what the market wants. As returns keep struggling, they continue doing more of what they always did – and explain away poor results.
Kraft is a huge corporation, a recent addition to the Dow Jones Industrial Average. But the company focus is all from the past, not about the future. The company insufficiently studies competitors, and clearly eschews Disruptions. And you can look all over company documents and not find a whiff of White Space to try new things. Without innovation, and no sign of a process to lead them toward innovation, it would be a mistake to expect better performance. Even if Kraft is one of the largest consumer goods companies in America.
by Adam Hartung | Feb 15, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in, Web/Tech
In Create Marketplace Disruption I talk about how Sun Microsystems (see chart here) became wedded to a Success Formula which was tied to selling computers. In its early days Sun had to build its own systems, workstations and servers, to make its techology available to customers. As the company grew, it continued pushing the hardware, even though increasingly all of its value add was in the software. One of its more famous innovations was a software product called Java – now used all across the web. But because Sun could not figure out how to sell hardware with Java the company literally gave the product away – on the theory that growing internet use would increase demand for servers and workstations.
But like most Locked-in Success Formulas, Sun's fell into diminishing returns. The market shifted. First it's biggest buyers, telecom companies, fell into a depression early in the century. And corporate buyers struggled to maintain old IT budgets, increasingly transfering work offshore and demanding lots more performance at lower prices. Secondly, an emerging software standard, Linux, started competing with Sun at a much lower price point, and corporate buyers found this a viable solution. And thirdly, Linux and Microsoft both improved performance operating on somewhat "generic" PC hardware that was considerably cheaper than Sun's hardware, further augmenting corporate movement away from Sun.
But Sun continued to push forward with its old Success Formula. Now analysts are confused about Sun's direction, and largely think the company less likely to survive (read article here). With most analysts recommending investors sell Sun Microsystem shares, as one analyste (Rob Enderle) put it "They seem like a software company, but they are sort of like a hardware company." He added that after years of giving software away for free in efforts to entice hardware buyers Sun Microsystems is on the verge of being obsolete.
Sun Microsystems is just another example of a company so busy focusing on doing what it always did that it didn't evolve to what the market demanded – and rewarded. As software became the value, Sun did more but didn't figure out how to evolve its Success Formula to charge for it. The company remained Locked-in to its old practices, and refused to Disrupt and open White Space where it could find a more valuable Success Formula for the future. Too bad for employees, vendors and investors.
by Adam Hartung | Feb 10, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in
GM is in intense negotiations with bondholders, employees (via the union) and the government over its future. At stake is nothing less than the future of America's largest auto company. A company that saw revenue decline more than 40% in January after deciding in December to idle most of its manufacturing plants.
The negotiations are focusing on whether GM can be competitive. But, unfortunately, GM seems to be directing that discussion toward cost reductions (read article here). As if all GM needs to do is somehow lower costs and it will be competitive with Toyota, which displaced GM atop the global auto industry as the world's largest in January. What customers globally know is that the issue at GM isn't just about cost (which can pretty much be translated into "union contract busting.") Customers want quality products that fit their needs, produced at high quality, with low service costs, and low cost of use (interpret – higher mileage.) It's been 20 years since the yen/dollar valuation gave Japanese manufacturers lower cost of production – and yet year after year Toyota, Honda, Subaru and Suzuki keep growing share while U.S. manufacturers keep declining.
One of the more difficult to understand articles this week was the lauding of GM's vice-chairman Bob Lutz. Mr. Lutz is more than 70 years old! He might well have been a great executive 35 years ago (in 1974) when he was an up-and-coming executive. But my how the world, and the auto industry, has changed since then. I'll never forget watching him interviewed on television about the Tesla (the electric sports car) and seeing him laugh. He literally dismissed Tesla as unimportant – not up to the standards of GM and it's industry leadership. At the time my thought was "I think you'd be a lot smarter to listen to these new guys than be so smug and ignore them." Of course, in short order, Toyota's hybrid vehicles helped lead Toyota past GM, and the approach of Mr. Lutz was looking less and less viable. Good bye, and good riddance, would be a better report for an executive who not only stayed around too long and didn't "save" GM, but ignored powerful competitors while trying to defend an outdated Success Formula.
It is time for GM, and the other domestic auto competitors, to move on. The old Success Formula has failed. It's not about just doing less well, with GM stock valued at $2.70 and the negotiation about converting bondholders to equity holders in order to get more government bailout money — the game is over. What worked for GM in the 1950s, and most of the 1960s, doesn't work any more. And the success of Toyota and Honda demonstrates that. America doesn't need Bob Lutz (and his compadres) any more – may he enjoy his retirement (which is a lot more secure than the thousands of GM retirees that weren't executives). If investors, employees and vendors of the American auto industry are to avoid even more downfall it is time to develop an entirely new game – with new leaders.
GM (and its brethren) need to quit villifying unions as the "boogeymen" causing all their problems. Management signed those union agreements – and if they weren't viable management should have dealt with them. The employees of GM - and all the citizens of Detroit, southeastern Michigan and northwester Ohio as well as the extended midwest – have a vested interest in the succes of this industry. They will agree to leadership which helps them succeed. Continue the old "company vs. union" battles will do no good. Leadership needs to be focused on offering an approach to delivering products that will energize employees and ucstomers alike.
GM must define a new future. Not one based upon a series of cost cuts – which will be matched by competitors. GM needs to demonstrate it can change its view of R&D, product development, customer finance and distribution to meet current customer needs. For GM to be viable, management must demonstrate it knows that tweaking the old model is insufficient. It's time to develop an "entirely new car company" as Roger Smith said when he funded the launch of Saturn. And America's banks, investors and auto buyers all know this.
Increasingly at GM, Disrupting the old business model seems unlikely. Current management is so Locked-in it continues searching for ways to Defend the old model, in spite of deteriorating results at the nadir of failure. If America is to invest in this company, it deserves new management which is able to develop a new company that can truly compete. It is time to demand new leaders who are not the "old guard", but instead leaders who are able to bring new products to market that are competitive by implementing White Space where these new products can be launched through new distribution. For America to keep supporting GM the company needs to move beyond old arguments about labor costs, and get serious about changing its product line and distribution system as well as its legacy employment costs. It's possible to turn around GM – but only if management will abandon its Defend & Extend Management practices and instead use Disruptions to open White Space for a better company to emerge.
by Adam Hartung | Feb 9, 2009 | Current Affairs, Food and Drink, In the Swamp, Leadership
The second step in following The Phoenix Principle to achieve superior returns is to study competitors. Better, obsess about them. Why? So you can learn from them and position your products, services and skill sets in a way to be a leader. We would hope that studying competitors would not lead a company to take on battles it's almost assured of not winning. Too bad nobody told that to Mr. Schultz at Starbucks, who seems intent on killing Starbucks since his return as CEO.
Starbucks become an icon by offering coffee shops where people could meet, talk and share a coffee – while possibly reading, or checking their email. One of the most famous situation comedies of recent past was "Friends", a show in which people regularly met in a coffee shop not unlike Starbucks. People could order a wide range of different coffee drinks, and the ambience was intended to reflect a more European environment for meeting to drink and discuss. This combination of product and service found mass appeal, and rapid growth. Meanwhile, the previous CEO rapidly moved to seize the value of this appeal by stretching the brand into grocery store sales, coffee on airlines, liquor products, music sales, various retail items, some food (prepared sandwiches and high-end snacks, mostly), artist representation and even movie making. He knew there was a limit to store expansion, and he kept opening White Space to find new business opportunities.
But then Mr. Schultz, considered the "founding CEO" (even though he wasn't the founder) came roaring back – firing the previous expansion-oriented CEO. He claimed these expansion opportunities caused Starbucks to "lose focus". So he quickly set to work cutting back offerings. This led to layoffs. Which led to closing stores. Which led to more layoffs. The company fast went into a tailspin while he "refocused."
Meanwhile competitors started having a field day. Dunkin Donuts launched a campaign lampooning the drink options and the special language of Starbucks, appealing for old customers to return for a donut – and get a latte too. And McDonald's, after years of study, finally decided to roll out a company-wide "McCafe" in which McDonald's could offer specialty coffee drinks as well. While Starbuck's CEO was rolling backward, competitors were rolling forward – and in the case of McDonald's rolling like a Panzer tank.
Now, with a big recession in force, McDonald's is making hay by siezing on its long-held position as a low cost place. Like Wal-Mart, McDonald's is in the right place for people who want to seek out brands that represent "cheap." With sales up in this recession, the company is now launching a new program to highlight its McCafe concept directly aimed at trying to steal Starbucks customers (readarticle here).
So, here's Starbucks that has "repositioned" itself back as strictly a "coffee company". And the company has been spiraling downward for over a year. And the world's largest restaurant company has its sites set right on you. What should you do? Starbucks has decided to launch a "value meal" (read article here). Starbucks is going to go head-to-head with McDonald's. Uh, talk about walking in front of a truck.
Far too often company leadership thinks the right thing to do is "focus, focus, focus" then define battles with competitors and enter into a gladiator style war to the death. And that is just plain foolish. Why would anyone take on a fight with Goliath if you can avoid it? At the very least, shouldn't you study competitors so you compete with them in ways they can't? You wouldn't choose to go toe-to-toe when you can redefine competition to your benefit.
But that is exactly what Starbuck's has done. Starbucks spent its longevity building a brand that stood for being somewhat "upmarket." You may not be able to afford a Porsche, but you could afford a good coffee in a great environment. Sure, you might cut back when the purse is slim, but you still know where the place is that gave you the great, good-inside feeling you always got when buying their product or visiting their store. Now the CEO of that company has taken to comparing the product, and the stores, to the place where kids are jumping around in the play pit – and you can smell $1.00 hamburgers cooking in the background. He's decided to offer values which compare his store, where you remember the cozy stuffed chairs and the sounds of light jazz and the smell of chocolate – with the place where you sit in plastic, unmovable benches at plastic, unmovable tables while listening to canned music bouncing off the tile (or porcelain) walls where you can wipe down everything with a mop.
You study competitors so you can be fleet-of-foot. You want to avoid the bloody battles, and learn where you can use strengths to win. Instead, Starbucks' CEO is doing the opposite. He has chosen to go head-to-head in a battle that can only serve to worsen the impression of his business among virtually all customers, while tacitly acknowledging that a far more successful (at this time) and better financed competitor is coming into his market. His desire to Defend his old business is causing him to take actions that are sure to diminish its value.
Let's see, does this possibly remind you of — let's see — maybe Marc Andreeson's decision to have Netscape go head-to-head with Microsoft selling internet browsers? How'd that work out for him? His investors? His employees? His vendors?
Studying competitors is incredibly important. It can help you to avoid bone-crushing competition. It can identify new ways to compete that leads to advantage. It can help you maneuver around better funded competitors so you can win – like Domino's building a successful pizza business by focusing on delivery while Pizza Hut focused on its eat-in pizzerias. But you have to be smart enough to realize not to try going headlong into battle with competitors that can crush you.
