by Adam Hartung | Feb 8, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership
General Electric's (chart here) future earnings and valuation were recently lowered by an analyst at J.P. Morgan (read article here). Reviewing the difficulties facing GE he commented, "Former [Chief Executive Jack] Welch built a culture of earnings management that was unsustainable." One of the few times I've ever heard an analyst make excuses for management. Unfortunately, he could not be more wrong. Investors have every reason to expect GE's earnings growth to continue.
There is no doubt that the real estate bust has led to lower consumer spending, as well as big troubles for banks struggling with reserve requirements as they mark down loans. There is a "wall of worry" among consumer and business spenders alike. Yet, GE's task is to find ways to grow – even in the face of market challenges. When companies fall into a growth stall they have only a 7% chance of ever again growing at a mere 2%.
At GE we're seeing first stages of a growth stall. Why? Despite the very aggressive culture at GE, when Mr. Immelt replaced Mr. Welch he did not maintain the level of Disruption and White Space that his predecessor maintained. For whatever good reasons he had, Mr. Immelt steered GE on a course that was more predictable – and far less likely to make hard turns and hold leaders accountable. GE was very strong, and the company could continue to build on past strengths. And doing so, Mr. Immelt sustained GE largely by Defending & Extending historical practices. Along the way, acquisitions and divestitures were very predictable actions – not openings into new markets that could develop a new Success Formula.
Then the markets shifted. Very hard. And a long-term GE business called GE Capital was suddenly in a lot of trouble. This was not entirely unpredictable – but GE Capital had fallen into Defending & Extending its old business rather than really assessing what might happen. They had real estate investments, and complex hedging products that made real estate losses worse. GE Capital's reserves began disappearing overnight. Simultaneously, NBC was seeing declining revenue as ad demand fell through the floor. Again, not unpredictable given the inroads Google was making in the ad market since 2002. But NBC had fallen into believeing it could Defend & Extend its traditional business, rather than use scenarios to point out the potential shift of advertisers to the web. Even though Mr. Buffet at Berkshire Hathaway jumped in with financing, the reality was that GE had not prepared for the scenario unfolding. By slowing its Disruptions and White Space, GE fell into the same problems many of its other big company brethren fell into. Something the company had avoided under "Neutron Jack" who kept the company eyes firmly on the future while avoiding complacency in existing businesses.
Part of what made GE the incredible earnings machine it was under Mr. Welch was its extensive scenario planning which led the company to get out of businesses, and get into new ones. Under Mr. Welch GE implemented Disruptive techniques like focusing on market share (#1 or #2 was one Disruptive technique) or implementing Destroy-Your-Business.com teams to prepare for internet-based competition. But under Mr. Immelt GE did far less changing of its businesses. GE remained largely in industrial businesses, it's financial business and traditional media. Although it had extensive business interests in India, GE itself was not deeply involved in new internet-based or information-based businesses. It spun out its biggest IT business (GENPAC), reaping a huge reward which the company mostly invested in additional industrial businesses - like water production.
GE is a great company. It's the only company to be on the Dow Jones Industrial Average since the index was created. But not even GE can escape market shifts. GE was one of the first to pick up on the shift to globalization and was an early investor in offshore operations. But the last few years GE's fortunes have stymied as the company spent more energy Defending & Extending its old businesses instead of doing more in new markets. No company, of any size or age, can afford to depend on its old businesses. All businesses must prepare to compete in the future, on the requirements of future customers and against future competitors willing to maximally leverage current and developing opportunities for improvement via technology, business model or any other factor.
GE has a lot of resources, and a long-term culture of Disruption and using White Space. GE has the built-in skills to attack its old Lock-ins, find competitive opportunities and rapidly gear itself in the direction of growth. And that's what GE needs to do. Some analysts are worried that GE may have to reduce its dividend – and well GE should!!! When markets shift as rapidly as has happened this last year, its more important to develop new market opportunities than Defend a dividend payout. GE needs to move quickly to re-establish itself in growth markets for products and services that can push GE into the Rapids and pull the company out of this growth stall. Right now, investors should be demanding that Mr. Immelt act more like Mr. Welch, and push hard for Disruptions that open new White Space projects. That Mr. Immelt is on Mr. Obama's new business economic team (read article here) is not important to investors, employees and suppliers. Right now, all hands and minds need to be focused on finding new markets to regain growth for GE.
by Adam Hartung | Feb 5, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Quotes, Web/Tech
Dell had a tough day Thursday when J.P.Morgan downgraded the stock to the equivalent of a sell (read article here). The stock continues its relentless slide – despite the return of Mr. Dell as CEO (chart here). Some quotes:
- "Our downgrade … focuses squarely on the potential that Dell's PC exposure..could force the company to seek revenue offsets" interpretation – revenues should go down
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"looking for revenue from other sources, Dell could face new costst and competition that could destabilize margins and cause the company to dip into its cash reserves." interpretation – entering new markets isn't free, and new competitors will make the road tough so expect Dell to go cash negative
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"Dell gets around 60% of its total revenue from PC sales, which is an example of how exposed the company is to a market that is widely expected to shrink this year…PC unit shiptmets to fall this year by 13.5% from 2008" interpretation – this is primarily a one product company and that product is not going to grow
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"the enterprise replacement cycle … could be deferred to next year … Dell will be hard-pressed to maintain its profit margins this year as the company faces more-entrenched consumer-market competitors in Acer and Hewlett-Packard" interpretation – Dell sells mostly to companies, who are not replacing PCs, and in the consumer market Dell will find tough sledding competing with Acer and HP
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"Dell is on track with its plan to cut $3billion in costs by 2011" interpretation – Dell is cutting costs, not growing revenue
To steal from an old Kentucky Fried Chicken ad "Dell did one thing, and did it right." Dell's Success Formula worked really well, and the company grew fantastically well as it improved execution while the corporate PC market was growing. But the market shifted. Dell had not developed any White Space to enter new markets, so it was unprepared to keep growing. When revenue growth slackened, the company did not Disrupt its Success Formula, but instead kept trying to do more, better, faster, cheaper. And lacking revenue growth opportunities, the company is slashing costs in its effort to Defend its bottom line and old business model. And all that has resulted in another downgrade – and a company worth a lot less than it was worth before. Just as you would expect for a company that fell out of the Rapids and into the Swamp.
by Adam Hartung | Jan 28, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
In a recent presentation I told the audience that they had quit printing newspapers in Detroit during the week. The audience said they weren't surprised, and didn't much care. The other day I asked a room full of college students when the last time was they looked at a newspaper (not read, just looked) – and not a single person could remember the last time. In Houston I asked two groups for the headline of the day that morning – not a single person had looked at the newspaper, and none in the group subscribed to a newspaper. Even my wife, who used to demand a Wednesday newspaper so she could receive the grocery ads, asked me why we bother to subscribe any more because she now gets the ads in the mail. This wholly unscientific representation was pretty clear. People simply don't care much about newspapers any more.
So, if you had $100 bucks to invest, and you had the following options, would you invest it in
- A professional baseball team (like the Boston Red Sox or Chicago Cubs)?
- A manhattan skyscraper?
- A newspaper?
That is exactly the question which is facing the New York Times Company (see chart here), and their decision is to invest in a newspaper. In fact, they are selling their interest in the Boston Red Sox and 19 floors in their Manhattan headquarters so they can prop up the newspaper business which saw ad revenue declines of greater than 16% – and classified ad declines of a whopping 29% (read article here). (Classified ads are for cars, lawn mowers, and jobs – you know, the things you now go to find on Craigslist.com, ebay.com, vehix.com and Monster.com and aren't likely to ever spend money on with a newspaper.)
The value of New York Times Company has dropped 90% in the last 5 years – from $50 to $5. The decline in advertising is not a new phenomenon, nor is it related to the financial crisis. People simply quit reading newspapers several years ago, and that trend has continued. Simultaneously, competition for ads grew tremendously – such as the classified ads described above. Corporate advertisers discovered they could reach a lot more readers a lot cheaper if they put ads on the internet using services from Google and Yahoo! There was no surprise in the demise of the newspaper business.
At NYT, the smart thing to do would be to sell, or maybe close, the newspaper and maximize the value of investments in About.com and other web projects (which today are only 12% of revenue) as well as Boston Sports (owner of the Red Sox) and hang on to that Manhattan property until real estate turns around in 5 years (more or less). Why sell the most valuable things you own, and put the money into a product that has seen double-digit demand and revenue declines for several years?
Of course, Tribune Company isn't showing any greater business intelligence. Management borrowed far, far more than the newspaper is worth 2 years ago through an employee stock ownership plan (can you understand "good-bye pension"?). So last week they sold the Chicago Cubs. For $900million. Tribune bought the Cubs, including Wrigley Field, 28 years ago for $20million. That's a 14.5% annualized rate of return for 28 consecutive years. Not even Peter Lynch, the famed mutual fund manager, can claim that kind of record!
Through adroit management and good marketing, they modernized the Wrigley Field assets and the Cubs team – and without ever winning the World Series drove the value straight up. As fast as people quit reading the Chicago Tribune newspaper they went to Cubs games. Who cares if the team doesn't win, there's always next year. And unlike newspapers, there aren't going to be any more professional baseball teams in Chicago (there are already two for those who don't know - Chicago's White Sox won the World Series in 2005). And they aren't building any additional arenas in downtown Chicago to compete with Wrigley Field. Here's a business with monopoly-like characteristics and unlimited value creation potential. But management sold it in order to pay off the debt they took on to take the newspaper private.
Defending the original business gets Locked-in at companies. Long after its value has declined, uneconomic decisions are made to try keeping it alive. Smart competitors don't sell good assets to invest in bad businesses. They follow the capitalistic system and direct investments where their value can grow. The New York Times may be a good newspaper – but who cares if people would rather get their news from TV and the internet – and they don't read newspapers "for fun?" When people don't read, and advertisers can get better return from media vehicles that don't have the printing and distribution costs of newspapers, what difference does it make if the outdated product is "good?" If you think the New York Times Company is cheap at $5.00 a share, you'll think it's really cheap in bankruptcy court. Just ask the employee shareholders at Tribune Company.
by Adam Hartung | Jan 27, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lifecycle, Web/Tech
Last week was quite a contrast in tech results. Google announced it had hired 99 new employees in the fourth quarter, but was planning to lay off 100. Not good news, but a veritable growth binge compared to Microsoft - that announced it was laying off 5,000 from its Windows business. To put it bluntly, people aren't buying PCs and that's the focus of all Microsoft sales. As the PC business stagnates – not hard to predict given the shift to newer products like netbooks, Blackberry's and iPhones - revenues at Microsoft have stagnated as well.
So now the pundits are predicting that Microsoft's weakness indicates an acquisition of Yahoo! is in the offing (read article here). The story goes that with things weak, Microsoft will buy Yahoo! to defend its survivability. Not dissimilar to the logic behind Pfizer's acquisition of Wyeth.
But does this really make sense? Microsoft is fully Locked-in to a completely outdated Success Formula. Mr. Ballmer has shown no ability to do anything beyond execute the old monopolistic model of controlling the desktop. Only a massive Disruption by founder Bill Gates kept Microsoft from falling victim to Netscape in the 1990s. But there hasn't been any White Space at Microsoft, and year after year Microsoft is falling further behind in the technology marketplace. Now the growth is gone in their technology. It's just a "cash cow" that is producing less cash every year. Microsoft is a boring company with boring management that has no idea how to compete against Google. They would strip out whatever market intelligence Yahoo! has left in an effort to turn the company into Microsoft. There would be nothing left of value, and a lot of cash burned up in the process.
Why shouldn't Yahoo! buy Microsoft? Google is the leader in search and on-line ad sales. The closest competitor is Yahoo!, which is so far behind it needs massive cash and engineering resources to develop a competitive attack. Yahoo! has a new CEO with the smarts and brass to Disrupt things and create a new Success Formula. Yahoo! could take advantage of the cash flow from Microsoft to develop new products, possibly products we've not thought of yet, that could create some viable competition for Google. We don't need another Microsoft, but we do need another Google! Why shouldn't Yahoo! take over the engineers and technical knowledge at Microsoft, as well as distribution, and use that to develop new solutions for web applications from possibly search to who knows what! Maybe something that moves beyond the iPhone and Blackberry!
What's the odds of this happening? Not good. That would defy conventional wisdom that the company with all the cash should win. But we all know that as investors we don't value cash in the bank, we value growth. So the company with growth opportunities, and the management to invest in new solutions, should be the one that "milks" the "cash cow." The growing company should be cutting the investment in old solutions that are near end-of-life (like Windows 7), and putting the money into growth programs that can generate much higher rates of return. By all logic of finance, and investing, Yahoo! should buy Microsoft. It's Ms. Bartz we need running a high tech company, shaking things up as the underdog ready to use White Space to develop new solutions that can generate growth. Like she did when beating Calma and DEC. Not the CEO best known for his on-stage monkey imitation and no idea how to generate growth because he's so committed to Defending & Extending the old cash business — completely missing every new technology innovation in the last decade.
Yahoo! has a chance of being a viable competitor. Yahoo! has a chance of competing against Google and pushing both companies to new solutions making the PC an obsolete icon of the past. But if Microsoft buys Yahoo!, it will do nobody any good.
by Adam Hartung | Jan 26, 2009 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Do you remember when Home Depot was a Wall Street – and customer – darling? Home Depot was only 20 years old when its incredible growth story vaulted it onto the Dow Jones Industrial Average 9 years ago, replacing Sears. Unfortunately, that youthful ascent turned out to be the company crescendo. Since peaking in value within a year, Home Depot has lost more than 2/3 of its value (see chart here). Things have not been good for the company that "changed the rules" on home do-it-yourself sales.
Along the way, Home Depot changed its CEO a couple of times. And it opened some White Space type of projects. But today, the company announced it was shutting down those projects (Expo Design Centers, YardBIRDs, HD Bath) cutting 5,000 jobs - and an additional 2,000 jobs in a "streamlining" efforts (read article here). In the process, it affirmed revenue will decline 8% this year while earnings per share will drop 24%.
Amidst this background, the stock rose 4.5%.
Home Depot is a company with a very strong Success Formula. That Success Formula met the market needs so well in the 1980s and 1990s that the company excelled beyond all expectations. But like most companies, Home Depot was a "one trick pony." It knew how to do one thing, one way. Then in the early 2000s, competitors started catching up. And Home Depot didn't have anything new to offer. The market started shifting to competitors with lower price – or competitors with even better customer service – leaving Home Depot "stuck in the middle" decent at both price and service not not best at either. And with nothing really knew to attract customers.
So Home Depot launched Expo Design Centers. It was leadership's effort to go further upmarket – to sell even higher priced home items. This was a failed effort from the start:
- Leadership did not tie its projects to any committed scenario of the future where Expo would create a leadership position. There was no scenario planning which showed a critical need for Home Depot to change.
- Expo did not learn from competitors, nor did it set any new standards that exceeded competitors. KDA and others had long been doing what Expo did – and even better! Rather than obsessing about competitors in order to realize where Home Depot was weak, and finding new ways to grow the market, Home Depot decided to launch its own idea without powerful competitive information.
- Thirdly, Home Depot did not Disrupt at all. Although Expo existed, it was never considered important to the company future. Leadership never said it needed to do anything different, nor that it felt these new projects were critical to company success. Instead, leadership let all the employees believe these projects were merely trial balloons with limited commitment.
- And, for sure, Expo and other projects did not meet the real criteria of White Space because they lacked the permission to violate Home Depot Lock-ins and the resources to really be successful.
Now, years later, with the company in even more trouble, Home Depot is closing these stores. It appears management is taking a page from Sears – the company they displaced on the DJIA – which closed its hardware and other store concepts to maintain its focus on traditional Sears. And we all know how that's worked out. Leadership is wiping out growth opportunities to save cost, in order to Defend its now poorly performing Success Formula, rather than using them to try developing a solution for declining revenues and profits. So easy to simply quit. Instead of re-orienting the projects along The Phoenix Principle to try and fix Home Depot, leadership is killing the growth potential to save cost with hopes that some miracle will return the world to the days when Home Depot grew and made above-average returns.
What do Home Depot leaders want employees, investors and vendors to anticipate will turn around this company? Even though Home Depot was a phenomenal success, once it hit a growth stall it fell amazingly fast. Not its historical growth rate, nor its size, nor its reputation was able to stop the ongoing decline that befell Home Depot once it hit a growth stall. (By the way, 93% of those companies that hit a growth stall follow the same spiraling downward path as Home Depot). As Sears has shown, a retailer cannot cost-cut its way to success. Refocusing on its "core business" will not return Home Depot to its halcyon days. And these cuts further assure ongoing company decline.
by Adam Hartung | Jan 25, 2009 | Defend & Extend, In the Swamp, Leadership, Science
Two weeks ago I blogged about R&D layoffs at Pfizer (chart here), and warned that all signs were indicating Pfizer was nearing really big trouble because it had missed the boat on new technologies as it road out its patent protection looking for new ways to extend its outdated Success Formula.
Now we hear rumors that Pfizer is planning a mega- acquisition by purchasing Wyeth (chart here) for some $65B (read article here). That's about 3 times revenue for a company growing at less than 10%/year. This acquisition will most likely keep Pfizer alive – but it's benefits for shareholders will probably be nonexistent – and probably a negative. And the impact on employees is almost sure to be a net loss.
Pfizer missed the move to "biologics" – which is the term for the new forms of disease control products that use genetics, bio-engineering and nano-technology as their basis rather than a heavy reliance on chemistry and pharmacology. As a result, its new product pipeline has not met company growth needs. So now that Pfizer is buying a company with significantly biologic solutions, Pfizer leadership is sure to argue that it is filling its pipleline gap with the new solutions and all will be good going forward.
But the reality is that there are much cheaper ways for Pfizer to get into biologics than spending $65billion – a big chunk of it cash – on a huge acquistion. With banks stopped and investors realing, there are dozens of projects in universities and small companies that are begging for funding. These range from invention stage, to well into clinical trials. If Pfizer wanted to become a successful company it would
- Tell investors and customers its scenario for the future, with insights to how the company sees growth and the investments it needs to make
- Telling investors and employees the competitors that are most important to watch, and how they plan to deal with those competitors
- Disrupting its old Success Formula. Leadership would make sure all employees and management are stopped, and recognize the company needs to make a serious change if it is to catch up with market shifts and regain viability
- It would invest in multiple solution areas and multiple projects, and the allow them to operate independently as White Space where Pfizer could learn how to modify its Success Formula in order to regain growth and success in the future.
This clearly is not what is happening at Pfizer. Instead, the company is planning to take a big cash hoard, which if it doesn't want to invest in White Space it could return to investors, and spend it on a huge acquisition. We all know that almost all big acquisitions do not achieve desired goals, and that the buying investors get the short end of the stick as the selling investors achieve a premium. Why? Because the buying leaders, like those at Pfizer, are without a solution and looking for the acquisition to cover over past sins and make them look smart and powerful. So, driven largely by ego, they overpay to get a company as if that makes them the "winner."
But what happens? We can expect that Pfizer will find out it has to do something drastic to make the overpayment potentially work, and staff cuts will quickly ensue. Probably across-the-board employee cuts in the name of "synergy", but which weakens the acquired company. Then, as it absorbs Wyeth, Pfizer will push to force its old Success Formula onto Wyeth – after all, Pfizer is the "winner". But Pfizer needed Wyeth, not vice-versa. As it cuts cost, it cuts into the value they ostensibly paid for. Many of the best at Wyeth will go elsewhere to continue competing as they know produces better results. The value of the acquisition will go down as Pfizer "integrates" the acquisition, rather than raise it.
But in a year, Pfizer will declare victory, no matter what. Pfizer's revenue has been flat for at least 4 years (stuck in the Swamp) at about $48B. Wyeth's revenue has been growing at about 10%/year and is about $22B. So in a year, Pfizer can say "Revenues are now $65B, an increase of 30%". Of course, the reality would be that revenues were down 7%. Of course they will brag about their integration project, and brag about various cost cuts implemented to streamline "execution." Pfizer leadership will say they made the right move, even if all they did was use up a cash hoard in order to delay changing the company. That, by the way, is what I call "financial machination". If you can't dazzle the investor with brilliance, make a big enough acquisition so you can baffle them with bulls***.
If you're a Wyeth investor, take the money and run. You don't want to stick around for a takeover destined to lower total value and reduce the excitement of new R&D programs and medical solutions. Go find alternative companies that need cash, and help them move forward with their new solutions. If you're a Pfizer investor, don't be fooled. If the analysts cheer the takeover, and the stock pops, it's unlikely you'll get a better time to sell. The leadership has demonstrated the last 5 years, as growth has been nonexistent and the equity value has steadily declined, that they don't know how to regain growth. This acquisition is not changing the leadership, managers nor Success Formula of Pfizer that has long been producing lower returns. This acquisition is the latest in Defend & Extend moves to protect the outdated Success Formula. If this gives you an opportunity to get out – take it! Within 2 years the "new" Pfizer will be a lot more like the old Pfizer than Wyeth.
by Adam Hartung | Jan 22, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
Microsoft announced today it intends to lay off 5,000 workers (read article here). This action, included in its announcement that Microsoft is going to miss its earnings estimate, spooked the market and is blamed for a one-day market dip (read here). The company's equity value, meanwhile, dropped to an 11-year low – out of its 33 year life (see chart here). Of course, the blame was placed on the weak economy.
But we all know that Microsoft has been struggling. The Vista launch was a disaster. A joke. Techies resoundingly ignored the product – as did their employers. Because Vista was so weak, Microsoft is looking to launch yet another operating system – just 2 years after Vista was launched. Incredible, given that Vista was more than 2 years late being launched! Additionally, in an effort to increase interest in Windows 7, the new product, Microsoft has dramatically increased the availability of beta versions for review (read here).
Microsoft was once the only game in town. But over the last few years, Linux has made inroads. Maybe not too much on the desktop or laptop, but definitely in the server world. The hard core users of network machines have been finding the cappbilities of Linux superior to Windows, and the cost attractive. Additionally, netbooks, PDAs and mobile phones are gaining share on laptops every day. Customers are finding new solutions that utilize network applications from companies such as Google are increasingly attractive. By laying off 5,000, Microsoft is not addressing its future needs – to remain highly competitive in operating systems and applications against new competitors. It is retrenching. This doesn't make Microsoft stronger. Rather, it makes Microsoft an even weaker target for those who have the company in their sites.
Why should anyone be excited about a company that is willing to cut 7.5% of its workforce while it is losing market share? Sure, the company is still dominant in many segments. But once the same could be said for Digital Equipment (DEC), Wang, Lanier, Compaq, Silicon Graphics, Sun Microsystems, Cray and AT&T. All fell victims to market shifts making them irrelevant. Not overnight – but over time irrelevant, nonetheless.
It's hard to imagine, today, a world without Microsoft domination. After all, this was a company sued by the government for monopolistic practices. Yet, we know that even market domination does not protect a company from market shifts. Microsoft's layoffs demonstrate a company planning from the past – it's former dominance – rather than planning for the future. Many industry leaders are already seeing a technology future far less dependent upon Microsoft. Shifting software solutions as well as changing uses of platforms (largely the declining importance of desktop and laptop Wintel machines) is making Microsoft less important.
Trying to Defend & Extend its past glory is not serving Microsoft well. Once, any changes in its operating system was front page news. Now, a new release struggles to get attention. Microsoft is at great risk – and its layoffs will weaken the company at a time when it cannot afford to be weakened. When Microsoft most needs to be obsessing about competitor's emerging strengths, and using Disruptions to open White Space where it can put employees to work on new solutions, Microsoft is cutting back and making itself more vulnerable to competitors now surrounding on all fronts. This should be a big concern for not only those being laid off, but those remaining as employees and those investors who have already seen a huge decline in company value.
by Adam Hartung | Jan 14, 2009 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership
Yesterday Yahoo! announced it was replacing its old CEO with Carol Bartz, former CEO at Autodesk. Interestingly, most analysts aren't very excited – because they don't think Ms. Bartz brings the right experience to the challenge (read article on analyst reaction here.) The complaint is that Ms. Bartz is not steeped in consumer goods or advertising experience, so she's not the right person for the significant challenges facing Yahoo!
Yahoo! does not need "more of the same." Yahoo! needs to adapt to the technology requirements necessary to succeed in on-line ad placement. Google is way, way out front in internet advertising sales, and there's not a single executive at Google with experience in ad sales or consumer goods! Google has changed the game in advertising largely because it has not been Locked-in to old notions about advertising, and has instead created new competitive approaches leaving old players in the dust. And largely because its executives have eschewed historical advertising lore in favor of creating new solutions.
Yahoo! doesn't need someone with advertising experience. Yahoo! needs someone that will Disrupt the organization and change its Success Formula. And for this, Ms. Bartz may well be exactly the right person. While she led Autocad the company which changed the world of CAD/CAM (Computer-aided-design/computer-aided-manufacturing software), and in the process brought down a large GE division (Calma) and in the end crippled DEC (Digital Equipment Corp.) which was extremely dependent on CAD/CAM workstation sales. Autocad was supposedly a "toy" running on cheap PCs, but it became the software used by many engineers that was a fraction of competitor's cost and operated on machines a fraction of those needed to run competitor software.
In the process, Ms. Bartz became known as "one tough cookie." A CEO who understood that competitors gave nothing easily, and it takes a very tough smaller competitor to unseat market leaders. Year after year she led a company that brought forward new products which challenged competitors – all better financed, with larger market share and long lists of large, successful customers. And after 15 years or so Autocad emerged as the premier competitor. Isn't that the experience most needed by Yahoo!?
Meanwhile, one of the old leaders in ad sales – Chicago Tribune – is now changing its format from broadsheet to tabloid (read article here). For those not steeped in newspapers, broadsheets (like Wall Street Journal or USAToday) have long been considered "quality" journals, while tabloid format (like a magazine) has been considered a lower quality product. Although this switch is a cost saver, and any implication on journalistic quality is largely symbolic, the reality is that Tribune Corporation has slashed its journalistic staff in Chicago, L.A. (L.A. Times) and other markets to a shadow ghost of the past. In just a few years, a leading news organization has become almost irrelevant – and left two of America's largest cities with far too little journalistic oversight. Now it's trying to save itself into success (read article here).
Yahoo! is changing its CEO, and appears to be putting in place someone ready to Disrupt and install White Space. Tribune Corporation has slashed cost, slashed cost, slashed cost, increased its debt, and turned itself into a shell of what it used to be. Now the company is taking actions to lower paper cost – in an effort to again save a few more pennies. After watching its local classified advertisers go to CraigsList.com, and its display ad customers go to Google, its new leader, Sam Zell, remains unwilling to Disrupt and invest in White Space to become an effective internet news organization. Today even HuffingtonPost.com is able to offer more news on more topics faster than any news properties at Tribune Corporation to an avid internet news readership.
Following the Tribune lead, Gannett – publisher of USAToday – has announced it intends to force everyone in the company to work for one week for no pay (read article here). Apparently not even color pictures and feel-good journalism can attract advertisers. Probably because not even hotel guests care any more about getting a newspaper. Not when they log on to the wireless internet upon awakening to check e-mail and news alerts before they even open the room door to go to breakfast. Gannett will have no more success trying to save its business by forcing employees to work for free than Tribune has had with its cost cuts. Ignoring market shifts is not successfully met by trying to do more of the same cheaper.
What Gannett, Tribune Corporation and other news organizations need is their own Carol Bartz. Someone who may not be steeped in all the tradition and experience of the industry – but knows how to Disrupt the status quo and use White Space to launch new products and move toward products customers want.
by Adam Hartung | Jan 13, 2009 | Defend & Extend, In the Swamp, Leadership, Lock-in
Today one of the world's leading pharmaceutical companies announced it was cutting R&D staff (read article here). This is a very big deal because pharmaceutical companies rely on new drugs (new innovations) to extend their Success Formulas. American drug companies rely on big R&D investments, followed by big FDA approval investments. These big investments are seen as "entry barriers" that smaller companies cannot overcome, and thus provide high profits to the big drug companies. That's the core of their Success Formulas – which have been huge profit producers for more than 4 decades.
So what does it say when Pfizer lays off R&D workers? Clearly, there's less faith in the company developing the new products which will pay off. Thus, the old "entry barrier" is clearly not as valuable as it once was. But do you think we're on the brink of no new medical solutions?
Hardly. Today, genetic drug programs and other solutions are being developed and evaluated at greater numbers than ever. Only, you don't need a multi-billion dollar R&D center to develop these solutions. With the explosive knowledge expansion in bio-engineering and nano-technology breakthroughs are happening in universities, university spin-offs and start-ups of former pharmaceutical engineers. The old approach to disease treatment is reaching diminishing returns, while new approaches (namely genetic drug therapies and mechanical approaches such as nano-tech) are making rapid progress. The old "S" curve is nearing its peak, while the emerging "S" curve – that started in the 1980s with Genentech – is coming of age and entering the fast upward slope of the new "S" curve.
But unfortunately, Pfizer, Merck, Bristol Meyers and most other historical drug companies have missed this shift. They kept investing in the "traditional" (substitite "old") approach even as new approaches showed growing promise. They kept hiring M.D.s, pharmaceutical Ph.Ds, chemists and biologists. Meanwhile, bio-engineers and nano-engineers were making faster progress with new approaches. Of course initially regulators were skeptical of these new approaches, forcing additional testing — and reinforcing sustaining the old Success Formulas in the traditional "drug" companies. But it was clear to those on the leading edge of medicine that these new approaches were offering all new baselines for improvement, and possibly cures.
Now, Pfizer is (and its dominant competitors, to be sure) are in a tough spot. They hung on to the old Success Formula a really, really long time. In fact, almost 3 decades after alternative solutions began showing promise. Each year, the drugs they had protected by patents (thus proprietary) were coming closer to commercial replication and lower profitability. But each year, they redoubled their efforts in the traditional approach. Now, debt is hard to come by – and traditional solutions are even harder. But they are woefully short on the ability to offer solutions using the latest and greatest technology.
Unlike most companies, drug companies make most of their money from patented products. That means they make huge profits while there is no competition – but see dramatic (80%+) price erosion within days of losing patent protection. Thus, more than most companies, they can literally "peer over the edge" into the abyss of decline.
Pfizer just admitted it is a boat on the upper Niagra, in Canada, looking over the falls. It stayed way too long on its leisurely approach, and did noy prepare itself for the next step. On the other side are aggressive new competitors with new technology, new solutions and vastly superior results. But Pfizer has not prepared to be part of that new marketplace. So they are cutting specialized scientists in an effort to cut costs and protect profits. A bit like throwing the elderly overboard as you see your boat approaching the falls in an effort to slow your approach to the brink.
To survive long-term busineses have to evolve to new technologies. They have to overcome their dedication to old technologies and solutions in order to invest in new approaches. The have to invest in White Space which brings these new answers to the forefront, and attracts the traditionalists to move into the new market space. But unfortunately Pfizer has delayed these investments far too long. Cost cutting cannot save a Pfizer (or Merck, Bristol-Meyers, or Ely Lilly, etc.). When technology shifts, like it did from typewriters to PCs, the move happens fast and the fortunes of major players can shift dramatically (anyone remember Smith Corolla?). Pfizer is admitting it's unlikely to make the technology shift, and investors better pay close attention to the other industry leaders.
There's a new cowboy in town, he's showing he's one heck of a good shot, and it's time to pay close attention. The old sheriff may be closer to unemployment than he thinks.
by Adam Hartung | Jan 11, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lifecycle
Do you remember when Jim Cramer of Mad Money fame told his viewers to buy Sears Holdings because "his good friend" Ed Lampert, hedge fund manager, was going to make them all rich? That was in back in 2005 and 2006. For many months analysts, investors, vendors and customers watched what was happening at Sears, wondering what Mr. Lampert was going to do. In the end, he followed a very traditional turn-around strategy, slashing employment, benefits, pay and inventory – and Sears became a much smaller business. But the value of having friends hosting TV shows was clear. Sears went from $30 to nearly $200/share on the strength of Cramer's chronic recommendation. As it became clear Sears was getting smaller with no benefit to investors, and no strategy to grow, the value crashed back to $30/share in 2008 (see chart here).
Lately, some shareholders are bidding Sears value up again. Largely entirely due to additional cost cuts, store closings and inventory sell-downs, Sears profits exceeded expectations (read article here). At the same time, senior leaders admit Sears has "a long way to go catching up to competitors that have been more consistent in merchandising and driving traffic to their stores." Creating profits by financial engineering and asset sales has not made Sears a more competitive retailer, and not likely to grow. Investors will be well served to ignore Jim Cramer, and recognize the fundamental decline Sears has undergone – and is continuing.
This same week, Walgreen (chart here) announced it was cutting 1,000 management jobs (read article here). As I've previously blogged, Walgreen has to figure out how to grow revenues in its existing stores – not just open new stores. The old Success Formula has run out of gas, and Walgreen needs a new one. But we don't see any plans for how it intends to open White Space and find that new Success Formula. Instead, only cost cuts have emerged, intended to improve profits if not revenue growth. Not a good sign.
And Best Buy (chart here)is finding that even as its #1 competitor, Circuit City, slowly goes bankrupt it can't grow revenues or profits (read article here.) Many were hopeful that the failure of Circuit City would create an opportunity for Best Buy. But faster than Circuit City can shut stores, new competitors are filling the gap. Not only are general merchandisers, like Wal-Mart, trying to sell similar products – but independents (like Abt and Grant's in Chicago) are fighting to bring in customers with product selection and better pricing. Last month, a basic refrigerator at Grant's was half the price of a basic unit at Best Buy, and the selection of high-end products was more than twice as large at Grant's and 4 times larger at Abt.
Retailing has been hit with significant challenges from market shifts the last few months. Critically, low cost and easily available credit that financed not only customer purchases but lots of inventory is now gone. Cost and supply chain efficiency will not sustain a retailer any longer. Nor will simply opening lots of new stores, financed by low cost mortgage debt. But none of these 3 leaders have Disrupted their old Success Formulas. Instead, each keeps trying to fiddle with minor changes, hoping their size and past legacy will somehow drive new revenue and profit growth. Rather than Disrupt, all 3 keep trying to Defend & Extend the old Success Formulas with cost cutting measures.
When big market shifts happen rarely are the old winners able to maintain their leadership position. Why not? Because they react by trying to do more of the same. These Defend & Extend actions – usually cost cutting and efforts at efficiency and execution – only serve to push the business further into the Swamp, and closer to the Whirlpool. In Sears case, the company is rapidly becoming irrelevant as a retailer. Honestly, what retail analyst closely monitors sales and profits at Sears any longer? Sears is closer to the Whirlpool than most would like to admit. Walgreen and Best Buy aren't nearly as close to irrelevancy, but we can see that the are stuck in the Swamp. Lacking Disruptions and White Space to develop a new Success Formula, we can only expect mediocre (or worse) performance out of them.
So who is the frequent winner from market shifts? New competitors more closely aligned with new market conditions. We don't yet know who the biggest winners will be. Perhaps it will be on-line players. Perhaps it will be an emerging retailer that today has only a handful of stores (like Abt or Grant's). Some kind of hybrid customer distribution? Some new sort of merchandiser? New competitors will do some things very differently than the old leaders, and in so doing offer better value that more closely aligns new market needs. Look not at large, traditional names. Instead, look on the fringe at competitors you may not know well, but that are continuing to grow even as times are tough.
As we move into 2009, we must keep our eyes closely on changing market conditions. As old leaders stumble, we can expect recovery only if we see Disruptions and White Space. And this becomes a wonderful opportunity for new competitors, perhaps not well known today, to emerge with new Success Formulas poised for growth. If so, a new wave of Creative Destruction will change retailing – just as Woolworth's (now gone in both the U.K. as well as the U.S.) once did a long time ago.
