by Adam Hartung | Nov 10, 2008 | Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in
What a day this Monday is turning out to be. Circuit City files for Chapter 11 (read Reuters article here, and Marketwatch article here). Sirius radio looks like it will follow soon (read article here). And Deutsche Bank analysts are predicting GM will end up wiping out shareholders through either bankruptcy or a government bailout that will eliminate the equity (read article here). GM was trying to find a solution by merging with Chrysler, but that deal's now dead leaving Ford at risk of failure, and Chrysler in need of a partner if it is to survive (read Financial Times article here). Who's pulling the rug out from all these stalwarts of American capitalism?
Let's not forget that Circuit City was the statistically best performing company in Jim Collins' wildly popular book "Good to Great". How could a company that was considered a model for all leaders to follow decline so far, so fast? Is it worth considering that the management approach the author recommends possibly might not be as effective as promised? Mr. Collins' recommends companies figure out their approach to the market, then get everyone committed to that approach. After that, his recommendation is to leave ego at the door, and execute, execute, execute against the approach and its metrics. Those who work hard, and sacrifice, he predicts will win. So, should we conclude that Circuit City changed after he wrote his book? Did management become vainglorious? Did leaders, managers and employees lose commitment to the market approach? Did everyone quit working hard, quit sacrificing? Is that the problem in all these companies? Egotistical management lacking committed and hard working employees willing to sacrifice?
My research into hundreds of companies for "Create Marketplace Disruption" concluded just the opposite. In most instances of troubled companies, management was extremely dedicated and hard working. Examples of sacrifice were everywhere, as employees dropped bonuses and accepted pay and benefit cuts. Vendors took longer terms and lower prices while carrying inventory for their troubled customers. Customers remained loyal often right up to the point of failure. In reality, there was just as much commitment and sacrifice, hard work and effort in those that failed as those that succeeded. As Mr. Rosenzweig concludes in "The Halo Effect" these characteristics do not explain performance of winners as distinctive from losers. So, what is it?
Following best practices can oftentimes be as harmful as anything else. Companies that get into trouble consistently demonstrated commitment to Defend & Extend management, even after market shifts rendered D&E management unable to improve results. Continuing to optimize, to do more while trying to be faster and better and cutting costs in efforts to be cheaper simply did not turn the corner on performance. For example, just today a leading marketing web site is recommending that companies need to implement only tactics that are designed to optimize the existing brand and its performance while eschewing innovation (read article here). Innovation is costly and risky, they presume, so investing in wht you know is the only way to go. That same journal pointed out that all the American auto companies were focusing on cost cuts in an effort to save themselves (read article here) - when we all know the biggest problem these companies face are autos which aren't competitive with foreign products which have equal or higher quality at better pricing and often considerable advantages in fuel economy, longevity, cost of ownership and performance.
When management focuses internally, bad things happen. Focusing on how to operate better presumes there will be no market changes which alter competitiveness. The reality is that most companies falter because they miss market shifts – and the shifts cause competitors to become relatively more attractive. If management keeps trying to do what it used to do better, it misses market changes and keeps falling farther and farther behind. Simple product enhancements (product variations or simple derivatives), early cost cuts, and other short-term actions give a false sense of betterment leading to complacency – as competitors keep gaining share due to better relative market position.
The retail marketplace started shifting powerfully in the late 1990s as internet retailers changed the costs and processes for customers. Circuit City ignored these market trends far too long. The auto industry has been shifting ever since offshore competitors started gaining share in the 1980s. But the "Big 3", their employees and their vendors ignored these trends for too long. Even as offshore competitors opened facilities in America, the changed competitive marketplace was ignored as GM, Ford and Chrysler tried doing more of what they'd always done. In the end, who pulls the rug on these companies? It's the competition.
Competitors who link their Success Formula to changing markets use scenario planning to keep abreast of necessary changes and obsess about all competitors to learn what they can do to remain in front with customers. These winning competitors don't Defend & Extend some plan management creates, but instead use Disruptions to keep themselves adaptable to changing markets, and use White Space to constantly test new solutions which can keep them advantaged. The losers are the ones who keep trying to do more, better, faster, cheaper with their old Success Formula, and fall behind competitors who ignore the siren's call of optimization, focus, productivity and sacrifice in favor of adaptability and leading market trends.
by Adam Hartung | Nov 6, 2008 | In the Rapids, In the Swamp, In the Whirlpool, Leadership
Companies get into trouble when they stop developing scenarios and plan to succeed by merely Defending & Extending what they’ve always done. In the last few weeks we saw Bear Stearns and Lehman Brothers disappear because they did not prepare for market shifts. Merrill Lynch almost followed them, and may still if Bank of America (chart here) decides to change the name (now that Merrill is becoming a wholly owned subsidiary of BofA).
Companies get into trouble when they stop developing scenarios and plan to succeed by merely Defending & Extending what they’ve always done. In the last few weeks we saw Bear Stearns and Lehman Brothers disappear because they did not prepare for market shifts. Merrill Lynch almost followed them, and may still if Bank of America (chart here) decides to change the name (now that Merrill is becoming a wholly owned subsidiary of BofA). Another example popped up today when we learned the Las Vegas Sands (chart here) is on the brink of failure (read article here). As Sands management ran up the debt, it failed to consider scenarios which could have caused people to not gamble – like a recession! When you aren’t looking at the range of possible shifts, it’s easy to be blindsided. In the last year, the Sands stock price has declined from $120/share to $8. That’s an amazing $40billion loss of value! And all because it forgot to plan for market shifts.
On the other hand, let’s look at Apple (see chart here). Apple is highly dependent upon computer chips for all its devices, from the Mac to the iPhone. Originally the company was built on microprocessors from Motorola. But that changed years ago as the company adopted chips from IBM. Now Apple is using chips from Intel. In its phone products, Apple once used IBM chips but now licenses its chips designs from ARM holdings and modifies them for its own use. And recently Apple hired the former IBM chip head to a new position managing device hardware engineering (read article here).
Wow, Apple looks to be all over the board. Some accuse Apple of being a lousy partner with is chip suppliers. Or accuse CEO Jobs of being a control freak who is trying to get into the chip business. But think again:
- Apple is highly dependent on chips. If they guess wrong on the chips, and over-commit, they could end up suddenly behind competitors and in big trouble.
- How is Apple to know if its vendors will remain on top of the technology curve? If the partner slips, Apple could slip with it.
- Competitors are all around Apple with new products, including Google with its new phone and Motorola with its new commitment to the same software Google is using. They are trying different technology solutions with the hope of eclipsing Apple.
What we see is Apple looking forward, and seeing a range of potential scenarios. Any of these vendors could be dominant, or could be a flop. Additionally, Apple itself has some ideas about what could create market leading product that might eclipse the vendors. What we see is a company that is keeping its options open. Apple is using scenario planning to identify a range of potential outcomes, and it is trying its best to keep itself positioned to win regardless of which outcome occurs. It is obsessing about competitors, and keeping itself flexible to move quickly with market shifts should a competitor take an action which could jump it into the lead.
Making big bets is NOT the job of management. That’s a fool’s folley. Good leaders use scenario planning to identify a wide range of options, and work hard to keep their options open to win regardless of which scenario develops. You have to marvel at how clever CEO Steve Jobs is to position Apple for future success, and how good it is for investors that he would add someone to his top staff who can help keep all options open. This is a very good sign for Apple investors, employees and customers that Apple will remain a strong, viable competitor into the future – even as the shifts of technology threaten to whipsaw the market.
by Adam Hartung | Nov 4, 2008 | Defend & Extend, General, In the Whirlpool, Leadership
In 2004 Motorola (see chart here) was about to take off. It's radio business was continuing to grow as it launched into digital products. And its handheld cellular business was about to go nuts with the launch of a new product called Razr. A new CEO was focusing the company on the future, obsessing about competitors that were launching new products, Disrupting everything from the new product launch process to free corporate lunches and opening White Space all over to get growth going. And it worked.
But then, almost as fast as it grew, Motorola went south. Instead of continuing the new approach, Ed Zander, the CEO, became overwhelmed by a 2-pronged set of concerns. Carl Icahn started buying shares and asking to oust the CEO so he could (somehow) start cutting costs. Instead of taking on Mr. Icahn by demonstrating how his results were headed the right direction while Mr. Icahn was clueless when it comes to high-tech, Mr. Zander began cost cutting to appease Mr. Icahn. Secondly, Mr. Zander stopped pushing the scenario building, competitor obsession, Disruptions and White Space. Instead, he reacted to employee uneasiness by turning immediately to a Defend & Extend strategy, Locked-in on the Razr. New products dried up as the company just pushed harder and harder on Razr sales. The company quickly began operating as it had 8 years earlier when it slid into disarray, lousy returns and massive layoffs as the future grew murky.
Now Motorola is trying to define a new future. The plan is to split the company into 2 parts. Radio and cellular. But the problem is that the biggest, cellular, is in deeply difficult territory. Sales are down, new product launches are few and profits are gone. So the Board hired a new CEO for that business – the former Chief Operating Officer at Qualcomm. And now Crain's Chicago Business reports he's issued an internal memo with his plan (read article here). So can we expect a turnaround?
His plan involves changing his top reports. And he's cutting a line of new products being launched to save cash and "better position products for the future." He's narrowing the technology line-up toward those he believes are the most likely winners. And he's reorganizing along geographic lines. So do you think this will "fix" Moto?
There are reasons to be concerned:
- Products are being stopped from market review. In the end, White Space has demonstrated that the marketplace is much better at selecting winners than executives are. It was "getting Razr out the door" that got Moto going again – an historical problem at Motorola that loves to over-engineer everything and has been slow to new products letting competitors chew them up.
- The company is narrowing its technology use. History has shown that technology shifts can happen fast in high tech, and those companies that avoid the bets by playing the widest technology tend to make the most money the longest. Making technology bets is a quick way to turn a large fortune into a small one – and Moto doesn't have much fortune left.
- There is no Disruption in what he's doing. Changes in employees at the top, and reorganizing along traditional lines, does not attack the behavioral or structural Lock-ins. Without an attack on existing Lock-ins the organization will not do anything new. Organizations like to Defend & Extend what they've always done. Given that there's no Disruption planned, why would we believe the organization will be more productive?
- No White Space. The opposite could be implied, with the decision to stop a new product launch and to narrow the technology use. It's up to the leadership to be right, to guess the future of technologies and customer needs as well as the design of new products. Instead of White Space to develop a new Success Formula to which the company can migrate, this is an effort to have the CEO be brilliant and lead the organization into better results. Unfortunately, this approach almost always fails as Lock-in inhibits transition and the difficulties of being prescient become obvious.
I'd love to see Moto come back. But with the approach as relayed by the Chicago journalists, it appears unlikely. Perhaps a few big investors with private equity will think that a "streamlined" and "focused" Moto will be a better bet. But the fact is that only the market will decide if Moto is a good operation. And that will require having new products and services that meet changed market needs. Moto operates in a hotly competitive marketplace. It doesn't have the luxury of dictating what will work and what won't. Competitors will have more to say about its success than management will. And this approach is weak on scenario development – and absent on talking about competitors. Without Disruption and White Space, how can we expect the company to be effectively market reactive? Doesn't look good for shareholders, employees, suppliers or customers.
by Adam Hartung | Nov 3, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
Circuit City (see chart here) has announced it will close another 155 stores (see article here). Here, right before the big holiday buying season, Circuit City is contracting drastically. The company is almost out of cash, and is running into problems obtaining inventory. And with the likely demise of the company soon, it's unclear how many customers will buy from Circuit City when they can't take back items that break after the retailer is gone.
What makes this story somewhat remarkable is that Circuit City was one of the 11 companies Jim Collins profiled in "Good to Great." Not only was it one of what were considered the best 11 corporate performers in the world – it's turnaround to greatness score was the absolute highest of all the companies profiled, more than twice as high as the next best performer, and more than 3 times higher than the average "Good to Great" company. Jim is considered a management guru, who receives around $100,000 every time he gives a speech to corporate clients. "Good to Great" has been considered a corporate bible by many CEOs and other executives who have taken the stories from Mr. Collins to heart and decided his approach is the best way to great success. So to have Circuit City severely falter, and most likely fail, after only a handful of years since Mr. Collins published his book is an event worth spending some time discussing.
Despite Mr. Collins' great wealth accumulation and speaking success, he is not without detractors. Many academics have questioned the validity of his research. And in "The Halo Effect" professor Rosenzweig of Switzerland's top business school casts Mr. Collins as a fraud. Unfortunately for Mr. Collins, a review of the performance of his 11 "Great" companies demonstrates their performance since publishing the book is – at best – average. When one fails, perhaps it's worth spending some time reconsidering Mr. Collins' recommendations.
What appears true is that companies Mr. Collins likes end up in growth markets. Then, they pursue very targeted strategies which Mr. Collins recommends you not alter much nor even challenge. Mr. Collins ascribes business success in these companies, as he does in his first book about start-ups that get big ("Built to Last"), largely to dogged determination and sacrifice. He proselityzes that success is the result of hard work, dedication, and focus. And, from all appearances, once a company is into the Rapids of Growth, such actions to reinforce the Success Formula are helpful for the early leader to grow. For those who turnaround, much of their success can be ascribed to getting into a growth market and then simply doing what got them there.
But the problem with Mr. Collins' "Great" companies occurs when they lose their growth. In most cases, exactly as it happened with Circuit City, competitors figure out the Success Formula and they copy it. Additionally, lacking the significant Success Formula Lock-ins (behavioral and structural) which Mr. Collins loves and become part of the "Great" companies, new competitors more quickly implement new ways of competing which the "Great"companies ignore. In Circuit City's case, this was obvious in spades as Circuit City ignored on-line competitors which have lower cost, faster inventory turns, wider selection and lower price than traditional brick-and-mortar stores.
As a result, even Collins's "Great" companies end up falling out of the Rapids. Quickly they move into the back half of the life cycle, mired in the Swamp. Without the current of growth, which pushed them in the Rapids toward profitability, they are consumed fighting competitors. But, doing "more, better, faster, cheaper" of what they've always done simply does not make them more profitable. Competitors create market shifts which require changes in the Success Formula to continue thriving. But, with "everyone on the bus" (a favorite phrase of Mr. Collins) no one knows how to do anything new, and there's no place to try anything new. Quickly, results continue faltering and the company is sucked into the Whirlpool of failure – a prediction being made by Marketwatch.com when labeling today's Circuit City article "Circuit City Circling the Drain." Of course, it's hard to argue with Marketwatch's editors when the company value has declined from over 30 dallars per share to 30 cents per share in about 2 years!
Phoenix companies avoid this sort of fall by overcoming their Lock-ins. Something Mr. Collins never discusses. Yes, these Lock-ins help them grow during the Rapids. But all markets eventually shift. The Rapids disappear due to competitive changes. To succeed long-term companies have to Disrupt their Success Formulas by attacking Lock-in BEFORE they find themselves in the Whirlpool. And they implement White Space where they can test and develop a new Success Formula toward which the company can migrate for long-term success. Winning long-term requires more than a single turnaround into a growth market and then slavish willingness to do only one thing. Instead, it requires figuring out likely market changes with extensive scenario planning, being obsessive about competitors in order to identify new competitive changes. And then Disrupting and using White Space to constantly be reborn.
by Adam Hartung | Oct 30, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
The business press, whether print or on-line, is full of stories about lay-offs. Motorola (chart here) to cut another 3,000 jobs in its flailing handset business (article here). American Express (chart here) to cut 7,000 jobs (article here). Over the last few weeks, other announcements included 3,200 job cuts at Goldman Sachs (chart here), 5,000 at Whirlpool (chart here) and 1,000 at Yahoo! (chart here).
Given the regularity with which leaders have implemented layoffs since the 1980s, investors have come to expect these actions. Many see it as the necessary action of tough managers making sure their costs don't unnecessarily balloon. And political officials, as well as investors and employees, have started thinking that layoffs don't necessarily have much negative long-term meaning. People assume these are just short-term actions to save a quarterly P&L by a highly bonused CEO. The jobs will eventually come back.
Guess again.
Most layoffs indicate a serious problem with the company. Long gone are the days when layoffs meant people went home for a major plant retooling. Now, layoffs are a permanent end of the job. For the employer and the employee. Layoffs indicate the company is facing a market problem for which it has no fix. Without a fix, management is laying off people because the revenues are not intended to come back. Thus, the company is sliding into the Swamp – or possibly the Whirlpool – from which it is unlikely to ever again be a good place to work, a good place to supply as a vendor or a good place to invest for higher future cash flow. Layoffs are one of the clearest indicators of a company implementing Defend & Extend Management attempting to protect an outdated Success Formula. Future actions are likely to be asset sales, outsourcing functions, reduced marketing, advertising & R&D, changes in accounting to accelerate write-offs in hopes of boosting future profits — and overall weak performance.
Layoffs are closely connected with growth stalls. Growth stalls happen when year over year there are 2 successive quarters of lower revenues and/or profits, or 2 consecutive declines in revenues and/or profits. And, as I detail in my book, when this happens, 55% of companies will have future growth of -2% or worse. 38% will have no growth, bouncing between -2% and +2%. Only 7% will ever again consistently grow at 2% or more. That's right, only 7%.
When you hear about these layoffs, don't be fooled. These aren't clever managers with a keen eye for how to keep companies growing. Layoffs are the clearest indicator of a company in trouble. It's growth is stalled, and management has no plan to regain that growth. So it is retrenching. And when retrenching, it will consume its cash in poorly designed programs to Defend & Extend its outdated Success Formula leaving nothing for investors, employees or suppliers. The world becomes an ugly place for people working in companies unable to sustain growth. People try to find foxholes, and stay near them, to avoid being the next laid off as conditions continue deteriorating. Just look at what's happened to employment and cash flow at GM, Ford and Chrysler the last 40 years. Ever since Japanese competitors stalled their growth, "there's been no joy in Mudville."
Given how many companies are now pushing layoffs, and how many more are projecting them, this has to be very, very concerning for Americans. Clearly, many financial institutions, manufacturers, IT services and technology companies appear unlikely to survive. Meanwhile, we see wave after wave of new employees being brought on in companies located in China, India, South America and Eastern Europe. For every job lost in Detroit, Tata Motors is adding 2 in India. For every technologist out of work in silicon valley, Lenovo adds 2 in China. For every IT services person laid off at HP's EDS subsidiary, Infosys adds 2 in Bangalore. It's no wonder these companies don't regain growth, they are losing to competitors who are more effective at meeting customer needs. There really is no evidence these companies will start growing again – as long as they use layoffs and other D&E (Defend & Extend) actions to try propping up an old Success Formula.
Sure, times are tough. But why die a long, lingering death? Instead of layoffs, why not put these people to work in White Space projects designed to turn around the organization? Instead of trying to save their way to prosperity – an oxymoron – why not take action? In most of these companies, lack of scenario planning and competitor focus leaves them unprepared to rapidly adjust to these market changes. But worse, Lock-in and an unwillingness to Disrupt means management simply finds it easier to lay off people than even try doing new things. And that is unfortunate, because the historical record tells us that these companies will inevitably find themselves minimized in the market – and eventually gone. Just think about Polaroid, Montgomery Wards, Brach's Candy company, DEC, Wang, Lanier, Allegheny Coal, Bear Sterns and Lehman Brothers.
by Adam Hartung | Oct 28, 2008 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lifecycle, Lock-in
Wal-Mart (see chart here) has not been doing badly the last couple of quarters. Of course, it hasn't done great either. And if we look back the last 8 years – well there's not been much to get excited about. Wal-Mart Locked-in on its low price Success Formula 40 years ago and hasn't swayed since. Today as incomes go down and fear is huge about jobs and investments people are looking for low prices so they are returning to Wal-Mart. But those sales aren't coming easily, because Target, Kohls and other retailers are battling to get recognized for value while simultaneously offering benefits consumers demonstrated they enjoyed before economy went kaput. It's not at all clear that the small uptick in sales at Wal-Mart is anything more than a short-term blip in a very flat environment for Wal-Mart.
It's unclear that there's much growth. This week Wal-Mart admitted it was finding fewer opportunities to open new stores as saturation of its low-price approach appears imminent in the USA (read article here). Instead of opening new stores capital expenditures are going to decline by 1/3, and dollars are being shifted to store remodeling rather than new store opening. This implies a far more defensive tactic set, reacting to inroads made by competitors, rather than an understanding of how to regain the growth Wal-Mart had in the previous decades.
So now Wal-Mart is saying it will turn investments toward emerging markets (read article here). Sure. Wal-Mart wrote off huge investments and exited failed efforts in Germany and France, It's efforts to expand in Canada and the U.K. have been marginal. In Japan it only avoided a huge write-off and failure by making an acquisition. And its China project has gone nowhere, despite much opening hoopla 5 years ago. So why should we expect them to do better with a second attack into China, possibly going into India and Mexico?
The Wal-Mart Success Formula worked in the USA and drove incredible growth, but it is unclear that shoppers in developing countries get much benefit from a strategy largely based on buying goods from low-cost underdeveloped countries and importing them to the USA for mass-market buyers in low-cost penny-pinching store environments. What's the benefit to Wal-Mart's approach in Mexico or India? In India and China customers must pay high duties on imported goods, and low-cost retail exchanges already exist across the country for domestic products. Additionally, lacking a robust infrastructure (meaning a big car and good roadway to carry home mass quantities of stuff bought in large containers) it's unclear that Wal-Mart's approach is even viable. If you have to carry goods home on a bicycle, why would you want to go to a big central store? Isn't buying regularly what you need better? Wal-Mart has made no case that it's Success Formula is at all viable outside the USA, and especially in emerging countries.
Compare the Wal-Mart approach to Google (see chart here). In the last year Google has moved beyond mere search into other high-growth businesses such as mobile telephones. And today Google announced it is going to legally offer books and other copyrighted material to customers in some ways unique – but competing with Amazon's e-book (Kindle) business (read article here). Google keeps entering new high-growth markets with new demands from new customers. And in each market Google enters with new products intended to be better than what's out there today.
Wal-Mart keeps trying to find a way to Defend & Extend its old, tired Success Formula. Wal-Mart is huge, but its growth has slowed. Competitors have entered all around it, and every year they are chipping away at Wal-Mart by offering different solutions to customers. The competitors are getting better and better at matching the old Wal-Mart advantages, while offering their own new advantages. And we can see Wal-Mart is now being defensive in its histiorical markets while naive in trying to export its old Success Formula to markets that don't show any need for it. Wal-Mart is mired in the Swamp, struggling to fight off competitors while its growth is disappearing and its returns are under attack. On the other hand, Google keeps throwing itself back into the Rapids of growth in new businesses that offer new revenues and increased profits. And it enters those markets with new solutions that have the opportunity of changing competition. Google doesn't have to have everything work right for it to find growth through its White Space projects and continue expanding its value for customers, suppliers, employees and investors.
by Adam Hartung | Oct 21, 2008 | Disruptions, In the Rapids, Leadership, Openness
Yesterday I talked about how Lock-in to an old Success Formula kept Sun Microsystems from undertaking Disruptions in the 1990s that would have helped the company keep from floundering. One could get the point that with this weak economy, the die has been cast and there’s little we can do. "Oh Contrare little one".
Let’s look at Apple (see chart here) – the company Sun passed up to focus on its core server business in the 1990s. Today Apple announced profits are up 26% this year – despite the soft economy (read article here). We all know about the iPod, iTunes, iTouch and now iPhone. Apple has demonstrated that it is willing to bring out new products in new markets without regard for "market conditions", and as a result drive new revenues and profits. It would be easy to delay new investments and new launches in this economy to drive up profits, but the company CEO maintains commitment to internal Disruptions and ongoing White Space to drive growth – especially while competitors are retrenching.
Another recent example is Coach (see chart here) the maker of high-end luggage, leather goods and fashion accesories. Most high-end goods are seeing sales plummet. But Coach used its scenarios about the future to invest in its 103 factory outlets and many discount outlets. Instead of running to the high end and doing more of the same, while cutting costs, Coach has put new products into the market and offered new discount programs – in addition to its growth of outlets beyond the traditional Coach stores (read article about Coach here.)
Any company can take action at any time to grow. All it takes are plans based on future scenarios, rather than based on just doing "more of the same." Being obsessive about competitors allows for launching new products before anyone else, and gaining share. And using Disruptions to create White Space for successful new business development. This can happen at any time – not just when times are good. In fact, when times are bad (like now) it can be the very best time to focus on growth. When competitors are trying to retrench it creates the opportunity to change how customers view you, and grow. This might well be the best time ever to not only Disrupt your own thinking – but Disrupt competitors by changing your Success Formula and doing what’s not expected!
by Adam Hartung | Oct 20, 2008 | In the Swamp, In the Whirlpool, Leadership, Lock-in
With the economy soft, and sales harder to come by, more companies are thinking about what changes they can make to be more competitive. But what we’re seeing now is the emergence of competitors that Disrupted when times were good, and the decline of those who chose to Defend & Extend old Success Formulas in order to maximize profits back then.
Let’s take a look at Sun Microsystems (see chart here.) Trading today at $5.25/share, Sun was a darling of the internet boom – peaking at about $250/share in 2000. But $5.25/share (adjusted for splits) is about what Sun was worth in the mid-1990s. At that time Sun was a big winner as internet usage exploded and the telecom companies – as well as industry participants from tech to manufacturers – could not get enough Unix servers. Everyone was predicting that the need for servers was never going to decline, and Sun was "#1 with a rocket", to use an old radio term for a big hit song.
In 1995 Sun held a management retreat for all its managers and higher in Monterey, CA. Scott McNealy, the chairman and CEO, asked the audience "if you could buy Apple, would you do it?" The audience reacted with a positive roar! These managers all saw the benefit of having a low-price workstation line to augment their expensive servers. Further, Unix was notoriously difficult to use and the hope of bringing a better GUI interface was very appealing. They saw that if they could help the sales of Macs it would be a great way to slow the Wintel (Microsoft Windows plus Intel microprocessor) PC platform – which was the biggest competitor to Unix. And Apple had lots of applications in media and the office that eluded the very techie Sun products. These managers, directors and V.P.s had all thought about an Apple + Sun merger, and they saw the opportunities.
Mr. McNealy looked at the raucous, hopeful crowd and said, "you think you could fix that mess? With all we have to do to keep up with market growth, you don’t see buying Apple as a major diversion?" The air was sucked out of the room. Obviously, Apple was troubled. But there was real hope for growth in new and unpredictable ways from combining the two companies, their positive brands, their great technologies and their creative roots. But Mr. McNealy went on to tell the audience that the executive team had thought about the acquisition, and just couldn’t see doing it. It would be too disruptive.
That management retreat had as its keynote speaker Gary Hamel, author of Competing for the Future. Mr. Hamel gave a great presentation about how his research showed great companies figured out their core – their core strength – and then reinforced that strength. The rest of the retreat was spent with the management personnel in various break-out sessions defining the "core" at Sun Microsystems and then identifying how Sun could reinforce that core.
Of course, it only took 5 years for the internet bubble to burst. The telecoms were some of the first victims, with their value plummeting. Demand for servers fell off a proverbial cliff. Meanwhile, Unix servers from IBM and others had increased in performance and capability – giving the once high-flying Sun a competitive kick in the pants. Worse, the power of Wintel servers had continued to increase, making the price difference between a Unix server and a Wintel server much less acceptable. IT Department customers were beginning to shift to PC servers in order to lower cost. And Sun, with its focus on servers, had no desktop product to sell – no competitor to the PC – nor any software products to sell. The internet market was rapidly shifting toward Cisco and those who sold robust network gear. Sun was watching its market disappear right out from under it – and happening in weeks.
Now it’s unclear what the future holds for Sun Microsystems (read article here). Sales have not recovered. Losses have been mounting. Sun’s dealing with hundreds of millions of dollars in restructuring costs (again), and some of its businesses are now worth so little that the company is probably going to be forced to write off millions (maybe billions) in goodwill on the books. If it has to write off too much good will, Sun could end up declaring bankruptcy.
The time for Disruption at Sun was when business was good – in 1995 and 1996. Had they bought Apple, who knows what combination might have happened. At the time, Cisco (see chart here) was growing quite handily. But Cisco built into its ethos the notion that the company would obsolete its own products. This desire, to never ride too far out the product curve and instead cannibalize their own sales before competitors did, has allowed Cisco to keep growing revenues and profits. Instead of "focusing on its core" Cisco keeps looking for the competitors (companies and products) that could make Cisco obsolete – and using those competitors to help Cisco drive growth.
Even with Disruptions, many competitors will not survive this recession. Not because the managers are lazy or sloppy. But because they will become victims of better competitors who built Success Formulas more aligned with future market needs. Those who Disrupted in 2005 and 2006, who positioned themselves for globalization and rapid market shifts, will do relatively better in 2009 than those who chose to Defend & Extend what they used to do. The best time to Disrupt and create White Space is when things are good – because that prepares you to win big when markets shift and times get tough.
by Adam Hartung | Oct 16, 2008 | General, In the Rapids, In the Swamp, Leadership, Lock-in, Openness
Traders help markets function. Because they take short-term positions, sometimes hours, a day or a few days, they are constantly buying and selling. This means that for the rest of us, investors who want to have returns over months and years, there is always a ready market of buyers and sellers out there allowing us to open, increase, decrease or close a position. Traders are important to having a constantly available market for most equity stocks. But, what we know most about traders is that over the long term more than 95% don’t make money. Despite all the transaction volume, their rates of return don’t come close to the Dow Jones Industrial Average – in fact most of them have negative rates of return. Only a few make money.
For investors it’s not important what the daily prices are of a stock, but rather what markets the company is in, and whether the markets and the company are profitably growing. On days like today, which saw the DJIA down triple digits and up triple digits in the same day (read article here), it’s really important we keep in mind that the value of any company in the short term, on any given day, can fluctuate wildly. But honestly, that’s not important. What’s important is whether the company can exp[ect to grow over months and years. Because if it can, it’s value will go up.
Let’s take a look at a couple of companies in the news today. First there’s Google (see chart here). Despite the recession, despite the financial sector meltdown and despite the wild volatility of the financial markets, the number of internet ads continued to go up. Paid clicks actually went up 18% versus a year ago. (read article about Google results here). Gee, imagine that. Do you suppose that given the election interest, the market interest during this financial crisis and the desire to learn at low cost more people than ever might be turning to the internet? Does anyone really think internet use is going to decline – even in this global recession? Google is positioned with a near-monopoly in internet ad placement (Yahoo! is fast becoming obsolete – and is trying to arrange to use Google technology to save itself see Yahoo! chart here]). By competing in a high growth market – and constantly keeping White Space alive developing new products in this and other high-growth markets – Google can look out 3, 5, 10 years and be reasonably assured of growing revenues and profits. And that’s irrespective of the Dow Jones Industrial Average (where Google might well replace GM someday) or whether Microsoft buys the bumbling Yahoo! brand (read about possible acquisition here).
On the other hand, there’s Harley Davidson (see chart here). Motorcycles use considerably less gasoline than autos, so you would think that people would be buying them this past summer as gasoline hit record high $4.00/gallon plus prices. Yet, Harley saw it’s sales tumble 15.5% (much worse than the heavyweight cycle overall market drop of 3%) (read article about Harley Davidson’s results here.) The problem is that Harley is an icon – for folks over 50! The whole "Rebel Without a Cause" and "Easy Rider" image was part of the 1940s post war rebellion, and then the 1960s anti-war rebellion. Both not relevant for the vast majority of motorcycle buyers who are under 35 years old! Additionally, long a company to Defend & Extend its brand, Harley Davidson has raised the average price of its motorcycles to well over $25,000 – a sum greater than most small cars! Comparably sized, and technologicially superior, motorcycles made by Japanese manufacturers sell for $10,000 and less! Worse, the really fast growing part of the market is small motorcycles and scooters that can achieve 45 to 90 miles per gallon – compared to the 30 mile per gallon Harley Davidsons – and Harley has no product at all in that high growth segment! Harley Davidson is a dying technology and a dying brand in an overall growing market. No wonder the company is selling at multi-year lows (down 50% this year and 67% over 2 years) . Even though the stock market may be down, Harley Davidson is unlikely to be a good investment even when the market eventually goes back up (if Harley survives that long without bankruptcy!)
Watching the Dow Jones Industrial Average, or the daily stock price of any company, isn’t very helpful. Daily, prices are controlled by the activity of traders – who come and go incredibly fast and mostly lose money. What’s important is whether the company is keeping itself in the Rapids of Growth. Google is doing a great job at this. Harley Davidson is Locked-in to its old image and thoroughly entrenched in trying to Defend & Extend its Lock-in – completely ignoring for the past decade the more rapid growth in sport bikes, smaller bikes and scooters. As investors, customers, employees and suppliers what we care about is the ability of management to Disrupt their Lockins and use White Space to stay in the Rapids of growth.
by Adam Hartung | Oct 15, 2008 | Defend & Extend, In the Swamp, Leadership, Lock-in
Are people risk averse? Or do they like risk? Would you believe those questions don’t matter, when trying to understand risk?
Today we’re being told that the bankers who ran some of the world’s largest investment banks were taking ridiculous risks – and the decisions to take on those risks is now undoing financial services globally. Were these bankers all gunslingers – willing to take crazy risks? Would you believe me if I said they didn’t think they were taking much, if any risk?
Risk is a relative term. What’s "risky" is really a matter of perception. Let’s say I drive to work on a local highway every day. The traffic cruises at 65 miles per hour, but since I’m always late I drive 75. On a particularly late day I drive 80. Because I usually drive 75, the relative risk seems small. But the reality is that at 80 the chances of a minor mishap becoming a disaster are far greater. Once you are comfortable driving 75, the perception of greater risk is only the marginal difference between 75 and 80 – so it seems small. Over time, if I choose to keep driving a bit faster, within short order I’ll be driving 100 miles per hour. This may seem crazy – yet there are many drivers on Germany’s high-speed autobahn highways that drive this fast – and faster!! To those of us who poke along every day at 65 miles per hour these speed demons of the autobahn seem to be taking a crazy risk – but to them, working up to those high speeds gradually over time, the relative risk now seems quite small.
And this is what happens in our business. When a bank takes a deposit, it then can loan money. But should it lend dollar for dollar – deposit compared to loans? While nonbankers might say "don’t lend more than you borrowed" that seems ridiculously conservative to bankers. Bankers say that because most loans are repaid, they only need enough deposits to cover the normal ebb-and-flow of the cash demands on the institution. So they feel comfortable loaning out 2 or 3 dollars for every dollar of deposit. Of course, the more loans the banker makes and the rarer defaults occur, the more likely the banker will start to give loans that are 4 times the amount on deposit. Where does this stop? We know with Lehman Brothers the leverage reached 30 to 1 (read about financial institution leverage and regulatory recommendations here)!!! It didn’t take many defaults for Lehman to suddenly find itself unable to meet its obligations and disappear.
The bankers at Lehman Brothers learned not to fear what they knew. Not only that, but they hired immensely smart mathematicians and physicists to try calculating the amount of risk they were taking on with their leverage and their obligations. Using mathematics far beyond the grasp of all but a fraction of the population, they asked scholars to try calculating the risk in the loan packages they sold, and the credit default swaps. They continuously studied the risk. The more they studied the easier it was to take on more risk. The longer they kept doing what they had always done, and the more knowledgable they became, the less risky they perceived their behavior. Of course, as we now know, Lehman Brothers took on far more risk than the company, its investors and its regulators could afford.
The other side of this coin is how we perceive things we don’t know. Almost none of the buggy manufacturers in the early 1900’s transitioned to making automobiles. To them automobile manufacturing involved engines, and that was too risky. By the time buggy manufacturers felt they had to change, it was too late. When we are brought new opportunities to evaluate we don’t evaluate the real merits of upside and downside. Instead, we first question if the opportunity falls into our realm of expertise. If not, we deem it too risky. Because we don’t know much about it, we choose to think it’s too risky for us. Yet, the risk might be quite low.
Take for example buying Microsoft stock in the early 1990s as PC sales skyrocketed and Microsoft already had a monopoly on operating systems – and was building its monopoly in office software. The risk was quite small, since all Microsoft needed was for PCs (PCs made by anybody – it didn’t matter) to continue selling. That was not a high-risk bet. Yet most investors shied away because they didn’t understand tech stocks – including Warren Buffet who famously bought a mere 100 shares, declaring he didn’t understand the business! (Just think, if Warren Buffet had bought a large chunk of early Microsoft, he’d be as rich as himself plus Bill Gates today – now that’s a mind-boggler.)
When markets shift, relative risk can be deadly. If we continue to perceive things we know as low risk, we will "double down" our bets on customers, market segments, technologies and products that have declining value. If we think that doing what we always did will produce old returns we will do what’s comfortable, even when the market is moving headlong toward new solutions. Look at U.S. manufacturers of televisions (remember Quasar, Magnavox and Philco?). Experts in vacuum tubes and other analog technologies, plus the manufacturing expertise for those components, they were all late seeing the shift to solid-state electronics and all ended up out of business. All that expertise in the old technology simpy wasn’t worth much when the markets shifted – even though the new technology seemed risky while the old technology seemed familiar, and reliable.
When markets shift, the greatest risk is the "do what we know" scenario. Although it’s the easiest to approve, and the most comfortable – especially at times of rapid, dynamic change – it is the one scenario guaranteed to have worsening results. There’s an old myth that the last buggy whip manufacturer will make huge profits. Guess again. As buggy whip demand declines everyone loses money until most are gone. But there isn’t just one remaining player. The few who remain constantly see prices beaten down by the excess capacity of buggy whip designers, manufacturers and parts suppliers ready to jump in and compete on a moment’s notice. Trying to be last survivor just leaves you bloody, beaten up and without resources to even feed yourself.
It’s not worth spending a lot of time trying to evaluate risk. Because rarely (maybe never) in business is there such a thing as "absolute risk" you can measure. Risk is relative. What might appear risky could well be merely a perception driven by what you don’t know. What might appear low risk could be incredibly risky due to market shifts. So the real question is, are you Disrupting yourself so you are investigating all the possibilities – good and bad? And are you keeping White Space alive so you are experimenting, testing new ideas? New products, new technologies, new markets, new distribution systems, new components, new pricing formulas, new business models —- new Success Formulas? The only way to avoid arguments of risk is to get out there and do it – so you can get a good handle on what works, and what doesn’t, in order to make decisions based on opportunity assessment rather than Lock-in.
