by Adam Hartung | Oct 10, 2008 | Defend & Extend, General, Leadership, Lifecycle, Openness
We talk a lot about evolving markets. When we use that phrase, evolving, we think of gradual change. In reality, evolutionary change is anything but gradual.
People think of change as happening along the blue line to the left. A little change every year. But what really happens is like the red line. Things go along with not much change for a very long time, then there’s a dramatic change, and then an entirely new "normal" takes hold. This big change is what’s called a "punctuated equilibrium."
What we’ve recently seen in the financial services industry is a punctuated equilibrium. For years the banks went along with only minor change. They kept slowly enhancing the products and services, a little bit each year. Regulations changed, but only slightly, year to year. Then suddenly there’s a big change. Something barely understood by the vast majority of people, credit default swaps tied to subprime mortgage backed securities, became the item that sent the industry careening off its old rails. That’s because the underlying competitive factors have been changing for years, but the industry did not react to those underlying factors. Large players continued as if the industry would behave as it had since 1940. Now, suddently, the fact that everything from asset accumulation to liability management and regulation will change – and change rapidly.
When punctuated equilibrium happens, the old rules no longer apply. The assumptions which underpinned the old economics, and norms for competition, become irrelevant. Competition changes how returns will be created and divvied up. Eventually a new normal comes about – and it is always tied to the environment which spawned the big change. The winners are those who compete best in the new environment – irrespective of their competitive position in the old environment. The one thing which is certain is that following the old assumptions is certain to get you into trouble.
I’ve been surprised to listen to "financial experts" on ABC and CNBC advising investors since this financial services punctuated equilibrium hit. Consistently, the advice has been "don’t sell. Wait. Markets always come back. You only have a paper loss now, if you sell it becomes a real loss. Just wait. In fact, keep buying." And I’m struck as to how tied this advice is to the old equilibrium. Since the 1940s, it’s been a good thing to simply ride out a downturn. But folks, we ain’t ever seen anything like this before!! This isn’t even the Great Depression all over again. This is an entirely different set of environmental changes.
In reality, the best thing to have done upon recognizing this change would be to sell your equities. The marketplace is saying that global competition is changing competition. How money will be obtained, and how it will be doled out, is changing. Old winners are very likely to not be new winners. Competitive challenges to countries, as well as industries and companies, means that fortunes are shifting dramatically. No longer can you consider GM a bellweather for auto stocks – you must consider everyone from Toyota to Tata Motors (today the total equity value of Ford plus GM is 1/10th the value of Toyota). No longer can you assume that real estate values in North America will go up. No longer can you assume that China will buy all the U.S. revolving debt. No longer can you assume that America will be the importer of world goods. How this economic change will shake out – who will be the winners – is unclear. And as a result the Dow Jones Industrial Average has dropped 40% in the last year.
To all those television experts, I would say they missed the obvious. How can it be smart to have held onto equities if the value has dropped 40%? Call it a paper loss versus a real loss – but the reality is that the value is down 40%! To get back to the original value – to get your money back with no gain at all – will take a return of 5% per year (higher than you could have received on a guaranteed investment for the last 8 years) for over 10 years! That’s right, at 5% to get your money back will take 10 years!! Obviously, you would have been smarter to SELL. And every night this week, as the market fell further, these gurus kept saying "hold onto your investments. It’s too late to sell. Just wait." Give me a break, if the market is dropping day after day, how is it smart to watch your value just go down day after day! You should quote Will Rogers and say to these investment gurus "it’s not the return on my money I’m worried about, it’s the return of my money"!!
Or read what my favorite economist, Mr. Rosenberg of Merrill Lynch wrote today "There is no indication…that the deterioration in the fundamentals is abating…all the invormation at hand suggests that the risk of being underinvested at the bottom is lower than the risk of being overexposed to equities….in other words, the risk of geing out of the market right now is still substantially less than the risk of continuing to overweight stocks…what matters now is to protect your investments and preserve your capital." (read article here)
The world is full of conventional wisdom. Conventional wisdom is based on the future being like the past. But when punctuated equilibrium happens, the future isn’t like the past. And conventional wisdom is, well, worthless. What is valuable is searching out the new future, and learning how to compete anew. Right now it’s worth taking the time to focus on future competitors and figure out how you can take advantage of serious change to better your position. You can come out on top if you head for the future – but not if you plan for a return to the past.
by Adam Hartung | Oct 9, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
The news is really bad in the auto business. For the first time since 1993 the number of cars sold in the USA in a month has declined to below one million. Sales are down over 25% from the previous year. And sales are predicted to decline considerably more in 2009. The value of General Motors (chart here) has declined to what it was in 1950 – when the Dow Jones Industrial Average was about 269 (GM is a component of the DJIA). (Read article here.) In the 1960s, when GM was king of the industrial companies, a popular phrase was "As goes GM, so goes America." This was based on the notion that GM was a microcosm of the American industrial economy. Is this still true – does GM portend the future of America?
A lot has changed in the last 40 years. Most importantly, the globe is no longer dominated by an industrial economy. Fewer and fewer people are employed in industrial production. We see it all around us as we realize that there are more people writing computer code than making computers. We’ve shifted to an information economy. Companies that ignored this shift, like GM, without finding opportunities to get into the growth economy are now suffering. GM started down the new road once, in the 1980s, by purchasing EDS and Hughes electronics. But later GM leadership sold those businesses in order to "focus" on the auto business. So now it’s only natural to recognize that the most industrial of the industrial companies are at the greatest risk of failure. No longer is GM a microcosm of any economy – including America. As GM goes so goes GM – but that doesn’t say anything about the future of America.
Some companies have shifted. They find new opportunities for growth. Today, wind energy is getting a big lift due to higher costs for petroleum fuels and increasing restrictions on greenhouse gases from using fossil fuels. Wind farms already exist offshore European countries, producing over 1,100 megawatts of power. Now such farms are being built not only on the great prairies of Texas and the American plains, but off the eastern U.S. coastline (read article here.) While there isn’t much interest for investing in auto manufacturing, there is lots of interest for investing in these wind farms to produce electricity – especially in high-cost electricity locations along the eastern seaboard.
And in the middle of this market we find – General Electric (see chart here). GE is the only U.S. company that makes wind turbines, and is a leader in promoting the new source of power. While many people have fixated on GE Financial and its woes, they have ignored the fact that GE is an American leader in many markets seeing rapid growth globally – such as wind power, water production, health care equipment and municipal infrastructure development. These markets are benefitting from the ecomomic boom in China, India and other developing countries, as well as emerging growth in the USA.
Any country’s economy can continue growing if it develops Phoenix companies that keep their eyes on the future and create White Space projects to keep them moving toward growth. These companies don’t fall into the trap of being "focused" on a single business, and dependent upon growth within that historically defined market. They constantly look for places to grow, regardless of what the company has previously done, and develop opportunities to learn in those new markets so they can create a new Success Formula maintaining growth. As long as America has companies that keep repositioning themselves for growth – such as GE, IBM, Cisco Systems, Apple, Google, Genentech, Johnson & Johnson, Baxter, etc. – America can have a great future.
by Adam Hartung | Oct 8, 2008 | Defend & Extend, General, Leadership, Lifecycle
Today Walgreen’s (see chart here) announced it was dropping its plan to purchase Long’s Drugs (see chart here). (Read article here.) This means a lower offer to buy Long’s from CVS (see chart here) now comes to the forefront. Yet, some of Long’s big shareholders are balking that the CVS bid is too low. And all this amid the most dynamic set of economic circumstances since the 1930s. So, who’s right?
As you might expect, it all depends on your scenario about the future. Walgreen’s has seen it’s equity value fall 50% in the last 2 years. Pretty amazing given that the "core" business is considered highly resistant sales of necessary drug items – after all regardless the economy people get sick and they need medicine. But the reality is that Walgreen’s built its reputation on its Success Formula the last decade of being able to open a new store every 20 hours or so. That’s an easy to understand Success Formula, but it has the obvious downside of identifying the weakness of saturation. To maintain growth, Walgreen’s requires opening more and more stores. But there are markets (like the hometown Chicago area) where stores are getting almost every block! People started wondering if Walgreen’s could keep growing once it had to drive more revenue out of existing stores – rather than just opening new ones.
But now real estate is falling in value. And we all know debt is getting harder and more expensive to obtain. It’s going to be harder and harder to borrow money to buy land and put up buildings. We’re also hearing that pension payments are going to be cut, due to lower stock valuations, and money for health care could be harder to come by. Looking forward, Walgreen’s decided it was smarter to focus on its existing stores than taking on a slug of new debt and a bunch of new stores. Especially given that many of these new stores (at Long’s) would be redundant to existing Walgreen’s in California — and who’s going to buy the land and buildings or leases for those stores if the economy going forward is as bad as being predicted? Sears (see chart here) buyer Ed Lampert was supposed to make a fortune selling all those Sears buildings – and that hasn’t exactly worked out (to put it mildly).
You have to hand it to a leadership team willing to change course. The good news is that for the last several years Walgreen’s hasn’t just opened new stores. The company has experimented with all kinds of new sales initiatives – from printing photos to refilling ink cartridges to selling groceries and even clothing. Unfortunately, many of those efforts took a back seat to new store openings. Walgreen’s didn’t see them as Disruptive growth opportunities, and they weren’t given White Space with permission to do whatever was necessary to succeed, nor the dedicated resources to really develop an alternative Success Formula. So they were just experiments with minimal impact. But now, for Walgreen’s to keep growing, it will have to do some Disrupting and put those projects front and center. The company will have to put some serious energy into learning if it can bring out its own high-end cosmetics line (aborted), or it’s own designer clothing (aborted) or capture decent share in selected office supplies versus Staples (aborted).
It’s hard for a Locked-in organization to change course. The momentum to keep doing what was always done is enormous. For Walgreen’s it must have appeared oh-so-tempting to buy Long’s. "Damn the Torpedos, full speed ahead" is such an easy cry for the company skipper to make. But here it really appears that some good scenario planning has kept the company from running headlong into a deal that could bankrupt the business if things do go southward economically (as it appears).
But to regain its previous success, Walgreen’s now has to change its Success Formula. And that requires more than walking away from a deal. It requires implementing a Disruption and getting serious about White Space to figure out what will make Walgreen’s the super-retailer of 2020. The company made a good move today, and now we’ll have to see if they can follow through.
Meanwhile, if you own Long’s Drug you should sell as fast as possible. The company value has increased 4x in the last 4 years – with a huge pop based on the acquisition discussions. And the company has no plan for how to grow enough to maintain the recent value. If CVS is willing to purchase Long’s, sell to them. What we can be sure of is that the saturation of drug stores has already begun, and any business that has too many assets, and too much debt, is not a good place to be invested. Better to have the cash.
by Adam Hartung | Oct 7, 2008 | General, In the Swamp, Lifecycle, Lock-in
So the stock market is crashing. Is now the time to buy? Many CEOs are asking this question.
The problem is that too often people try to buy a company that’s "cheap", using its past history as the basis. Take Bank of America (see chart here). BofA earlier this year bought the most troubled of all the mortgage companies Countrywide Financial. And then when Lehman Brothers was falling into bankruptcy BofA purchased Merrill Lynch, a retail stock brokerage that has been realing from on-line competition since e*Trade started in the 1990s, has one of the weakest mutual fund departments, one of the weakest research departments and a weak investment bank. BofA’s view was that based upon history, these companies were very cheap. But now, shortly after the acquisitions, BofA is announcing that it must halve its dividend, and raise additional equity through a new stock sale in order to shore up its balance sheet. And on top of this, earnings are down for the quarter and the year as the CEO starts claiming that estimates are pretty meaningless (read article here). Should you buy the new stock offering?
When markets shift, the value of assets tied to old Success Formulas decline. In the new market, the old Success Formula produces weaker returns and thus it is worth less. Too many people see this lower value as being a chance to "buy on the cheap." But far too often value will continue to decline because the old business simply isn’t worth as much. In Bank of America’s case, it bought extremely large players, but those that are inexorably linked to the old markets with old Success Formulas that are fast becoming out of date. While Merrill Lynch may be a great old name, the company itself has never been able to produce its old level of returns since brokerage markets shifted over a decade ago. Increasingly, it looks like BofA simply bought out-of-date competitors that were finding themselves on the rope as this market shift happened. And the BofA leadership is even leaving the old leaders in place after the acquisition.
Just in case you think that all the strategy and finance brains in big corporations means they are better judges of company value than yourself, remember that very rarely does any acquisition become worth what it cost. All finance academicians point out that buyers overvalue acquisitions in the process. In the end, it’s the buyers that see valuations suffer due to lower than anticipated earnings. In this case, BofA has bought large – but weak – competitors in markets reeling from shifts. And BofA has shown no proclivity to take dramatic changes to alter the Success Formulas (which JPMorgan Chase did upon acquiring Bear Sterns for almost nothing). This is a recipe for weak future performance.
Those companies that will benefit from acquisitions in this turmoil will have to purchase companies that better position the acquirers for future growth. Leaders not necessarily in size, but in the ability to produce growing revenues and profits. And acquisitions which can help migrate the acquirer’s Success Formula forward toward better competitiveness and higher returns – not just adding immediate (but declining) revenue. What’s going on at BofA may look like an effort to "buy on the cheap," but it’s more likely to end up "a pig in a poke."
by Adam Hartung | Oct 5, 2008 | General, Leadership, Lifecycle, Lock-in, Openness
This blog primarily focuses on businesses. But in Create Marketplace Disruption I point out that Success Formulas exist at multiple levels – not just companies. At a higher level, Success Formulas exist for functional groups, work teams and individuals. At a lower level than companies, Success Formulas exist for industries and even entire economies. When a shift happens at any level, all levels above that have to adjust for that shift. Over the last few weeks, we’ve been witnessing the impact of shifts in economies that are having a tumultuous impact on the financial services industry – and the companies participating in that industry.
With last week’s announcement of higher expected first time unemployment claims (see article here), The U.S. is confirmed to be headed into a recession (if not already there [article here].) But beyond the U.S., the economies of the developed economies in 2009 is expected to grow .6% -the weakest since 1982. The emerging markets are expected to grow at 6.1% (weakest since 2003) – 5.5 percentage points higher – 10x developed markets – 4x the average difference in growth rates during the 1990s. This is a pretty massive change. (Read article here)
The U.S. banking crisis has been the result of lots of bad loans on everything from mortgages to autos and credit cards. As asset values (principally homes) and incomes declined, the number of unpaid loans went up. It turned out that many of these loans had been packaged and sold off, and derivative instruments were created on those assets to help increase returns, causing not only the lenders to get into trouble by defaults, but investors (like insurance companies). Sort of a "domino effect" – or some say the falling of a "house of cards." While this explains why U.S. banks and insurance companies stumbled, why are we also seeing a rash of problems across Europe and some in Asia (read article here). The governments are "bailing out" banks and other financial companies from Ireland to Iceland – while putting in place lots of additional regulations (like banning short sales [article here] – a tactic also being used in the USA.)
In the USA, banks and investment banks allowed ever-increasing risk to creep into the debt market via higher lending limits on asset values and incomes. They were seeking ways to maintain results by manufacturing ever riskier transactions dependent on fast rising asset values and incomes – even if there was no reason to believe they would happen. They were looking for ways to Defend & Extend their Success Formula. We now can see that was happening all around the developed markets. Emerging market governments were buying secure U.S. Treasuries. But everywhere else institutions were trying to find higher yields in order to Defend & Extend their Success Formulas. As a result they bought mortgaged-backed securities and other even riskier instruments. Now that those securities are defaulting, all the developed markets are seeing big financial industry problems. The unwinding of risk is causing big problems all across the developed markets where actually making things – manufacturing, IT code, services – has been declining.
At the base of the pyramid, the economy, we can now see that the markets which make things are doing a lot better than those which have been outsourcing. This had already made a big difference in many manufacturing industries. And now we can see it in financial services. What underlies these industry problems is that the relative competitiveness of the economies is shifting. Every industry, company, functional manager, work team and individual will have to alter their Success Formulas to deal with this change – or face declining returns. Some started making these changes years ago (such as GE and IBM), and others have not (such as GM and Ford).
If there is not going to be a wholesale realignment of global economic leadership, it will require the government, industry and company leaders in the developed countries to make substantial changes in their Success Formulas. The recent U.S. financial services industry bail-out bill only addressed the current debt and cash flow crisis. It did not address the fundamental changes in the economic competitiveness. We can soon expect similar requests for government bail-outs from the auto industry, homebuilding industry, appliance industry, etc. Until government leaders develop a different economic model, the developed countries will struggle. And the industries that formerly led in these countries will continue to see market dominance shift as it has done in IT services, customer service, furniture manufacturing and several others. Success Formulas must be changed from the bottom to the top – including those of the individuals who are seeing the changes in competition affect them.
What’s needed now more than ever is White Space to address these market Challenges. Just as the New Deal in the 1930s and the dramatic tax reductions of the 1980s allowed for experimentation and creation of entirely new Success Formulas to changed market conditions – similar White Space is needed in government today. And those who lead their industries and companies must begin using more White Space to find new ways to compete – rather than trying to Defend & Extend despite declining returns. Equally, functional group heads and work team leaders will find themselves having to use more White Space to address competitive needs – rather than falling back on old assumptions about what works.
Those who implement White Space and develop new Success Formulas they can migrate toward will be able to improve their competitiveness and survive – possibly thrive! Those that don’t will find the future very tough sledding. There is no doubt about the global shifts that started a decade ago and are continuing today. Trying to wind the clock backward will never happen. Old competitive models are now obsolete. The winners will be those who follow the Phoenix Principle and use White Space to migrate their Success Formulas.
by Adam Hartung | Oct 2, 2008 | General, In the Rapids, Leadership, Lifecycle, Openness
I was asked today what I thought about Berkshire Hathaway’s bail-out of GE – did it make me less of a GE fan?
No. Firstly, Warren Buffet’s $3B investment in GE is not a bail-out (read about the deal here). The U.S. bail-out package is for purchasing distressed assets that have questionable value. That is not what Berkshire Hathaway did. Mr. Buffet created one of those private equity deals you and I could only dream of getting. For his investment he gets preferred shares, which have a 10% coupon yield — that’s about 5x what you or I can get on a savings account now – and places his dividend right up there at the top of the payments G.E. will make. If GE would like to repay the money Mr. Buffet is investing they can do so in 3 years – as long as the company pays an additional 10% premium over the dividend. Thirdly, Mr. Buffet receives warrants to purchase $3B of GE stock at $22.50 a share – about half what the stock was worth a year ago, equal to its recent lows, and a price not seen by GE shareholders since the market crash of 2001 (see GE chart here). So Mr. Buffet has what would be called a real sweetheart deal. A big dividend, a buyout premium, and options to make billions if GE survives and remains a long term winner. Mr. Buffet did not simply buy GE common stock, the option available to us mere investing mortals, so we have to look at GE differently than Mr. Buffet did.
GE is the only company that has been on the Dow Jones Industrial Average since its inception. The only one. More than 100 years. But this does not mean it will remain on the DJIA. History is not a good reason to be optimistic about GE – and Mr. Buffet’s likelihood of pocketing a few billion more dollars for the Gates charity. You should be optimistic about GE because in the middle of this rather dramatic market disruption, GE is fast taking action to become a more competitive company. Not just shore up its old business, like most of the banks are doing, but rather repositioning its portfolio to be more successful in the post-crisis market.
We have already heard that the crisis is causing, and will for a goodly while cause, debt to be more expensive. And harder to come by. Long before debt becomes a problem, and long before anyone questions GE’s credit worthiness, GE is already taking action to increase its cash hoard and preserve it’s AAA debt rating. While others are contemplating what to do, GE is raising money from its businesses, Mr. Buffet, from its planned sale of another $12billion in stock. Given the currently low stock price, many CEOs would say "I won’t sell more equity until the markets recover and the value goes back up. I want to avoid earnigs dilution." But GE’s Chairman is acting now to prepare the company for competition in the post-crisis market.
Instead of worrying about dilution, Chairman Immelt admits he is raising cash because "it gives us the opportunity to play offense in this market should conditions allow." Get that – rather than being on his heals and reacting defensively, GE’s leadership is getting its act together to take advantage of low asset values during and after this crisis. It is making sure the company has the resources to continue investing in White Space – to continue being a Disruptive market player in markets that others are just now trying to figure out. GE is revamping its portfolio to be a market leader in 2012, 2015 and 2020.
GE is reporting a bad quarter – and none too good year. But the leadership has recognized the risk of falling into a growth stall. Rather than trying to wait and see what happens, and drift off into the Flats and the Swamp, leadership is taking fast action to throw GE right back into the Rapids. GE is revamping its financial services business to adjust to the market shift. And it is selling many of its long-held U.S. businesses that are facing far slower growth – like the iconic appliance and light bulb businesses. Imagine that, selling the business most closely identified with founder Thomas Edison – the light bulb. In this "nothing is sacred" attack on the existing business portfolio the company is moving rapidly into infrastructure projects like water production in developing markets China and India.
Short term GE’s equity value is subject to the whims of traders and the overall market direction. But looking long-term, it’s hard not to be optimistic about a company that’s doing such a good job of using scenarios to do its planning, keeping track of competitors, taking action leveraging market disruptions and keeping White Space alive and vibrant for future growth.
by Adam Hartung | Oct 1, 2008 | General, In the Rapids, Leadership, Openness
I’ve talked about scenario planning several times during this recent financial crisis. Scenario planning is the first step in becoming an evergreen Phoenix Principle organization that can achieve above-average long-term performance. If we overcome our tendency to focus on what we’ve always done, and what we do today, by getting our eyes set forward we can do a lot better job of providing markets what they want, when they want it and at a healthy profit to boot.
First, think about big trends. It was 3 years ago that home values flattened, and the decline in sales started. Using that information, it was possible to think ahead to what it would mean. U.S. consumer consumption would decline (which has now happened for more than a year) as home values flattened, and then declined, because there would be less home equity to be used for buying stuff. Additionally, holding on to higher mortgages meant that consumers would have less debt capacity. Further, falling prices would mean fewer new home creations, which would mean less being spent on carpeting, refrigerators, furniture, and all that other stuff. Furniture retailers and appliance retailers would struggle.
Of course, it wasn’t hard to imagine that some people on a merry-go-round of home sales would see the merry-go-round stop — leaving them with mortgages they couldn’t afford and homes worth less than they paid. That would lead to foreclosures – and then what would happen to all those packaged mortgage instruments being sold by investment bankers? And if banks couldn’t resell the mortgages, where would the deposits come from to support new mortgage creation? And if the bankruptcies rose, what would happen to those who guaranteed the mortgages (like Freddie Mac and Fannie Mae) and those who bought all those bonds (like AIG)?
OK, so it’s easy to see in retrospect. But what about going forward? Well, think about autos. We know that the consumer isn’t going to see their homes going up in value for a goodly while. Nor will there be easy credit for buying cars. So, what would you expect? Why, declining auto sales of course. The next few years are destined to be very tough for the already strapped automakers General Motors, Ford and Chrysler. So even though auto sales have been declining for 11 straight months (which is a 17 years record, and puts sales at a 15 year low [read article here]), and sales are off 26% to 34% versus a year ago for most American manufacturers (read article here) there’s really no reason to expect new car sales to start going up again any time soon. And we can see that GM bonds are now yielding a whopping 21% as people doubt their ability to repay those debts. But also, we can expect the number of auto dealers to decline. And now the news is reporting America’s largest Chevrolet dealer just filed bankruptcy, laying off 3,200 people, as the industry anticpates 600 dealer failures this year (read article here.) Tight consumer credit hurts sales, and also hurts the stocking of inventory on dealer lots.
Picking up on big trends can help us build a picture of the future. That picture doesn’t have to be completely accurate to help us plan. If we plan for the future, we can still succeed.
Back to our auto business. If we don’t buy new cars, we keep our cars longer. That means more maintenance. And more purchases of replacement tires, starters, and all those parts that wear out. It also means people will probably do more auto washing and cleaning to preserve their existing autos. And they are more likely to spend a bit to upgrade the existing car, say upgrading the stereo or the wheels, to brighten up life without the expense of buying a whole new car. And if dealerships are declining, then that maintenance and upgrage work will go elsewhere. So now would be a good time if you are a dealer to improve the maintenance departments to attract new customers, and help them with upgrade sales. And now is a good time for Pep Boys and Auto Zone to do better. The local car wash just might do OK, and if it offers various upgrades to add onto the wash they have the chance to boost the average ticket value of each wash. So while overall auto sales are dipping, this would be a good time to invest in all the support businesses for cars.
Someone once said that in business for every loser theirs a winner. I’m not sure if that is true. But what is true is that if you do your planning by looking squarely into the future, and building scenarios of most likely outcomes, you’ll do a lot better than if you keep planning for the past to continue. And once you have a good set of future scenarios, it can help you to compete a lot more effectively. Dealers that start being a lot nicer back in the maintenance area, and send out mailers to previous customers offering deals on oil changes, transmission changes, radiator tests and replacement tires will compete better than those that just keep running newspaper ads for us to buy the latest new car. Scenarios can help us to not only prepare, but compete a lot more effectively. No matter what our old Success Formula was, we can move to ones that are more profitable if we keep developing those future scenarios and implementing what future markets need.
by Adam Hartung | Sep 25, 2008 | General, In the Rapids, Leadership, Lifecycle, Openness
General Electric (see chart here) today announced earnings will decline (read article here). Its very large GE Capital unit, which produced 45% of last year’s corporate earnings, is seeing its unit earnings hit hard in this financial crisis. With its admission of the expected decline, many analysts are angry and say the senior leadership has no credibility (read article here). They are crying for heads to roll. So, should you sell GE stock if you own it?
First, look at the announcement. In addition to saying earnings are going to decline, the company has said it intends to diminish its financial business and grow its global industrial business. While it is cutting the dividend the financial unit pays to the parent, it is also cutting the debt in the financial unit. And, most importantly, GE is halting its stock buyback. "We have suspended the stock buyback to reduce GE Capital leverage, while still being able to pursue opportunistic acquisitions" is what Chairman Immelt said.
This is great news for investors. This management team has said it is less interested in manipulating earnings per share by buying back stock, and instead wants to make sure it has cash to make acquisitions at a time when many business values are declining. GE is preparing to keep its growth going, primarily outside financial services, by making sure it has cash and continuing its hunt for acquisitions. Meanwhile, its actions allowed the rating agencies to re-affirm GE’s triple A credit rating – making it a company able to raise debt from around the globe as this crisis continues.
This is exactly what you want to see in a Phoenix Principle company. GE is a portfolio of businesses, which it works aggressively to keep growing. Selling things that don’t grow, and buying things that do. It keeps moving people around in the company to challenge them, and thus help both employees and their units grow. It isn’t stuck in its old business, but is ready to keep moving forward. And it is planning to move forward by admitting it intends to make acquisitions if the markets remain troubled and asset values keep falling. Rather than pulling back to protect its core – especially its core financial services unit – GE leadership is taking action to move forward with less emphasis on financial services and a plan to invest in other businesses with better return potential.
If you are an employee, a vendor, a customer or an investor in GE – could you ask for more? With its eyes firmly on the future, a passion for beating competitors, a willingness to Disrupt even during turbulent markets and the willingness to continue creating and maintaining White Space GE will continue to be a long-term survivor with above average performance long term. Preparing to grow, regardless of market conditions, is part of what makes GE stand out – despite its critics.
by Adam Hartung | Sep 24, 2008 | Disruptions, General, In the Rapids, Leadership, Lifecycle, Openness
Yesterday, amidst all the brouhaha over the dissolving of America’s financial system, Google (see chart here) launched a new phone (read article here.) This would have surely been the #1 front-page news, except – again – the Congressional effort to deal with a trillion dollar investment decision in bad loans. So, is this a big deal that was given short shrift, or is it an announcement we can ignore?
There is debate about whether the Google phone is a game changer or not. And that debate cannot be resolved by phone gurus. Quite simply, mobile phones are no longer simply phones. All the new products are built with new operating systems which let them operate various applications making them quasi-personal computers with mobile telephony capability. There are now several players in the game, and to assess the likely winner’s you would be best served to read Geoffrey Moore’s book The Gorilla Game in which he chronicles the requirements for success when launching technology products. So, does this mean we should reserve opinion about the importance of this launch until more is observed about sales and market share generation?
Hardly. I’ve blogged a fair bit about Google lately – and it’s been positive – and once again I think you should be impressed with this launch. It shows Google getting into yet another growing market, and with yet another new technology. Once again Google has chosen not to sit on its laurels in search or ad placement and invest big money in White Space with permission to do what’s necessary to succeed. One thing Google has a lot of right now is money – and instead of hoarding it the company is creating and maintaining White Space which can keep Google in the growth Rapids. I doubt that everything Google does will make money, and I doubt all its products will succeed. But the fact that Google is investing its ample cash in projects inside growing markets which can sustain the growth is the best move the company could take now.
Also, it’s impressive that Google made its launch knowing that it wouldn’t get the top headline. This shows an organization more intent on White Space than headlines. Instead of creating a "splash" about itself the company put out a new product, using new technology, that operates on a new network, with new functionality – and did it during a very uncertain time for most investors and the economy. Obviously, Google is looking forward and sees it must get into the market now and compete to learn how it will succeed. While many other companies which are less cash rich are forced to pull back their horns, or with management that prefers to be conservative because of shifting markets, Google is keeping its eyes squarely on the future and sees that getting in now, during a period of great uncertainty, only increases its odds of success. When markets shift it most benefits the new entrant willing to create marketplace disruptions – and that’s what we see Google doing now.
We all were impressed with how IBM practically monopolized the mainframe computer business. We were impressed with how Wang dominated word processing. And how Digital Equipment dominated engineering mini-computers. We were impressed that Microsoft took total domination of the desktop market, Dell created domination in selling and distributing PCs, and Sun Microsystems garnered huge share in Unix servers. But each of these got into trouble when markets shifted and they weren’t part of the market shift. As they tried to "milk" their market position and disparage upstart competitors, they fell into Defending & Extending their outdated Success Formulas – until they either (a) had a big, dramatic turnaround, or (b) went out of business, or (c) saw their growth slow and their value plummet. What’s impressive is that Google is showing us the willingness to Disrupt what made them great and enter dispirate new markets with new solutions using White Space to develop new Success Formulas around those markets. With this behavior, they are much more likely to demonstrate long-term value creation than the companies listed above.
And for customers who recognize the value in new technology, as well as employees looking for ways to grow, and vendors ready to support the effort, as well as investors, this is a very good sign.
by Adam Hartung | Sep 22, 2008 | Defend & Extend, Disruptions, Ethics, General, In the Whirlpool, Leadership, Lock-in
By now, everyone knows the story. After all the cost to take over Freddie Mac and Fannie Mae, plus the guarantees given to J.P. Morgan Chase for their acquisition of Bear Sterns, and the cost to keep AIG alive – in the range of $300million to $600million – the Treasury secretary now says the U.S. taxpayers need to spend at least (it could be more – even more than 2x this amount) $700billion to purchase the bad loans sitting on the books of banks, investment firms, insurance companies and hedge funds.
So what does the taxpayer get for this? So far, all the taxpayer is told is "it’ll stave off an even worse crisis." I’m reminded of the words attributed to Illinois Senator Everett Dirkson "a billion here and a billion there and pretty soon it adds up to real money." This is a lollapalooza of a bunch of money – and yet no one seems interested in saying what the taxpayer gets. The proposal is pinned on "things will be worse if you don’t", without much talk about how things will ever get better. There’s no talk about how this will create more jobs, create rising incomes, or improve asset values. Just "it can get a lot worse."
So, put yourself in the role of CEO. If someone came into your office saying "I think we made a whopper of a mistake, and you need to agree to pony up something like $1 to $1.3trillion dollars to bail us out." After you get back up, what would you ask? How about, "what’s this for?" To which you hear "Well, it seems we simply made a bunch of bad investments, and now we have to buy them all back." Nothing about how your business will be better for having done it.
Now, it might occur to ask, "if I do this, how do I know it won’t happen again?" And that’s the question you really should be asking today. Have you heard before about this problem, and told your previous actions would stop the problem? If yes, wouldn’t you say "hey, I’m a bit tired of running around this tree and getting these recurrent bad news meetings. Seems like every Monday is something of a ‘here’s the newest crisis’ environment. What’s your plan to adjust to the market requirement?" And if the plan is to do more of the same, but now with more resources, done harder, and working smarter you’d be pretty smart to say "if the previous actions didn’t work, why should these work?"
In the end, this $700billion to $1.6trillion isn’t changing anything. It’s just putting the proverbial "finger in the dyke." Only what started out as a few hundred million dollars (the finger in the first hole) has exploded into over $1trillion and the dyke hole isn’t the size of a finger – it’s the Holland Tunnel! Clearly, what was tried hasn’t worked. Yet, this is asking more of the same. So, in the legislation the person who’s been watching and saying "things will be fine" and spending the hundreds of millions has now said "just to make sure this works, I want not only all this money but no oversight on what I might need to spend additionally – and no controls over what actions I might need to take – in order to finally stop the flooding problem." Uh, right. Since everything you’ve done before didn’t work the obvious right answer is to give you more money than I ever imagined, and on top of that give you unbridled permission to do anything else you want to keep trying more of the same to stop the problem.
When do you say "no"? Confronted week after week with crisis after crisis, when do you say "I don’t think this is working?" It’s so easy to go along. It’s so easy to say "this has been the way we’ve always done it. Things haven’t worked so far, so clearly all we need to do is do more of it. Possibly more than any of us ever dreamed imaginable – but surely if we do enough, do more, eventually it will work."
Now, more than ever, we need White Space. The financial markets have shifted. Competition has shifted. The balance of competitiveness has shifted to those who have access to lower cost resources of everything from oil to labor. Those who focus on industrial production can now see that it is dominated by those who have more people, who are equally trained and who work for less. Whether that is the production of shirts, or software code. Trying to prop up a global financial system based on the "full faith and credit of the U.S. government" is difficult when that government is significantly in debt, has lost its position as #1 in manufacturing output, and no longer controls the financing of everything from dams to auto purchases. Trying to "fix" this situation with solutions designed to work in another era, under a different set of circumstances, will not produce better results.
At the very least, when confronted with this kind of situation it is the time for leaders to say "where is the White Space to develop a new solution? If I have $1.3trillion to buy the problem – either by giving up the money or by printing more – and I forego all other expenditures (like health care, or defense against competitors) to put the money here – I deserve to see some money spent on developing a new solution. One that is built upon the new market characteristics." This is not the S&L crisis again, nor is it the failure of a single big bank. We are seeing the results of a market shift which the industry was not prepared for. And the only way to come out successful is to have White Space to develop a new solution.
So far, no one has asked for permission to develop a new solution – nor has anyone even proposed it. No one has even asked for resources to develop a new financial system. All the money is going to attempt propping up the old system – and the more we dig, the deeper we get.
At the very least, for $700billion, we need White Space. We don’t need hedge fund managers who are salivating to buy up beaten down assets. We don’t need regulators trying to roll back the clock. Nor do we need "do nothing" recommendations with "have faith this will all work out in a capitalistic system." We are in the information age – not the industrial age. We are in a global economy – not a U.S.-led international economy. We are facing new competitors, with different advantages, doing very different things. And we need new solutions. Without those, each Monday will continue to feel like the movie "Groundhog Day" as we relive over and again the problems we don’t address by simply throwing money at it. We have to find a way to move beyond "more of the same."
Mr. Paulson is willing to bet the U.S. Treasury on doing more of the same. He’s ready to spend money Americans don’t have (since there is a negative U.S. government budget and huge deficit.) This means either higher taxes, or turning on the printing press and creating inflation. That’s a bet he’s willing to take. Are you? Or would you like to see some options? Some new solutions? Or even some teams that are working on new solutions? If he’s your V.P., your CFO, do you approve his recommendation, or do you ask for something more – some White Space to develop a solution that does more than stave off future crisis. Do you look to the future, and how to win, or do you try to preserve the past and put all your money on the bet that old solutions will work?
People think of change as happening along the blue line to the left. A little change every year. But what really happens is like the red line. Things go along with not much change for a very long time, then there’s a dramatic change, and then an entirely new "normal" takes hold. This big change is what’s called a "punctuated equilibrium."