by Adam Hartung | Apr 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Last night ABC’s Nightline program featured an article on Starbucks (see print version here). This is not the first time Nightline has discussed Starbucks. The program previously chided management about it’s competition with McDonald’s (see video on YouTube here) saying Starbuck’s coffee wasn’t any better than the fast food giant. Nightline’s recent feature was that Starbucks needs to "regain its focus" under the return of early CEO Howard Schulz. Something he was happy to support. Even Marketwatch kicked-in its review of the "retro-strategy" being taken to rejuvenate the company by launching a new coffee blend (read article here).
Wrong. Do we need a lot more Starbucks? At 15,000 units, one could easily argue that it’s sensible to expect less growth. And, as in all markets, competitors are figuring out how to duplicate Starbucks original idea – from other "shops" such as Caribou Coffee to mass chains like McDonald’s and Dunkin’ Donuts. ALL Success Formulas have a half-life. ALL Success Formulas grow tired, and lose their ability to maintain above average growth and profits. And that is happening now to Starbucks. Starbucks did the right things to grow like crazy as an early pioneer in its largest business. But doing more of the same – possibly better, faster or cheaper – is not going to get Starbucks back on the growth path. That’s just Defend & Extend activity which is already demonstrating declining marginal value.
Mr. Schulz was obviously the right guy to get things growing 20 years ago at Starbucks. Out of the Wellspring he took the coffee shop idea into the Rapids. He built systems that helped Starbucks Lock-in on all the things that could help the company grow. Imagine the skill it took to consistently open 6 new units a day!!! He was the right guy in the right place and he helped create an empire.
But that’s not what Starbucks needs today. For at least 3 to 5 years it has been obvious there would be a limit to the growth in Starbucks traditional business. Starbucks has been tailing off the Rapids, and heading into the Flats. And now it is rapidly falling into the Swamp of low growth. It was obvious the demand for shops was going to become saturated, and competitors were bound to get sharper and better. So the last CEO Disrupted Starbucks – saying the company was not just a coffee company. He got into music production, movie production, performer management, liquor production and consumer goods. He also started expanding the stores to offer sandwiches and many other products besides coffee. He actively promoted and funded White Space to find new revenue opportunities. And that is what Starbucks needs more than anything – more sources of revenue.
Starbucks is blessed with a name that does not mean anything. Starbucks doesn’t have to think of itself as a coffee company. Think about Nike – which didn’t have to be a shoe company. Only by moving beyond shoes did Nike become the megapower brand it is today. For Starbucks to now make an about-face and try to find the future in its past is lunacy. That’s trying to catch last night’s dream. The competitive market which supported rapid coffee shop growth is gone, and a new one is in its place. Focusing energy on a slugfest with its competitors will only result in price wars, lower margins, declining growth, store closings, laid off workers and lower returns for shareholders (who already know this and have knocked 50% off the company value in the last year – see chart here.)
The appeal of "back to basics" is so strong. We’ve seen too many executives fall prey to the call. It seems so logical to think that if we "focus" on "core competencies" we will somehow return to previous greatness. But that simply isn’t true. Watch old prizefighting clips, and it is amazing. Rocky Marciano looks like an out of shape thug compared to the athleticism of Joe Forman or Muhamed Ali – who look like they need another year in the weight gym compared to Mike Tyson and today’s belt competitors. Each wave of winners creates yet another round of competitors who are different – and that changes the game. Doing more may have worked for Rocky Balboa – but he had the help of a dozen script writers to make his dream come true. In the real world, we cannot capture the old glory but rather have to find new places and ways to compete as our markets become crowded from those seeking our success.
Starbucks is in for some really big trouble – worse than already seen – if Mr. Schulz stays in place and continues with his plans. For investors, its highly unlikely to be a pleasant ride. Starbucks can succeed if it realizes that its future growth is not about the coffee. It’s about finding ways to change other markets the way it changed the last one. And that means avoiding focus on past successes and instead using White Space to develop a new Success Formula that can grow and prosper – achieving past results but in new ways.
by Adam Hartung | Apr 4, 2008 | General, In the Rapids, Innovation, Leadership, Lifecycle
Today the press announced that the U.S.’s #1 music retailer is iTunes (read article here.) This is actually pretty amazing, given that Apple’s (see chart here) iTunes is only 5 years old. To reach this position Apple climbed over Target, Best Buy and finally Wal-Mart. Companies generally considered pretty good retail competitors. And iTunes did it with a handicap. Those who track the stats count songs – so iTunes had to sell 12 tunes to get the credit the traditional retailers get for selling 1 album – so as for number of music transactions iTunes clearly dominates.
You have to ask, why did Wal-Mart (see chart here) and Best Buy (see chart here) let this happen? They arent without resources, and music is profitable. Why didn’t they get out there 4 years ago with web sites that attacked iTunes offering product at great prices? If Wal-Mart is "Always low prices" why didn’t they put out digital music at a discount to Apple? With best guesses now that Apple has 19% market share, to Wal-Mart’s 15%, why didn’t Wal-Mart react to declining CD sales and invest in its own digital music site to slow Apple and get it’s fair share?
Wal-Mart and Best Buy are too busy trying to get people into the store. Those big old buildings are what management thinks about. These buildings are a testament to the company. Management is fixated on keeping people going to the stores. As retail goes on-line, and music has been an early leader, Wal-Mart isn’t about retail. Wal-Mart is about it’s stores. Rather than figuring out how to be a great retailer, thus giving customers what they want, when they want it, at a price they will pay, Wal-Mart is all about trying to get people into those stores by selling things cheap. The decor is allowed to remain lousy, the advertising looks cheap, the products in many cases aren’t stylish or alluring – and in the case of music the product isn’t even what’s growing (digital) but rather they rapidly dying CD.
Wal-Mart doesn’t care any longer about retailing. Wal-Mart is fixated on Defending & Extending its Success Formula, which it has closely tied to those incredibly ugly stores. Wal-Mart is about doing more Wal-Mart. And, unfortunately, Best Buy isn’t a whole lot better. Their approach to on-line sales is to get you to place an order, and then pick it up in the store. Again, all about the physical store – not about retailing. The goal has long been forgotten as the organization fixates on it’s stores as sacred cows they have to justify.
So Apple, which is a well run company, didn’t really have much competition the last 5 years. Apple has been allowed to grab the lions share of the market, while prime, well-funded competitors have ignored it. Not only retailers, but look at Sony – which has all the pieces (a recording company and a leading position in consumer electronics) to mount a considerable competitive attack. But Sony can’t get beyond Defending & Extending its old businesses, completely missing the opportunity to be a leader in the fast growing digital music sales arena. And Apple just keeps growing, and practically minting profits, with ease.
Southwest Airlines did the same thing 30 years ago. There was no reason Southwest should have been allowed to grow so fast, and make so much money. There were lots of airlines. But many went broke (Pan Am, Eastern, Braniff, Continental) and the others lost billions of dollars trying to Defend & Extend their business rather than simply get in and really compete with Southwest. So, like Apple, Southwest grew fast and profitably – and did it with seeming ease.
So who is threatening Apple? MySpace is jumping in, and we all know MySpace is very savvy about internet users. But note that MySpace is a division of News Corporation (see chart here). NewsCorp was once a newspaper company. But today it has interests in not only newspapers but radio, TV, cable TV and the web. Chairman Rupert Murdoch is a leader, like Steve Jobs, who is not afraid to Disrupt – nor is he afraid to invest in White Space. As a result News Corporation has flourished while other companies started as newspapers (Tribune Company, New York Times Company, McClatchey, etc.) have struggled and are floundering.
Businesses that focus on Defend & Extending their past investments become obsolete. Like SS Kresge, Montgomery Wards and Woolworths’s – Wal-Mart’s stores are not a protection against competition. D&E management likes to think big assets (like The Chicago Tribune or New York Times) make them indestructible. Instead, they can easily become albatrosses.
New competitors need not fear large, entrenched competitors. They are most often unlikely to do anything about a successful new competitor. Early entrants not only get in the Rapids, but are often allowed to stay there an amazingly long time (and they longer they continue Disrupting and using White Space the longer they can stay).
by Adam Hartung | Apr 2, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Top oil industry executives were on Capital Hill yesterday being questioned about their profits (highest ever) and the tax breaks they receive for exploration and production. (Read AP report here under headline "Oil executives defend huge profits".) Let’s not be naive. As officers of their corporations, they have an obligation to maximize the value of their companies – otherwise they could be sued by investors. No matter their personal opinions, they have to defend their profits and their product prices. So reading that they did so should not be unexpected.
It’s not the headline that’s interesting, however. It’s how they reacted to questions about the future. After all, reported profits are the past. What does the industry see in the future, and how is it preparing for it?
Does anyone doubt that crude oil is being consumed faster than it is being produced? We’ve known that since – 1940! The 1970’s "oil price shock" certainly taught all of us that petroleum is a finite resource, and we’re using it up. It’s not whether we will run out of crude – but when. So the interesting question is, when will that happen and what are our biggest "energy" companies doing to prepare for it?
Unfortunately, this isn’t a big topic for these behemoths. Typical of the industry leaders, when the Chairman of BP America was asked what he wanted for America’s future he replied "We need access to all kind of energy supply" with the writer noting "adding that 85% of U.S. coastal waters are off limits to drilling." In other words, more of the same! Drilling more holes, possibly in environmentallyl dangerous locations, does not solve the real problem – world petroleum consumption keeps growing while the pools of oil underground are being used up.
Don’t get me wrong, I grew up in the Oklahoma oil patch. I had lots of relatives that poked holes in the ground, sold oil leases, and worked in oil companies. The industry was very good for my home state, creating jobs and raising the standard of living. But that was then. What we need to address is the future. What are these companies doing to replace these massive revenues as oil gets harder and more costly to find? What are their future scenarios, and how are they proposing to help create a wonderful future? Together, according to the article, the major oil companies spent $3.5b on other options besides oil last year (solar, wind, biodiesel). Their tax breaks – $18billion. Their profits last year $123b!
These companies are incredibly Locked-in. They aren’t energy companies, they are oil companies. Right now, they are making lots. But look at history, and they have sure had their down years (or, rather, decades). These companies are the sort that make good money 5 out of every 20 years. Oil companies have never been a great, consistent, long-term sort of investment. Right now, they are making a lot of money. Shouldn’t they be taking action to make the future better than the past? Wouldn’t it be good for investors, employees and customers if they invested in something besides more oil wells to improve their consistency and growth prospects? Wouldn’t all parties enjoy these companies developing a path to long-term success, even as the oil supplies diminish? As stewards of investor value for the long-term, don’t they need to have a resolution for growth besides merely higher prices? Don’t they need to find ways to actually make more energy and add real growth to their business?
Lock-in is allowing these companies to invest in a marginally declining value proposition. More holes, and more risk. They keep doing what they know how to do, what they’ve always done. What’s needed is White Space where the best minds could really work hard on new alternatives. These companies need to give real Permission to develop a new Success Formula – not just window dressing. The amounts they are investing are small not only compared to profits, but compared to the alternative investments they make in deep water drilling or inhosptible location projects. These oil projects as well cost in the billions of dollars. So the companies aren’t truly resourcing White Space either.
We all know the oil will run out. As investors, we should be looking for leaders that are seeking new ways to compete. New solutions. It will be the new solutions that create long-term above average rates of return. But these leaders didn’t exhibit much interest in anything but Lock-in and more of the same. And that’s too bad for the industry – and all of us customers as well.
by Adam Hartung | Mar 29, 2008 | Defend & Extend, Disruptions, General, In the Whirlpool, Leadership, Lifecycle
Boy oh boy did the Chicago press decide to beat up on Motorola (chart here) this week. With the company’s announcement that Motorola does intend to split into two seperate entities – by spinning off the mobile handset business – the press decided it was time to unload. Headlines: "Pulling wings apart a risk for Motorola" (link here) – "Expert’s advice: Cut red tape and deliver" (link here) – "Motorola breakup ends comeback effort" (link here) – "Motorola must think beyond its batwings" (link here). Reading these articles, you would think the people running Motorola were dullards and miscreants with limited skills and poor business sense. But do you really believe that?
The management at Motorola is filled with very bright, hard working people. Most of them have been quite successful inside Motorola or from outside and recruited in. So the question becomes, if they aren’t stupid, how can this happen? As I’ve blogged before – leadership did a decent job of Disrupting initially, and all of Motorola opened White Space that launched new projects and products. Growth followed. But in mobile handsets leadership allowed the early success of Razr to succumb to old-fashioned notions of maximizing product revenue and profit. Management wasn’t stupid, it just listened to the siren’s song of "maximize profits by seeking market share and using volume to seek lower costs in manufacturing, sales and distribution." Who would argue with that? It made a lot of money really fast. It just left the company vulnerable to competitors – who acted fast and leapfrogged Motorola. And it allowed Defend & Extend practices, well entrenched in Motorola, to re-instill themselves.
So if management wasn’t stupid, what’s next?
First, Motorola does need to split. One business needs to keep doing the right things in DVRs, WiMax, headsets and 2-way radios. It needs to keep the funds from its success to re-invest in more White Space projects and not divert money as well as management attention into cellular handsets. The first business is Motorola – always has been – and justifies its brand image. This business is in the Rapids. This business has found ways to Disrupt its old Lock-ins, sell off busineses (like auto products) that don’t perform, bring in new acquisitions and set up White Space to find new growth markets.
The handset business needs to get out on its own – and either fail or turn around. Literally. Whereas the other part of Motorola got itself from the Swamp back into the Rapids, handsets isn’t just in the Swamp, it’s in the Whirlpool. The business would have gone into bankruptcy already if not supported by the rest of Motorola. These two businesses are in very different parts of the lifecycle, and require very different management solutions. So push it out the door and give it a chance, albeit a small one, to turn around.
The handset business needs to start over. New name, and a new leadership team willing to Disrupt abruptly. The key requirement is to so Disrupt the business that old practices are quickly abandoned – since they are what is causing the company to falter. The people, who know they are in trouble, have to see that old Lock-ins to practices like product reviews and technology stability – practices that are seen as good management – are what has gotten them into trouble and they have to be ignored. Those who have administered the best management practices – the Status Quo Police – have to be removed. Those who reinforced abiding by old practices have to go so that new best practices can be created around faster product launches and more market participation.
New handset leadership needs to very quickly give Permission for these bright people to unleash their skills. Permission has to be granted to rethink the technology, the products, the distributors — all aspects of the business. Handsets can’t win by doing what it did before, better. The business has to transform and that requires Permission to break all the rules – and White Space in which to try new things and see what works. Fast.
Great companies learn to let go early and fast. Quite simply, not all ideas pan out. Some products are huge successes, and some aren’t. Great companies keep Disruptions and White Space alive – launching new products and services. But if expectations aren’t met they cut quickly. They review why things didn’t work out as planned, and move on. Maybe too early, or too late, or wrong technology. But move on. Get over it, quit spending where its not making money. Love your launches, but don’t marry them. Keep nimble. Look at the businesses GE has entered, and exited, over the last 20 years. But Motorola, filled with truly innovative employees, spent too much energy on the "selection" process, launching too few products for the market to evaluate, and tried forcing them into success far too long. Does anyone remember Iridium (the failed effort at a satellite-based mobile phone network)? The faster the current distraction (handsets) is thrown over the wall the faster the rest of Motorola can get back to Disrupting and growing new Success Formulas in new markets.
And those in handsets have to learn to launch new products while existing products are still growing – and to let the customers decide what technologies and products are good rather than internal vetting and management. Whatever you call your company – you can’t move too fast finding a new Success Formula. With the size of ongoing losses, you’re in the Whirlpool fast on the way to extinction. It will take serious outside-the-box launches (like Apple launching itself into the music business with iPod and iTunes) to turn around your business. Only by Disrupting – recognizing the depth of your horrible situation publicly and as a team- then giving yourself Permission to overcome all the old Lock-ins and using White Space to redefine a new company can you hope to turn around.
It’s not about whether management is stupid. That is almost never the case. The issue is about managing, and overcoming, Lock-in. Those who learn to manage Lock-in by using Disruption and White Space keep themselves in the Rapids. It’s really, really easy, however, to follow the siren’s call of maximizing profits by letting Lock-in promote reduced innovation, reduced new product launches, reduced distribution experiments while maximizing sales and profits of existing products and services. Only by ignoring those calls can leadership turn around businesses by refocusing on Disruptions, giving Permission for truly different behavior and using White Space to develop new Success Formulas.
by Adam Hartung | Mar 27, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
We all find ourselves watching the news, or reading a newspaper, then shaking our head and saying "Why’d they do that?" When it all seems so obvious, why do leaders take action that seems counter to their goals?
Take the recent case at Wal-Mart (see chart here). A 52 year old employee gets hit by a truck and brain damaged. Wal-Mart’s insurance pays out $470,000 in health care costs. Yea! Great PR story for how WalMart sticks by employees that sign up for health insurance. But that wasn’t the story printed in the newspaper. When the family, at their own expense, sued the trucking company for lost future wages, pain and suffering and future care needs – winning $417,000 after expenses. But, that still wasn’t the story getting attention. No, what got a lot of attention was when Wal-Mart sued the now invalid and institutionalized former employee to get back its $470,000, won, and admitted it was taking the money away from her! (Read account of story on CNN.com here.)
Let’s just skip over whether Wal-Mart was right or wrong – legally or ethically. More practically, how much does Wal-Mart spend on Advertising and PR every year? Let’s see, $360B revenue at just 1% would be over $3B. So Wal-Mart wants customers to think well of the company and shop there.
As a result of the company’s lawsuit it gets back $470K – that’s .013% of its ad/PR budget. About enough to buy a couple of major market TV ads. Meanwhile, the airwaves (and blogsphere) get flooded with the story and its negative sounding impacts. MSNBC on its Countdown show labels Walmart "the worst person in the world" (see video here.) CNN puts the video onto its hourly loop for everyone to see (see video here). Anderson Cooper makes it a feature discussion on his television show. Even the L.A. Times writes a negative opinion about it in the newspaper (read here.) What would all of that PR cost WalMart to acquire for a positive story? Millions if not tens of millions of dollars. But it could have avoided all that cost for a mere $470,000.
Today WalMart is far from being a beloved company. There are those who like Wal-Mart, but there are those who don’t. For shareholders and employees, converting those that don’t like Wal-Mart into someone who does is beneficial, as it can raise sales, margins, future expectations for performance and even the stock price. As a simple business decision, why would anyone at WalMart decide to go after $470,000 when the risks are so enormous? Why not let this one go? Why do that (make the decision to sue this woman)?
Unfortunately, Locked-in organizations have no choice. When the Lock-in becomes too great, no options really present themselves. There is no room for creative thinking – even if that thinking were intended to help reach the goal. Behavior is no longer goal driven, but instead becomes executing the Locked-in Success Formula no matter what the potential outcomes. Just read this quote from Wal-Mart’s spokesperson (taken from the above referenced CNN article) "Wal-Mart’s plan is bound by very specific rules… We wish it could be more flexible in Mrs. Shank’s case since her circumstances are clearly extraordinary, but this is done out of fairness to all associates who contribute to, and benefit from, the plan." No room for flexibility, no matter the impact or outcome.
If every employee donated $.40 it would recover all the money Wal-Mart apparently saved by suing the damaged woman. But did Wal-Mart ask its employees if they would rather donate $.40 or sue her? Did anyone at Wal-Mart say "you know, this could cost us $10million in damaging PR – maybe it would be more valuable to our employees if we skipped this lawsuit." Obviously not.
When you wonder "Why did they do that?" remember this story of Wal-Mart. Locked-in organizations completely lose sight of their objective when making decisions that serve to Defend & Extend the Lock-in. And once decisions are made, the Status Quo police and all the rest of the organization jump to its defense — rather than think through what was going on. All any executive had to say was "oops, I think we blew this one. Let’s tell that to the press, drop the suit, and give this woman a $20,000 bonus while offering her husband a job in janitorial" and the bad press would have been diffused – possibly leading to a positive spin. But that’s not how Locked-in organizations behave – and that’s Why They Did That.
by Adam Hartung | Mar 23, 2008 | Defend & Extend, General, Innovation, Leadership, Lifecycle, Lock-in
Most management planning processes are designed to perpetuate the past. They are designed to figure out how to do what happened last year, or quarter, only a little bit better. In a high growth environment, no problem. Doing more is a good thing. And if markets were stable, it would be OK in any market. But too few companies compete in high growth markets, and no markets are stable any longer. Simply doing more of the same better, faster or cheaper isn’t enough.
Stuff happens. Just take for example some facts recently published in The Chicago Tribune (read full article here.) VCRs in 1978 were advertised at Sears for $795 ($2,500 in today’s money). A basic 5-cycle washer sold for $320 ($1,000 in today’s money), priced equivalent to a top-of-the-line washer today. Fifty years ago families spent almost 20% of income on food; today that has fallen to about 10%. But insurance premiums have gone up almost 80% in just the last 5 years. Today attendance at many private colleges – like jesuit or other private schools, not merely ivy league – costs more than the average family has as gross income in a year. My favorite — a 2008 Honda Accord produces more horsepower than a 1990 Porsche 911 Carrera.
All right, so we all know this. But we completely forget about it when planning. Yet, they all had really important implications. In 1978 most of us still watched movies in theatres – now many adults haven’t been in a theatre for years (hurting revenues and profits at everything from movie producers to theatre chains) because home entertainment systems and purchases/rented movies are so cheap. Meanwhile "big box" electronic/appliance stores have come on the scene wiping out mom-and-pop TV/appliance stores and probably Sears. In the 1970s laundromats were very popular for new families and people in small homes, but today it is a rare married couple living outside of an apartment that doesn’t have their own washer and dryer, making laundromats practically a concept of the past. I grew up tending to a family vegetable garden, and most families used part of their backyards growing vegetables to save on groceries. Today it’s cheaper to buy corn, green beans, tomatoes, carrots, potatos and broccoli than grow and preserve them at home – good for consumer goods companies and bad for seed vendors like Burpee as well as home canning suppliers like Ball and Kerr. While every working person in the U.S. had health insurance in the 1960s, today more than 40% of working adults have no health insurance. My older sister, like many girls in the 1960s, attended a Christian college paid for by my father who was a school teacher in a rural 5,000 person town and the only breadwinner in our home. Today, that college is long gone as are more than half the private colleges which used to exist in America – or they’ve been converted to satellites of state university programs. And I can well remember when I, working part time as a minimum wage college student, would earn over $2,000 a year and could buy a brand-new American made car (Ford Maverick anyone?) for less than that amount. Now new car sales are stagnant/down, and people are driving cars many more years creating opportunities for auto repair, auto parts and used car sales.
The competitors in all these businesses changed dramatically over just the last 50 years. And in each industry, the early leaders have been displaced. Why, planners kept trying to perpetuate the past rather than focus on the future. Companies failed to keep White Space alive that tracks market changes adapting the Success Formula to meet emerging Challenges.
Today we can look at eggs. I remember when every Easter eggs were on sale, usually at 50 cents/dozen. Not this year. Eggs are up 30% – and now over $2.00. Why? Many factors (read full article here), such as new regulations to improve the health of chickens has increased their personal space by about 10% but has led to taking millions of hens out of production. A new industry council focusing on improving hen welfare has caused most farmers to invest in new technology, siphoning funds for expansion into updating old facilities but without improving production. A national focus on increasing renewable energy has raised corn prices (for ethanol production) to record heights, increasing chicken feed cost 70% (remember when we referred to small amounts as "chicken feed") which accounts for 60% of egg cost. And the current financial crisis is causing lenders to hold back on loans to farmers, making investment dollars for new facilities very scarce and very expensive.
The result, egg prices have doubled in two years. But who planned for that? Practically no one. Is it a big deal? Well yes if you are Denny’s, IHOP or any other restaurant chain that focuses on breakfast. Or how about bakers, who need eggs for cakes, bagels and many breads. Or dairy companies that depend on eggs for a significant portion of their revenues, as demand declines due to price. It may seem trivial, the price of eggs, but it can make a big difference on businesses – and how many of them developed scenarios to prepare for this kind of change? Those that didn’t find their planning, based on Defending & Extending the past, not worth very much as they scramble (excuse the pun) to adjust to changing market conditions.
Good companies build scenarios of the future for planning. Not just "most likely" scenarios, but scenarios that could make a big diffference even if considered unlikely. It’s not what we plan for that hurts our businesses, but rather what we don’t plan for. The things that surprise us. Companies that survive for decades, and make above average returns, are ones that plan for unlikely events – and prepare themselves for conditions that are unlike the past. And they keep White Space alive to rapidly learn from these Challenges providing Success Formula adaptations that can keep the winning company out front and making above average returns. These are Phoenix Principle companies.
by Adam Hartung | Mar 22, 2008 | Defend & Extend, Disruptions, In the Swamp, In the Whirlpool, Innovation, Leadership, Lifecycle
A couple of weeks ago I blogged that the Chief Innovation Officer for Tribune Company – Lee Abrams – was unlikely to make much difference because he wasn’t given any White Space. He didn’t have permission nor resources to develop a new Success Formula – and as a result he would be allowed only to make minor adjustments around the existing Success Formula edges – a program which is way too little, too late for nosediving Tribune.
Recently Mr. Abrams was interviewed (read interview here), and the reported discussion leads me to be no more optimistic than I was before. While I grant Mr. Abrams with a lot of experience, good ideas and desire, he’s still without White Space and that means organizational Lock-in, and the Status Quo Police, will keep his efforts from yielding much improved results.
I was pleased to read that Mr. Abrams recognizes the difference in requirements between his success in radio and his challenges with Tribune. As he indicated, when he applied innovation to radio "what radio needed was discipline. It was all over the place and we disciplined it." That made a lot of sense for 1970s radio. Top 40 had ignited a huge growth wave, and the radio industry was in the Rapids. In the Rapids, businesses need to develop a Success Formula and become good at executing it so they can keep growing fast. Good business practices in the Rapids are all about Locking-In on the Success Formula and replicating faster than anyone else so you can grow the most and build the greatest resource base.
But after growth stalls it’s a whole different game. Once tipped into the Flats or Swamp successful innovation is about finding your way back into the Rapids. And Mr. Abrams seems to know that. When he took his new job at XM Radio a few years ago he had employees bring in memorabilia from traditional radio stations and he burned them! Similar to how he had a Chicago DJ bring disco records to the ball park and blow them up with explosives to mark the shift away from Disco programming! These actions were symbolic Disruptions – making people see that the past needed to be forgotten in search of a more successful future. Disruption is the first step to opening the mind, and organization, for a better future. Then it takes White Space, given Permission to truly develop a new Success Formula and resources to see the efforts through.
But Mr. Abrams isn’t blowing up any artifacts at Tribune. He sounds much more subdued as he looks to use the six smaller Tribune newspapers as "labs" to test things. He even says he "can’t do anything too radical right away." He’s not talking about necessary Disruptions. He’s talking about attempting some sort of evolutionary change within a horribly Locked-in and resource-starved company more focused on making debt payments than anything else.
Those 6 newspapers aren’t labs. The management in them is intent on making budget this year so they don’t have to cut more heads from the traditional business. Those managers are focused on saving their traditional business traditional ways. Mr. Abrams has no White Space there to develop a new Success Formula. Those papers have no spare resources, manpower or money, to spend on White Space projects. They want immediate cost savings or immediate revenue enhancements with no additional investment – and that means working around the edges for minor improvements that don’t run afoul of existing Success Formula Lock-in! If they see Mr. Zell offer resources to Mr. Abrams those newspaper leaders will be screaming bloody murder to Mr. Zell to give them the resources and they can be much more productive with them than any ideas being offered by Mr. Abrams. They won’t reject Mr. Abrams, but they will contend that they can do more short-term with the resources than he can! It will be tough for Mr. Zell to ignore those newspaper heads – after he’s cut their budgets for practically every line item!
Tribune desperately needs Disruption and White Space. I hope Mr. Zell finds it possible to really support his new Chief Innovation Officer by implementing some Disruptions. Things need to change in the newspapers, TV stations and radio stations FAST. The new leaders need to quickly Disrupt, so people realize change is expected. And White Space, with permission to do new things – radical things – as well as resources committed to their success is required. Give Mr. Abrams the tools to develop a new Success Formula and he might. But right now – he’s trying to hook a hose to the kitchen sink while rearranging the furniture in a house on fire.
by Adam Hartung | Mar 19, 2008 | General, In the Rapids, Innovation, Openness
We all are surrounded by so much Lock-in and Defend & Extend Management that sometimes it can be hard to find White Space.
On 3/19 the Chicago Tribune reported the creation of some White Space that could be very valuable (read article here.) Microsoft and Intel each invested $10million to open research centers at the University of Illinois in Champaign, and a like amount at the University of California in Berkeley. These centers have the openness to pursue new approaches to parallel computing which could improve everything from solving complex problems to identifying your most important text messages.
The key attributes of this White Space include: (1) permission to pursue any solution likely to succeed. Located at universitites, these projects are not hide-bound to previous company technology investments. University based research gives the profs and grad students the lattitude to seek out solutions which could well be overlooked in a traditional R&D organization. (2) Resources to actually make a difference. Regularly I hear about small companies trying to raise $200,000 or $500,000 for research. Today, that money goes only a short distance. $10million provides enough funds to really seek out a solution. And, (3) not all the eggs are in one basket. Investors selected 2 different locations to pursue the objectives, allowing failure while not completely jeapardizing results. Investing in 2 universities demonstrates recognition that no one can predict where success will occur, so it’s smart to have multiple approaches.
You could challenge these investments as perhaps lacking sufficient Return on Investment justification. But, recall that Internet Explorer was a product developed as a direct result of Mosaic, developed at the University of Illinois, and eventually licensed to Microsoft through a company called Spyglass. And IE had an extremely favorable ROI for Microsoft. White Space should not be a "throw away your money" pursuit. But it is OK to invest in areas where you cannot fully predict the result – and rather just the direction. If the outcome from this $20million (which was matched by $16million of state funding) is even 1/20th as successful as IE the value will be HUGE.
by Adam Hartung | Mar 17, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lifecycle, Lock-in
Almost since I began this blog I’ve talked off and on about newspapers. Living in Chicago, I’ve taken more than a few pot shots at the local establishment – Tribune Company, owner of The Chicago Tribune. Don’t get me wrong, I love "the Trib," as we call it in Chicago. For decades a great newspaper. And because I’m over 49, I still like reading papers. Heck, I very frequently put links in these blogs to the Trib’s web site. Good product at a good price. In fact, in today’s economy, probably too good a product for what I have to pay as a discount subscriber and on-line reader.
Even though all of us are used to the daily newspaper – including the travelers that pick up USA Today and those who just get the Sunday paper for "the ads" – it will disappear. Or at least change form so drastically it won’t appear like it used to be. That may be hard to accept – but then again, do you remember listening to 33’s, 45’s (and if that means nothing to you don’t worry, you’re just young) and LP records; Or 8-tracks, or cassettes? And soon, even CD’s will disappear to the growingly popular MP3 player. Nowhere is it given that we deserve a daily printed newspaper, and in today’s world it’s existence is becoming less viable by the month (read CBS Marketwatch on "Death Knell for Newspapers" here.)
You may be surprised to know that newspaper readership peaked in the 1950s. But you shouldn’t. After all, radio, television and cable TV all ate into newspapers’ share as a source of entertainment and news. The internet is just the latest competitive technology – but it is the one which has pushed the industry into the Whirlpool from which it won’t return. Newspapers have used their resources in many valuable ways, but they have little to none left they can use to become the next Google or Marketwatch. Most are overleveraged (read my past missives on the debt ladening of Tribune by Sam Zell), and all are short the cash (or debt capacity) to catch up with those who invested heavily into web growth a decade ago.
Defend & Extend Management never stops believing there is some way to save a dying business. But businesses do become obsolete. Mail order catalogs were once great, but in an internet world? Printed stock prices were valuable until on-line brokers came along. Heck, I remember when we used to have television repairmen – and they even came to our house and picked up the TV then returned it after repairing! Now we throw the thing away – and I don’t know where you’d find a repair person. My parents helped make the Kerr and Ball companies a lot of money by home canning vegetables they grew in the family vegetable garden -but what is the current market for companies making quart jars and home canning lids? Would you believe that we used to have operator manned printing presses in corporations to make copies of business documents? And carbon paper for multiple copies out of typewriters? Obsolescence happens, but D&E managers never see it. They are paid to follow a "never say die" approach to markets.
Only by constantly Disrupting and maintaining White Space can we hope to keep our companies long lived. No manager has a crystal ball for the future. Predicting the demise is very hard to do. It’s smarter to keep looking for growth, and be optimistic in finding it. Constantly looking for the direction to go is far better than trying to defend a business bound to shrink. Now that even the newspaper industry’s own study group is saying the industry won’t come back investors should start thinking about where they are putting their resources. No, it may not be commonplace to take a laptop in for the "morning constitutional" – but we’re bound to lose that broadsheet sooner than most people think.
by Adam Hartung | Mar 16, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
I was in Junior High when I learned about isotopes. By measuring the amount of radium in an object you could measure its age. Thus, knowing the speed at which radium degenerated gave us a "half life" of the isotopes – and with that we could judge the age of things like rocks and bones and other very interesting items.
Businesses don’t have isotopes, but their Success Formulas definitely have a half-life. New ideas develop into new Success Formulas which earn above average rates of return while growing. But, unfortunately, competitors can rapidly copy your Success Formula and the value drops amazingly fast, surprisingly far. And while the Success Formula remains, the returns don’t justify reinvestment and growth slows. Lock-in keeps the business running the old Success Formula even after its value has started declining. Great companies can fall victim to their own good management if they let the Success Formula age.
Target (see chart here) is just in the beginnings of this phase. Make no doubt about it, Target has been very well run. By introducing new ideas to discount retailing, Target took on Wal-Mart very successfully. Target grew, and it made good money growing. It was innovative, and it made innovation in housewares and clothing – at a low price – a new Success Formula within an industry long focused merely on price. Kudos to its great success, and its ability to slow the giant WalMart.
But being innovative and cheap – what’s called "cheap chic" – has been easily copied (read more here on Target and its competitors.) Lots of other very well run retailers, such as J.C. Penney’s and Kohl’s, have brought out their own innovative merchandise. Now Target is running hard-up against these companies, slowing growth and profits. Target has made product innovation it’s own Defend & Extend. Today, doing more handbags, lamps, dresses and shoes that knock off very expensive designers has become their Success Formula to which they have behaviorally, structurally and with their cost model Locked-in. It may sound surprising, but what is hurting Target today is focusing on making more of these innovations – because that is the Success Formula they are trying to Defend by Extending into more products, and their competitors are successfully copying. And there simply isn’t the same profit in that game there was a decade ago.
Some analysts are noting this, and ranking Target’s equity a "sell". I don’t blame them. Target has become internally focused on "execution" of its Success Formula. It doesn’t appear to have any White Space looking for the next retailing wave that will have above average profits. Target is squeezed between the low-cost (and completely Locked-in, do it until they die) WalMart and copycats. Unless Target quickly Disrupts, recognizing its Lock-in, and gets some White Space going the next round of handbags and red TV ads isn’t likely to do much for revenues or profits.
All Success Formulas, even great ones, have a half-life. The length of time they can earn above average returns is not dictated by the company. Rather, returns are dictated by competitors with their abilty to copy and even one-up the original good idea. And of course substitutes (like all those pesky on-line retailers that keep popping up stealing Target sales) come into the market slowing growth and hampering margins. That’s why everyone has to constantly maintain Disruptions and White Space. Otherwise, they keep optimizing their orginal good idea too long – and become too Locked-in – until even their own innovation skills become passe. You’ll never known you stayed too late at the dance until you look around and notice the band breaking set. It’s far better to keep open the White Space looking for the next party so you don’t get stuck – and watch your profits get mopped up.
