by Adam Hartung | Mar 13, 2008 | Disruptions, In the Swamp, Innovation, Leadership
Sometimes the headline can sound so good. But then the article gives no reason to believe the headline.
Take the recent case of Tribune Company deciding to hire a new Chief Innovation Officer (read article here). The headline says Tribune is hitching onto a star from the radio industry to help innovate out of its huge media mess. Of course its primary business, newspapers, is declining in readers and revenues. And its television properties have declining viewership as customers shift to more targeted programming. And its radio stations with their all-talk format have been duplicated and specialized to the point that the early Chicago innovator is barely noticable and easily forgetable in the competitive fog. So innovation is badly needed at Tribune, and we all should be glad that the cost-chopping Mr. Zell is finally seeing the light!
Mr. Lee Abrams is very talented person with a lot of historical success. I’ll grant him that he may well be perfect for this job. But he’s going to fail. Why can I say that?
- Firstly, because there have been no internal Disruptions at Tribune since the budget slashing began 6 years ago and accelerated under the change of ownership. The talk is all about finding some way to Defend & Extend the old businesses. Even the article indicates the company is hoping Mr. Abrams will find some golden D&E practice that will keep the newspaper competitive in the face of mounting internet competition.
- Secondly because Mr. Abrams was not given White Space. He has not been given Permission to do whatever he wants to find a new future – even if that means getting out of newspaper production faster, or dropping out of cable TV for more internet plays. And equally important he has not been given the Resources to create anything substantially new. Face it, Tribune is a multi-billion dollar business. For innovation to matter Mr. Abrams will need billions to invest. If the way to make a fortune in the future Media industry is to create or buy the next YouTube or Facebook or Yahoo! where’s he supposed to get the money for that? Tribune is using all its free cash to pay for those hugely expensive junk bonds that financed going public. Unless Tribune sells not only the Cubs but also WGN and some other properties, then stops trying to shore up great, but dated, Chicago Tribune and L.A. Times newspapers, there simply isn’t anywhere near the money needed for innovation to make any marked difference on this company.
- This comes way, way too late as a marginal effort. Almost all the Tribune assets are in no-growth businesses. And Tribune is huge. To make a difference, it will require an enormously big shift. A very dramatic change. Not just a big cost cutting. Not just a change in advertiser strategy. Tribune can’t wait on a bunch of small projects to bear out over the next 4 or 5 years. We’re talking about needing a wholesale restructuring of the business to get out of things that are quickly losing value and making giant bets in new things. And that is very risky. This project comes very, very late in the lifecycle at Tribune. The company can see the Whirlpool on the horizon. By letting the Re-invention Gap get so large between what Tribune does and what the future markets want it has created a very risky transition requirement – and under the best of circumstances we simply have to remain skeptical.
I’d like nothing more than to read about a big internal Disruption at the Tribune. Like replacing the CEO with an executive from Google. Or a program to convert 30% of its newspaper advertising customers to the internet over 24 months – thus starting a big transition from paper to digital news media. Compare the Tribune portfolio to News Corp. and you can get a sense of the kind of Disruption needed to get Tribune into a growth mode. Sell off substantial assets NOW. There are many buyers that want to get their hands on the L.A. Times and Chicago Tribune and Cubs. Do it NOW while the greater fools are out there ready to buy. Before readership drops another 15% and ad revenues fall another 25% and the Cubs potentially end up in the cellar (who knows, we’d all love them to win the World Series – but do you build a corporate transition plan on that?). Then give Mr. Abrams that money, and announce he has permission to do whatever it takes to create a new Success Formula. I’d love to read that headline and article. But so far, really….
by Adam Hartung | Mar 12, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Back on October 18, 2006 I blogged about Motorola (see chart here) hiring a new marketing chief, Kenneth "Casey" Keller. I was pleased because in his career he had demonstrated an ability to create White Space and launch new products even in stodgy old H.J. Heinz. Of course then I was an advocate of Motorola.
I guess we shouldn’t be surprised to now learn the new Motorola CEO has let his top marketer go (read article here). Not even 2 years on the job. Motorola’s wrong turn in the mobile phone business surprised me – and a lot of other people. And why would Motorola want a Disruptive White Space kind of marketing leader when the company is backpedaling as fast as it can to old ways?
After opening the company to lots of Disruptions, former CEO Mr. Zander decided to milk the Razr letting new products slow precipitously. While Disruptions and White Space continued in the other Motorola businesses, the mobile phone division drifted quickly back into old habits – Locking-in on technology, Locking-in on distribution, Locking-in on engineering, Locking-in on old product development and launch processes. So the competition caught up, and Motorola’s profits fell out of bed.
Conventional Wisdom got Motorola into trouble. Conventional wisdom says it’s good to extend product life and milk products. Conventional Wisdom says being #1 in market share is good – which Razr clearly was. Conventional Wisdom says it’s lower cost if you Lock-in on a single technology and engineer its use into all applications. Conventional Wisdom says to listen to your distributors, which Motorola did as it cut prices dramatically to drive volume. Conventional Wisdom says to reduce joint projects if you’re #1, which Motorola did by dropping its joint product development program with Apple after launching Rokr (opening the door for iPhone launch.)
Once the profit problems hit Motorola, more Conventional Wisdom. Stop all possible projects to preserve cash. Focus on trying to find a replacement product for the one you milked to death. Redirect resources toward your biggest business, even if it’s losing money and market share. Get everyone on board to doing the same thing, and let go those who dissent. Kill all projects not clearly tied to trying to "save" the old, crippled business. Focus on the problem business, even if there are other emerging business opportunities showing great promise (like set-top boxes, new applications of commercial 2-way radios and installing corporate wireless networks.)
Firing the marketing chief shows Motorola is using conventional wisdome to try fixing its dire situation. More than ever, Motorola needs Disruptions and White Space. Motorola needs to find an outside the box solution. The company needs different kinds of thinkers, and new projects that can return growth to the company — which probably will not be in mobile handsets any time soon. Conventional Wisdom will likely lead Motorola where Conventional Wisdom usually does – down the road of Sears, Marshall Fields, Montgomery Wards, Brach’s Candies and other long-lost once great Chicago companies.
by Adam Hartung | Mar 10, 2008 | Defend & Extend, General, In the Swamp, Leadership
When was the last time you bought something at an ACE hardware store? How large was your purchase?
I grew up in a town of 3,000 people. In the 1960s we had 2 – yes 2 – lumberyards in the town. We also had a hardware store. Now, those are long gone. People drive 20 miles to a larger city, where they can buy from Home Depot and Loews. Obviously, times have changed. But out there exists ACE hardware, a company dedicated to supplying small hardware stores as franchisees. Unfortunately, it is extremely tough to figure out how to create a viable value proposition when your competition buys products at the lowest possible cost, operates a world-class distrubtion system and employees small armies of experts working part time in the plumbing, electrical and other departments.
So what does ACE do? Why, restate earnings!! (read article here) Completely ignoring the competitive situation that is, at best, gloomy, the company restates prior year revenues and earnings for ’04, ’05 and ’06. Of course, in future years the CEO will conveniently find it unnecessary to remind us that earnings for previous years were lowered as he compares current results to the past. And through this financial machination he will attempt to prolong a Success Formula that is so out-of-date it’s surprising the company is still alive!
The very next week CW announces viewership. If you aren’t familiar, CW was formed when two U.S. networks – UPN and WB – decided they needed to merge to become more competitive. Facing an onslaught of new competition niching up the cable TV market, and an avalanche of new competitors on the internet, these two networks could see that future results looked grim. So they merged in order to consolidate viewership for their strongest programs. What happened? Well, before merger the two had 890,000 + 850,000 viewers in the desirable 18-34 demographic. Now? Viewership is a whopping 750,000!!!! (Read about CW here.) Is that what management calls "synergy"? Of course, one of the biggest players in this game is the Tribune Company, which recently went private under the leadership of real estate investor Sam Zell. Apparently the news is getting any better in TV while newspaper readership continues dwindling in Tribune’s major markets like Chicago and Los Angeles.
The point? Leadership has a vested interest in making their business appear good, whether it is or not. CEOs will regularly talk about how they are doing well, and taking good decisions for investors. Why, the CEO at ACE just said that despite having to restate 3 years worth of financials the investigation found "no fraud, no missing money and no missing inventory." Sometimes, management can "spin" better than a presidential candidate when trying to make themselves look good. It’s up to employees, vendors and investors to pay very, very close attention. Financial machinations appear around us everywhere, and spurrious mergers and acquisitions often hide the poorest competitors. In the end, without a strong program of Disruptions and very active White Space businesses are at risk of failure. And the longer they delay recognizing the risks, hiding risks through various machinations, the weaker these businesses become.
by Adam Hartung | Mar 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
If you read material printed on paper (and not just stuff on your computer screen), you’ve had contact with R.R. Donnelley and Sons (see chart here.) This was one of the industrial era’s venerable companies. In the time of Lincoln, books were somewhat rare and very precious. But in the industrial era improvements in printing technology allowed printing to become everyday – commonplance. And the world’s largest printer became R.R. Donnelley. So everything from phonebooks (do you remember phonebooks?) to books to magazines to financial reports and a lot more were printed, and continue to be printed, by R.R. Donnelley.
But, you’ve probably noticed that the world shifted. We don’t read as many newspapers, magazines and books – printed items – as we used to. The web changed things. We now do company research on-line, rather than through paper-based company reports. We want analyst reports on stocks, markets, new products, technology and everything else sent via pdf download rather than a booklet. There is still a place for printed material, but every year we see the shift toward digital distribution continue picking up steam. And that is bad news if you’re business is printing. A reinvention gap is being created between businesses focused on printing, and markets consuming information from analog but increasingly digital sources.
Alas, R.R. Donnelley saw this trend and made big acquisitions in 2005 and 2006 (Astron and Office Tiger, to name a couple) to move the company into business process outsourcing (BPO). These services were, and are, growing very, very fast as companies move all kinds of back office operations from payroll to accounts receivable, HR, payables, document design, etc. into someone else’s hands. GE created and spun off a company with more than $1B revenues (and as much market value captured by GE) named GenPact to compete in this business (Genpact chart here, and info on GE Genpact ownership here). Moving into BPO was a great way for R.R. Donnelley to migrate toward the new information economy.
But, R.R. Donnelley implemented its transition all wrong. Now the company is losing money, and undertaking massive writedowns (see Marketwatch news release here.) Instead of these acquisitions closing R.R. Donnelley’s reinvention gap, the company has fallen into a growth stall – and is farther from the Rapids than before! R.R. Donnelley is stuck in the Swamp – and headed for the Whirlpool if it can’t find some growth markets to patch up its leaky boat.
R.R. Donnelley did not put its BPO acquisitions in White Space and allow them to flourish. Instead, after acquisition R.R. Donnelley leadership tried to apply company practices to these acquisitions. They tried forcing these acquisitions into alignment with old-economy management techniques currently used by R.R. Donnelley. This resulted in acquired management, those that had built revenues and profits in the new markets, quickly deciding to leave – and leaving R.R. Donnelley with floundering ventures no longer as competitive.
Since then, R.R. Donnelley has continued making acquisitions. But not in growth businesses. Most recently management agreed to acquire a company that prints newspaper inserts! Imagine that, traditional printing in the declining newspaper market! R.R. Donnelley’s current CEO is committed to old Lock–ins and efforts to try Defending & Extending the expiring Success Formula. He’s blaming the problems on his predecessor – who led the charge toward innovation, while saying – in the midst of announcing losses and write-downs – "We are pleased with our performance in 2007"! (Read this quote plus more about R.R. Donnelley’s business reported in The Chicago Tribune here.)
Investors should run, not walk, to their computers and place orders for selling positions in R.R. Donnelley. Even though the value has declined by 50%, to levels not seen for 4 years, this company is very unlikely to ever have the glory it had when running printing presses was as profitable as making railroad cars, American automobiles and selling products at Sears.
by Adam Hartung | Mar 6, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you’ve read this blog the last 2 years you know I’m no fan of Mr. Lambert and the company he runs – Sears Holdings (see chart here). I have a vested interest in watching this story, because the day KMart announced it was buying Sears I was quoted on the front page of the business section of The Chicago Tribune saying that I gave the merged company no chance of success.
Since then I’ve been right. Sears and KMart sales have declined, sales per store have declined, Sears and KMart have lost market share as retailers, and the proprietary brands (such as Craftsman, DieHard and Kenmore) have lost share. Dividends for shareholders have been nonexistent and assets have declined in market value. Thousands of employees have lost their jobs, and many vendors have lower revenue and margins. So far, there are no winners as a result of this misguided venture by Mr. Lambert.
Prior to acquisition Sears was a very troubled company. It was no longer a retail leader, and it was using all possible tricks to Defend & Extend its outdated Success Formula – to minimal avail. Then along came Mr. Lambert – himself quite Locked-in to his own outdated, industrial era Success Formula. His plans to "milk" Sears and Kmart of value to feed his hedge fund has not worked out as he would have liked (to put it mildly).
When Mr. Lambert bought Sears there was value that could have been unlocked by Disrupting and using White Space. He should have moved very fast to sell off the large real estate holdings in a red-hot real estate market. Given the disastrous situation at Sears, he should have moved fast to shut down lots of stores not competitive with vastly better operators Wal-Mart, Kohl’s, Target and J.C. Penney’s. The well known brands mentioned above could have been rapidly sold to other retailers, possibly making lucrative deals with one of the major companies. And he could have converted Sears to a much greater on-line retail company, building on the strong skills at subsidiary Lands End (while building on long ago company history in catalog retailing.)
But Mr. Lambert didn’t Disrupt, and he didn’t open White Space to quickly change Sears and Kmart. Now…… his actions are far too little and far, far too late since the likelihood Sears Holdings will ever be worth much is pretty dim. Given the sales declines, and facing a major recession, the value has slipped away and how investors will ever capture it is completely unclear. Especially as Mr. Lambert promises more of the same as he intends to cut expenses further and purchase less inventory for upcoming shopping seasons. Those tactics haven’t been working, and nothing magical is going to make them work soon.
Mr. Lambert is now blaming the horrible condition of Sears on economic conditions – "Despite the perception during the first two years that we were not focused on growing our business, we were planning to do just that in 2007…. we did not foresee the severe economic turbulence ahead." (read article on current Sears conditions, and the source of this quote, here) Give me, investors, vendors and employees a break! This is simply making an excuse for the future while refusing to acknowledge the value destroying decisions previously made! Sears has gone down, not up, ever since this acquisition was made – and that can be blamed fully on Mr. Lambert. It was his job to prepare Sears for the future, not blame the future economy for his failures. If we were back when Sears was first founded, it’s safe to say town leaders would be tar and feathering Mr. Lambert and running him out of town on a rail — but then, of course, Mr. Lambert doesn’t live in Sears’ hometown of Chicago – he’s ensconced in New York where he doesn’t feel the pain his demonstratively lousy business decisions have created.
Postscript – readers should keep in mind that it’s been only about one decade – on mere short 10 year period – since Sears was one of the 30 Dow Jones Industrial Average companies. We should all remember how very fast companies that remain Locked-in to outdated Success Formulas can move from the Flats to the Whirlpool. Sears’ fall has been swift. Don’t ever think the past can protect you into the future – let Sears remind you just how fast failulre can sweep over any business, no matter how large and previously successful!
by Adam Hartung | Feb 28, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Compare two recent reports on automobiles. Last Friday The Chicago Tribune reported that U.S. auto sales this decade had declined 7% (read article here). Hmm, sounds like better quality cars is dampening revenues – and an excuse for GM, Ford and Chrysler to do poorly. However, just last week the Wall Street Journal reported that the number of passenger automobiles on the roads in China rose — get this now — from 500,000 to 50,000,000 in the last 30 years! Right, a 100X increase in the number of automobiles. I don’t know how many autos are on the roads in India, Chile, Brazil and other high growth countries – but I’m sure the number has gone up quite a bit. Any visitor to these countries can point out the increased congestion.
So, if all the growth is in these other countries, why hasn’t GM focused 50% (or more) of its market research there? Why haven’t most design efforts been focused on autos that meet the demands of these markets? Since all companies want to grow, why isn’t GM (and Ford, etc.) focused on supplying these markets with double digit volume gains? After all, Tata Motors of India is now launching a sub $2,500 auto (read more here) that it expects to sell in the tens of thousands, and simultaneously the company is taking over luxury brands Jaguar and Land Rover from Ford (see article here.)
Businesses get Locked-inside their boxes. GM, Ford and Chrysler have sold cars in Europe – but largely they have always been happy to be U.S. companies selling products in the U.S. Even though the growth has gone elsewhere, outside the U.S., these companies remain "inside the box" – and that box keeps getting relatively smaller as the global markets get larger. Although they may try to "think outside the box", Lock-in keeps them fixated on the U.S. and only marginally involved in other markets.
Companies like Tata "get outside the box – then think." They figure out how to make money in high growth markets, and go to new markets figuring out how to get a toe in. They compete, get bloodied up, compete more, learn and find a way to make money. They don’t get overwhelmed with planning exercises and building market models. They never lose sight of where growth is, and they keep their eyes on growing sales in these Rapids markets with high growth. Meanwhile, their eyes are forever on the horizon looking for the next growth opportunity.
No matter how big a business seems when growing, eventually growth slows. New technologies, new products or new competitors change the landscape, and what was once a very big box starts to shrink. Before long, as the growth goes to other markets, the box starts looking smaller and smaller. Yet, most companies remain fixated on competing inside their box. Like GM, so worried about U.S. market share that they missed the explosion in China, India and elsewhere. And now the competitors that learned how to succeed in the growth markets are keener, and better resourced, to come blow up the small box GM is fixated upon.
Businesses have to get outside the box or they eventually fail. The quicker they learn this lesson, and implement processes to Disrupt their cozy competitive world – while implementing White Space projects to keep them in the quickly shifting Rapids – the more likely they are to survive longer, and make significantly more money for investors while creating exciting jobs for employees and demand for suppliers.
by Adam Hartung | Feb 24, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
The Chicago Tribune today ran a feature on growth at McDonald’s (see chart here) the last 5 years. Of course McDonald’s grew, does no one remember the program McDonald’s launched in the mid-1990s to close stores? Over 5 years McDonald’s closed hundreds of stores in the U.S., Japan, U.K., Europe and almost every other country in the globe. Admitting to "saturation" claims made by franchisees, McDonald’s management set about reducing the number of units. By 2003, the closures had largely stopped – and magically McDonald’s is able to set out on a slow growth trajectory. And after the most massive stock buyback in company history, using funds from asset sales, the share price rose to new heights as well. Imagine that!
Now McDonald’s is trumpeting it’s coffee launch (read article hear). As the company prepares to roll-out lattes and cappuccinos, does anyone think this is the result of White Space – and the beginning of a new McDonald’s prepared to retake the high growth path? Hardly. The company has greatly automated the specialty coffee making process so its franchisee’s employees, let’s call them non-baristas, don’t need the skills of a Starbucks company employee. You won’t get the specified drink so made fun of by the Dunkin’ Donuts ads (fritalia anyone?) And despite some remodeling, you won’t have the same atmosphere in which to drink your elixir – it will still be a McDonald’s with its focus on speed over service pleasant surroundings.
Investors should face the truth that this is just another effort by McDonald’s to get you into the store for an Egg McMuffin, or Big Mac. Just as salads were introduced so moms would stop in for a happy meal for the 5 kids in the car pool. McDonald’s isn’t trying to upscale their environment so that businesspeople stop in to discuss a potential out-of-town deal. Nor attract the working women on their way to their next sales call. Nor the soccer moms taking a 20 minute break between the next exhausting task. This is about selling some additional beverages near the carry-out window – and hopefully getting a few extra sandwich sales. But do we really think that’s what the world wants – more Big Macs? Is the lack of a latte the only thing keeping us from going to McDonald’s more often?
I’d predict this wouldn’t work at all – except the returning Starbuck’s CEO has recently taken to Defend & Extend Management himself. His latest declarations to return to a coffee focus, and diminishing recent introductions of other products – including quality lunch foods – is playing right into McDonald’s hands. While McD’s may not be Starbucks, pretty soon Starbucks may not be either. Yet, in the end, tastes have shifted. This isn’t 1965. We may want a lot of things fast and consistent, including the vast bulk of coffee purchases from 7-11 and Dunkin, but that isn’t how Starbucks became a modern legend. And it isn’t the road to growth for Ronald McDonald.
McDonald’s isn’t really changing. And the long-term road to growth and above-average profits is still unclear. Nothing about a McDonald’s iced coffee indicates the company will soon be the next cache. Until management realizes that Chipotles is where customers are heading – toward new products in new service formats – McDonald’s results will, long term, remain uninteresting. Up for a while, but just waiting for the next innovation to push them back down. It can all sound so good….. but Locked-in management is not the route to prosperity. And these coffees are all about maintaining Lock-ins at McDonald’s.
by Adam Hartung | Feb 20, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Innovation, Leadership, Lifecycle, Lock-in
Motorola’s (see chart here) idea to spin off its mobile phone business is probably a very good thing for investors. Because that part of Motorola is a sitting duck. Motorola undertook a number of Disruptions the last 4 years, and many of its businesses have White Space doing the right things – such as launching great new products and keeping customers highly satisfied – in markets from 2-way radios to enterpise networks to digital set-top boxes.
But the mobile handheld business, well it just tried to hand onto its success with Razr for too long (read article about Motorola product competition here). Razr was good, but in today’s economy competitors around the globe see your new product and copy it as fast as possible. Then they start one-upping you, such as Nokia (see chart here) did by making lower cost phones and RIM (chart here) and Apple (chart here) did by bringing out products with even more innovation (such as Blackberry and iPod phones).
Motorola had higher cost chips, but you don’t have to be low cost to compete. Samsung used its chips to differentiate with multiple variations every month, swamping the market with "new" product even if it just barely was new. Meanwhile, Motorola introduced only 1 new product this year – the Rokr E8 – which wasn’t even new but (as the name implies) an updated Rokr which was introduced almost 3 years ago.
Now the mobile phone business is well into the Swamp (possibly even the Whirlpool some claim), while other parts of Motorola are keeping themselves in the Rapids. As the above referenced article says, previous troubles in mobile phones "stir uncertainlty and depress morale, rather than inspire Motorola’s deep pool of designers and engineers to be more innovative." Employees don’t like working in the Swamp or Whirlpool, where chronic anxiety over cost cuts, and declining investment keep the business in an also-ran status. An analyst wtih Jackson Securities said "I don’t think the people in the lab are idiots. I think creativity hasn’t been incentivized.." Employees like working in the Rapids. They know that’s where success occurs, and that’s where Motorola’s mobile phone business was in 2005 and 2006. But now that competitors have created what Ross Perot called "that great sucking sound" in mobile phones, why would anyone want to work there?
The engineers in Motorola’s mobile phone business are hard working, industrious, and talented. I know several of them, and they are world class. Their business unit’s fall from grace isn’t because of employee weaknesses or insufficient loyalty. Rather, the leaders (including Mr. Zander, CEO) made the horrific decision to try Defending & Extending their business with the Razr rather than maintaining Disruptions and White Space letting loose the talent which made and launched the Razr in the first place. This decision kept the innovation minimal, the opportunity for new products to reach market negligible and turned the business unit into a sitting duck. If this business had maintained the Disruptive behavior that got the Razr out the door, and used White Space to keep innovations flowing to market – instead of chasing market share and trying to lower costs – these engineers would be sitting pretty, rather than sitting ducks.
The competitors have been taking potshots for months. And now that we’re learning White Space disappeared in this unit, the risk is the corporation keeps trying to pump money from the better units into the duck as fast as losses pour out from competitive shots. It will be better for the employees, the investors, suppliers and customers if Motorola puts its energy into growing the businesses it has kept on course the last 4 years, and let bygones be bygones in a market Motorola created – but let get away. When you see a sitting duck, best thing is to walk away.
by Adam Hartung | Feb 17, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
We like to think that businesses succeed on the strengths of perseverence, tenacity and hard work. Yet, we know that many leaders, and their teams, follow these principles and still do not succeed. Unfortunately, too many businesses stake their claim on Defending & Extending their Success Formula "to the death" – and end up exactly there.
Sears (see chart here) is on the brink of failure, yet it is unclear the egomaniacal CEO who bought the company will give up his Success Formula to save investors, suppliers and employee jobs. (Read full Chicago Tribune article on the failing Sears turnaround here.) When Mr. Lampert took over Sears he was quick to say he was willing to give up revenue in the pursuit of better profits. Somewhere in his training Mr. Lampert built into his Success Formula that growth was not as important as short term profits – and in fact that profits could be captured in a no growth business for better investment elsewhere. But in reality, that theory just hasn’t been shown to work.
Sears cut employees, product lines, advertising, marketing and closed stores to raise short-term profits. But investors are now recognizing that these actions may well have destroyed the company. While Mr. Lampert pumped up the bottom line, he lost competitive position in large appliances – letting the Kenmore brand grow stale while Whirlpool and others grew revenues at Best Buy. And now with homebuilding on the skids, demand for these appliances is falling like an anchor. At the same time, the venerable Craftsman brand has lost share to Ryobi and other tool brands now sold in Home Depot and Loews. Mr. Lampert predicted sales for Sears products, and at Sears stores, would fall as he focused on profits. And they did! Mr. Lampert did a great job of helping competitive manufacturers and retailers gain strength while he started trying to milk his "cash cow."
Only the milk is not forthcoming. After consistently declining operating numbers, in the 2007 fourth quarter Sears profits declined 51%. So Mr. Lampert fired his hand-picked supplicant President, and announced a reorganization. Like the Captain shooting the first mate while ordering deck chair reorganization on the Titanic. And now analysist are saying that the sum of the parts at Sears (brands plus real estate) is worth less than recent market valuations – as much as 30% less!
Mr. Lampert believed in his Success Formula, and he asked investors to believe in it as well. Many did. But Mr. Lampert’s industrail era retailing Success Formula is woefully out of date – and not producing growth or positive results. He’s Locked-in, and he seems willing to take down with him anyone who will share his Lock-in. How long should investors believe in Mr. Lampert and his failed strategy? To the death? For those who think it may not happen – just consider Woolworth’s, Kresge, Montgomery Wards, KMart and Marshall Fields.
by Adam Hartung | Feb 11, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
One striking characteristic of Defend & Extend Management is that leadership, and often everyone else, becomes very willing to expect everything to work out eventually. Regardless of the signals. D&E leaders tend to be just like the characters in the 1913 novel by Eleanor Porter (read more about Pollyanna here) – always optimistic and always rewarded for their optimism.
Last Sunday the Chicago Tribune published an article about the major companies in Chicago that have either failed, or done poorly, in the last decade (read article here). The list of problems was pretty dramatic – Motorola, Sears, Sara Lee, Ameritech (gone, now SBC), First Chicago (gone, now JPMorganChase), Amoco (gone, now BP), Tribune (almost gone – in a highly leverage buyout), Quaker Oats (gone). Not to mention that Chicago real estate barely participated in the great real estate run-up the last 7 years – largely because netting job losses versus job gains the employment base hasn’t grown! No, Chicago isn’t finding real estate falling like Las Vegas, but it never came close to going up like Las Vegas (or Miami, or Walnut Creek, or Phoenix) either.
Yet, those interviewed in the article were completely "Pollyanneish" (how does a noun become an adverb?) A former Chicago executive virtually admitted there was little innovation in Chicago – and qualified himself by saying that Chicago innovation was more "adaptation." Ugh, let’s get real folks. In other markets people are creating breakthroughs and that is drawing the most talented people – and that is driving up real estate values. Meanwhile, Chicago accepted an out-of-town carpetbagger in Ed Lampert who destroyed Sears. And Motorola, once a national leader in innovation has seen its invention of cell phones lost to other competitors as the company now considers exiting the business!
I’m a midwestern guy, and I LOVE Chicago. To me, its a great place to live and work. But that’s what people say in Detroit, Cleveland, St. Louis and Tulsa also. Who cares? If you can’t create new businesses, and new jobs, and revenue growth it doesn’t matter. Let’s face it, Chicago spent nearly 10 days without breaking above freezing in one stretch this January, and Chicago just spent the first few days of February under snow and another 0 degree frigid blast. No one moves to Chicago for the weather! Or the theater. Or the symphony. Or the political influence.
GROWTH is all that matters. People love Paris, London and Rome. But only the wealthy idle look to move there. Today, property values for business and homes in Mumbai (formerly Bombay), Chenai (fomerly Madras) and Bangalore exceed Chicago. Go to these cities and you see employment growing 20% per year! People want to be in these places. Yes, the weather is hot. Often humid. And the roads are aweful. But that is where the action is. People there are defining the new future – the new global economy. Is that happening in Chicago?
Chicago has a great past. But who cares? If Chicago can’t compete on the world stage with Shanghai, Hyderabad and Buenas Aries for investment and growth it doesn’t matter. Chicago can quickly become the next large, boring, cold city. Not even Al Capone could slow Chicago when it had the stockyards, the steelmills and the reputation as "the city that works." But if Chicago doesn’t wake up and start making itself a leader we risk becoming just another big city on a nice fresh water lake. And the midwestern youth will fly to the east coast, west coast, China, South America, or India to find opportunity for riches.
