by Adam Hartung | May 21, 2007 | General, In the Rapids, Leadership, Openness
In January of this year I blogged about the White Space prevalent in the highly Disruptive Virgin culture. Sir Richard Branson has built an empire from small beginnings by constantly Disrupting his organization and creating White Space. Many high paying jobs have been created, and lots of money made for investors, due to this Phoenix Principle culture.
But there can be a definite downside if a Phoenix Principle culture is not managed well. Disruptions and White Space can be opportunities to overspend, and overinvest, leading to losses and failure. White Space is not child’s play. It is where new Success Formulas are formed via the crucible of competition. It is critical that managers in these environments have their "feet held to the fire" to produce results. Otherwise, cash flow is negative and profits never materialize. That’s bad news.
All businesses need a mix of Explorers and Stabilizers. Explorers usually become in short supply in Locked-in cultures, because optimization of the old Success Formula says that these kinds of managers are unnecessary. So Locked-in companies have to recruit Explorers to identify and create Disruptions, and then to have the skills for managing the creation of a new Success Formula.
White Space companies, and projects, need Stabilizers as well. Activities need to be disciplined and directed toward managing for cash flow and profit in the Rapids. As we saw all too well in the 1990s internet boom, too many Explorers make short shrift of these requirements, and their businesses simply flame out.
And that risk is now at Virgin Media. Using clever planning and intense hard work, Virgin Media has built itself into a large and powerful company that delivers mobile phone service, land-line service, internet service and satellite television service across Europe and other parts of the world. The company has made several growth-oriented acquisitions in the process, and those acquisitions have saddled the company with a huge debt load (see article here). This is big trouble for a business in the media game, because assets are not long-lived. So the debt payments go on after the technology needs to change – sucking up cash that should be used for changes and growth. Virgin Media is now losing money, and forced to make debt payments, while its primary competitors (the Murdoch-controlled Sky and British Telecom) are in far healthier financial shape. This is a risky situation, that may require someone buy out Virgin Media or it risks a precipitous decline that will be bad for Virgin as well as its investors, suppliers, employees and customers.
In the headlong rush to grow at Virgin Media, the managers may have been short a sufficient number of Stabilizers. The Explorers, which are sure to be popular in the Virgin culture, have been allowed to push the company growth. But now the entire Virgin Media organization is at risk. If there had been a more balanced management, with more Stabilizers, it is very likely the company would be in better financial shape and more competitive.
Everyone loves a party. And we all want to have a good time. But, if someone gets drunk the party can come to a crashing, unpleasant end. White Space can not be run like a party. It is a business. And if there aren’t Stabilizers around to control the consumption of resources, then the White Space business can find itself crashing.
by Adam Hartung | May 12, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
On May 5 the rumor hit the newspapers that Microsoft was considering buying Yahoo (see article here). Both companies insisted this rumor was unfounded. Then, on May 10 it was reported that Microsoft bought a 4% stake in CareerBuilder (see article here), competitor of Monster and Yahoo! HotJobs, for an undisclosed sum. These reports drive home the differing viewpoints between investors, who want White Space to drive value, and management, that wants to Defend & Extend the past.
Microsoft built its empire upon a Success Formula as a near monopoly. Systematically and effectively Microsoft first dominated the market for small computer operating systems with MS-DOS. They leveraged that knowledge and kept the company in the Rapids with the hugely successful Windows operating system. Then they overwhelmed all competitors making their suite of personal automation products (Word, Excel and Powerpoint supported with the Access database and a slew of supporting free products such as Internet Explorer and Outlook) a near monopoly as well. This Success Formula of building a totally dominant position in software products for PCs now dominates all decision-making.
Unfortunately, the market for personal computers no longer has the high growth rate it once did. Customers don’t feel compelled to purchase upgrades, as the recently released Vista has shown. Instead, they are doing more with other tools such as PDAs, mobile phones and even MP3 players. Additionally, the growth in PC usage has turned much more to internet environments such as search and entertainment (such as Google and YouTube) rather than the PC as a personal productivity tool. But Microsoft’s Lock-in to their old Success Formula has kept them out of these new markets.
Investors look at the slower growth and huge cash pool at Microsoft and long for the company to find new White Space. Yahoo! would be large enough and in a market with enough growth to actually represent an opportunity for Microsoft to move from its low-growth Swamp back into the high-growth Rapids. So investors are pushing the company to make moves to create and fund White Space to drive future value enhancement.
But Microsoft is so Locked-in it shows no inclination to take such a move. Dabbling into a segment such as career tools keeps the investment very low. Four percent of CareerBuilder in no way Challenges the Lock-in, and does not offer an opportunity to create a new Success Formula. By making this investment Microsoft tells investors "we have no intention of addressing new Market Challenges. We intend to remain Locked-in and hope Vista will someday give us the kind of growth we used to obtain from such new releases."
Investors will remain disappointed with Microsoft. But management, which is insulated from external investors by the large holdings of Bill Gates and its extremely large market capitalization, can ignore this disappointment. And by overlooking the White Space opportunities in favor of near meaningless small investments management signals investors the company has no intention of doing anything different any time soon.
Which should make the executives at Google extremely happy!
by Adam Hartung | May 7, 2007 | General, In the Swamp, Leadership, Lock-in
Eddie Lampert has finished yet another year at the helm of Sears Holdings. And during that time he’s proven he can cut costs. He hasn’t proven he can make money – even by selling assets. The stock remains highly priced largely on the belief he’s building a war chest to do great hedge fund deals, but so far he’s not demonstrated Sears and KMart give him the resources to pull that off. Instead of looking like Warren Buffet, his idle who turned a worn out textile company named into Berkshire Hathaway into a tremendous investment vehicle, Mr. Lampert looks more like the captain of the Titanic who kept up reassurances until imminent peril took down the ship.
Mr. Lampert was once a banker, and he’s never one to ignore the opportunities for financial machinations. Sears most recent quarterly financials show a profit. But all of that was engineered from one-time items like dividends from Sears Mexico and gains off a legal settlement with Sears Canada (see article here). Meanwhile, sales at stores open a year turned out another decline – this time of nearly 5%. Quarter by quarter Sears stores keep selling less and less. And more stores are closed. And the cash current is getting thinner and thinner.
Mr. Lampert closed the investor relations department. So to know what’s going on is opaque, to say the least. At the recent annual meeting he declared that his plan is to rebuild the Sears and KMart brands (see article here). After practically killing the previous ad budget, he intends to start new ad campaigns (although the budgets were not revealed.) His plan, or should I say hope, is that by "positioning" Sears and KMart he can improve performance. Yet, he’s said nothing about why WalMart, Target, Kohl’s, JCPenney, Loews and Home Depot would roll over and let him start eating into their market shares.
Mr. Lampert would like to make some acquisitions. But the problem is that 2007 is not 1977. Mr. Buffet started Berkshire Hathaway when the world of deal-making was still pretty small. There weren’t dozens of multi-billion dollar hedge funds with ample resources chasing every imaginable deal. Bershire Hathaway was able to pick and choose its deals, using very conservative financial analysis when valuing investments. Today, only the most aggressive investors become buyers, and that means paying a pretty price for those acquisitions. So Sears Holdings can’t generate enough cash to play into the huge deals, and the competition is so intense on smaller deals that none can be had. Mr. Lampert is reluctantly being drug into trying to keep Sears and KMart alive, but he has no idea how to do that.
Sears and KMart were companies in trouble when purchased by Mr. Lampert. But he never Disrupted them. He never set up White Space. Instead, he tried to milk them of their cash in order to buy other companies, and he’s proven he can’t do that well. So he keeps trying to string along the company another quarter, but meanwhile competitors are pounding away at the weaknesses of a company with no viable value proposition. And as a result, Sears Holdings drifts closer toward the Whirlpool.
by Adam Hartung | May 3, 2007 | Defend & Extend, General, In the Whirlpool, Lock-in
Sometimes market Challenges wipe out large numbers of businesses. As I posted in my last blog, Amazon’s approach to internet retailing of books wiped out thousands of independent booksellers, as well as most chains (anyone remember Crown Books?) When such a Challenging tsunami appears on the horizon, trying to Defend & Extend your old Success Formula simply makes no difference.
Yesterday the National Association of Recording Merchandisers met in Chicago to try and figure out how they should respond to the Challenge posted by MP3 technology. These are the people that retail CDs. Do you remember going to the "record store." Their top solution is to install machines in their stores allowing consumers to download songs onto a CD (see article here.)
Never mind that any one of us can already accomplish this task at home with an internet connection, and a computer with a CD burner. These in-store kiosks charge $.99/song (just like iTunes), then add on another $3.00 for the case and label. On top of that, the process is intentionally extended out 5 to 15 minutes to force additional time in the store and encourage shopping. So using this in-store process costs more, and takes longer than doing it in the comfort of your home. And, at the end of this you get a CD. When was the last time you saw someone on the street listening to music with a Walkman instead of an iPod or other portable MP3 player? These retailers do hope to give access to downloading songs to an MP3 player in the future, but they intend to put software on the songs so they can’t be duplicated. And the cost will remain at $.99.
Why would any music retailer think this is a good idea? Because he’s trying to find a way to Defend & Extend the Success Formula he built when music sales required a physical product. Once Locked-in, this manager is most likely to deny the depth of the Challenge, or tweak the Success Formula in hopes it will somehow work. As one retailer said "this machine…puts me back in the singles business." Oh yeah, he admitted to starting 38 years ago selling 45s (for those too young to know, those were 6 inch vinyl records with big holes in the middle.) To say he’s hoping the past will return would be an understatement.
The fact is that the percentage of people buying CDs has declined 15 percent since 2002. CD shipments in the first quarter of 2007 were down 20 percent. While digital downloading of songs keeps growing at 24%/year and greater. Trying to overlay the cost and effort of an old approach on a new solution won’t meet the market Challenge, instead it just moves the competitor another step toward the Whirlpool and disaster.
by Adam Hartung | Apr 30, 2007 | General, Lifecycle, Lock-in
Challenges don’t affect only large companies. Since the internet has become part of our lives, many small businesses have seen the emergence of enormous Challenges. Many have altered industries completely, wiping out several small businesses. For example, on-line book shopping has pretty well killed off the small bookselller.
Another example is developing in real estate (see article here). We probably are all familiar with the need to have an appraisal when refinancing a home. We want these appraisals fast, so we can close on the loan, and cheap – because who wants to pay more for closing costs than necessary. In response, Automated Value Models were developed. These created a change in appraisals from 100% being done by appraisers to only 25%. Yet, because of the huge boom in construction and refinancing the number of appraisers still continued to grow.
But now, a company out of Calgary named ZAIO (see chart here) is creating a database of 100% of homes in America’s top 250 cities. This will provide far more accurate appraisals than AVMs yet at a cost possibly lower. This database will have photographs of every home, as well as assessor’s data and the company’s own valuation. It should be complete by 2010. Yes, this is a huge undertaking. And it will cost $75million. But, in the future lenders will be able to get immediate appraisals, cutting the loan processing time by a week, while lowering the appraisal cost from $300 to $125. Do you remember when we all thought no one could map the entire United States and make it available on line? And now we all use MapQuest or Google maps. For free to us, as this database access is paid for by advertisers. So is it really hard to imagine a database of all our homes? And a consistent appraisal application?
This makes huge senes to everyone but —- appraisers. ZAIO is making the database available to local appraisers. They can purchase a "zone" of 10,000 homes for $9,500. But many are saying "no thanks" fearing it will hasten the decline in demand for their services. Others are hoping to retrench to supporting executive relocations and other niche opportunities. But, the fact is that this service will do to the 100,000 appraisers what Amazon did to the corner bookstore. Very few appraisers will survive except those using the automated ZAIO database.
If you are an appraiser, you have to face either buying into the ZAIO model or finding a new occupation. For the self-employed appraiser, or the small business, this is tough to face. But trying to Defend & Extend their old occupation in the face of this new Challenge can only create a disaster. While some revenue is possible, it’s time to Disrupt and find personal White Space. It’s time to create a new Success Formula before the revenue runs out.
And possibly time to consider investing in ZAIO. Their database will be used for not only appraisals, but evaluating mortgate portfolios of lenders and possibly insurance value estimations. It’s not a big jump to imagine a future when insurance adjusters can use the ZAIO database to start their process, and possibly use satellite pictures from Google to determine the damages. Possibly leading to insurance estimates made fast – from the office. And then a whole new market, insurance adjusters, might face the Challenge appraisers now face.
by Adam Hartung | Apr 26, 2007 | Disruptions, In the Rapids, Leadership, Openness
Lately I’ve been pretty hard on companies in this blog, so today I’m taking time to highlight two examples of companies following The Phoenix Principle on the road to long-term evergreen success.
Firstly is Motorola (see chart here). As previously blogged, Motorola is under attack by corporate raider Carl Icahn who would like to borrow a lot of money and pay it, as well as existing cash, out in a special dividend to investors. In other words, do to Motorola what Sam Zell is doing to Tribune Company. In the face of this effort, Motorola announced Tuesday it is buying Terayon Communications Systems to gain more capability (specifically software for delivering video) to it’s television set-top box business (see article here). Keep in mind, in 2009 the television system switches from analog to digital and the demand for set-top boxes to go with all the existing analog TVs is sure to grow – possibly exponentially. This acquisition is a great example of continuing to fund the White Space in a market that is in the early stages of the Rapids. Now that’s a great use of corporate cash – and will provide a real return to Motorola investors. If Motorola leadership and investors can keep the shark away.
Secondly is J.P. Morgan Chase (see chart here.) J.P. Morgan Chase is run by Jamie Dimon. Mr. Dimon is a very colorful character well known for short patience. When Jack Welch institutionalized White Space he was nicknamed Neutron Jack. Mr. Dimon may someday get a similar monicker for his willingness to Disrupt his own people and organization. And this week J.P. Morgan announced the acquisition of technology company Xign (see article here). Xign has been a pioneering company in developing the e-payments system for automated commercial (or busineess-to-business) transactions. This is projected to become a $1.7 billion market by 2010, even though you may never have heard of Dynamic Discount Management (DDM for short). Here we see a Disruptive leader investing in a new business opportunity at the front end of very high growth – exactly the kind of White Space that should excite investors. Compare this with the actions taken by J.P. Morgan’s primary competitor – Citigroup – last week when they laid off 5% of their work force and starting shutting offices and centralizing decision-making in order to protect their faltering old Success Formula.
Far too many leaders use Defend & Extend Management and kill the growth of their company. They manage for protection of the old Success Formula and wipe out all capabilities to Disrupt. They refuse to invest in White Space in favor of trying to prop up the old Success Formula. But there are reasons to be optimistic. There are companies using The Phoenix Principle and positioning themselves to migrate their Success Formulas forward to meet new Market Challenges. You just have to keep your eyes open and look.
by Adam Hartung | Apr 24, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
When you can predict behavior in business it is the first step to taking competitive advantage. When you can predict competitors, you know what to do to beat them. And you can take steps as an investor, employee, supplier or customer to decide how you’ll interact with them in your own best interest.
I blogged several days ago that the buyout of Tribune Company would force them to continue taking actions operate their Success Formula More, Better, Faster, Cheaper rather than addressing changing market factors. Even though it is certain this behavior will continue to hurt performance because that Success Formula is woefully out of date and not meeting market needs in world where news travels via the web. The debt load alone would create that Lock-in since it dramatically limits options. Further, the leaders last year were manipulating results (all very legal I’m sure) in order to maximize their bonuses and mask bad business performance.
What have we seen this week? On Friday the Chicago Tribune reported (see article here) that the company cash flow was off 12%. Of course! The leadership did everything possible to goose up cash flow at the end of the last year in order to maximize bonuses and attract a buyer for the company. It was easy to predict that cash flow would decline, and results would lag peers even in the struggling media industry. Then today Tribune Company announced it is cutting jobs across all its properties (see article here.) Of course, it has to cut costs to protect the old Success Formula. (When what the leadership needs to do is invest in internet projects to transform the company.)
Tribune once made a lot of money. Then the market changed as people moved from newspapers to the internet. But Tribune company did not adjust to that market change nearly rapidly or powerfullly enough. The company tried to tweak it’s Success Formula with cost cutting exercises while hoping the business would return to its prior state. Now, it’s More Of The Same while management keeps hoping that the past will return. But it won’t happen. And things will keep getting worse as cost cuts lead to further problems with the paper and fewer readers and fewer advertisers leading to more cost cuts – a vicious cycle. The business needs to change remarkably toward the internet – but now leadership and ownership is so Locked-in to the old Success Formula they can’t. They’ve refused to Disrupt and there is no White Space. And so Tribune Company is becoming very predictable. That’s bad for the employees, suppliers and new debt-holders. Good for competitors.
by Adam Hartung | Apr 19, 2007 | Defend & Extend, General, In the Swamp, Lock-in
In sports we talk about a player looking to go right and then going left and call that a "fake-out." We’re seeing the business equivalent today at Tribune company. In their own paper the company featured an article on a new "hyperlocal" web site being rolled out that is supposed to indicate a new approach for Tribune Company (see article here). This a a fake-out.
On the face of it, the new web sites may look like White Space and therefore a good thing. But the reality is that Tribune is incredibly Locked-in to its outdated Success Formula – and as I’ve blogged they are loading up on debt which will insure they remain Locked-in. This venture lacks 3 critical criteria for it to be considered White Space:
1 – the company has not Disrupted any of its old Lock-ins. They have not admitted that the Success Formula is outdated, and they have not attacked any of the Lock-ins keeping the company doing what it has always done. Without an attack on the Lock-in this kind of venture will soon run into all kinds of obstacles (from editorial to ad sales) and find itself without nurturing or any chance of success.
2 – the company has not committed any significant resources to this effort. They admitted it is only a small test. They have no promises to see it through to any kind of success, and have said they have concerns about how it will even work.
3 – this project is not something in the front of the Rapids which they can get behind big and hope to change the company. Cars.com or CareerBuilder.com are examples of things in the Rapids they could move into White Space and use to change Tribune company’s Success Formula. This project is so small and market-early that it is in the Wellspring and unable to make any real impact on results or the operations of Tribune.
It’s not just claiming you have a White Space project that makes it true. You first have to Disrupt your Lock-ins to give it a chance for success, you have to commit resources to see the project through, and you have to pick projects that are big enough to push your business back into the Rapids.
by Adam Hartung | Apr 18, 2007 | Defend & Extend, General, In the Swamp, Lock-in
Readers of this blog know I think WalMart (see chart here) is horribly Locked-in and thus well into the Swamp. As the chart shows, this has left them with maudlin performance (at best.) I recently posted on their fiasco firing the ad agency as part of firing their own advertising director in an effort to preserve that Lock-in and outdated Success Formula.
Today we learn (see article here) that WalMart’s fired agency, DraftFCB, is going to get the KMart account. This is a sharp move for Kmart. After WalMart and DraftFCB spend millions to study the discount retail marketplace, WalMart walks away from that research in order to preserve its own beliefs. So, KMart now gets all that research for free. And it is a very smart competitive move. KMart is using WalMart’s Lock-in to their advantage. And any time you do that, you improve your odds of succeeding.
Of course KMart is part of Sears Holdings (see chart here), and I’ve blogged often at how Locked-in Sears is. So I’m really not that optimistic for KMart. I think Eddie Lambert, Chairman at Sears Holdings probably took this move because he thinks he can save a few bucks. And, DraftFCB is famous in its industry for having some of the best cost justification work there is, which appeals to Mr. Lambert’s cost reduction Lock-ins. Nonetheless, it is a clever move that takes advantage of a competitor’s Lock-in, and any business that wants to succeed should look for such opportunities.
by Adam Hartung | Apr 16, 2007 | General, In the Swamp, Lock-in
Those blog readers from the U.S. could not miss the media bruhaha this week over Don Imus. He was fired for saying some outrageous things on the radio.
Don Imus is a self-proclaimed "shock jock". Don made a living for over a decade by saying outrageous things to public listeners of his radio show. He made a fortune, well over $1,000,000 per year personally and multiples of that for his producers and syndicators.
So, what happened? He created a Success Formula all around being outrageous. And the more outrageous he was, the more it appeared people listened, and the more advertisers wanted his show, and the more money he and his network (CBS) made. Don Imus spent 10 years building this Success Formula, and Locking it in. He was succeeding with this outrageousness, and his producers succeeded, and CBS succeeded and all the affiliate stations that aired his show succeeded. So, they kept promoting outrageous behavior. And, as more people listened, even very well known, very famous, very successful people appeared on his show. They leveraged Don Imus’ success to give them access to more people and increase their awareness and success. That’s what a Success Formula is all about. People succeed by doing more of what they always did. And they Lock it in.
But then, the market shifted. Not clearly. Not obviously. Not with an announcement on the front page of the New York Times. But public sentiment shifted about "shock radio." We could see the signs. Howard Stern and his producer (Clear Channel Communications) were severely fined by the FCC for things he said. The pressure became so great Howard was forced to go from public radio (called terrestrial radio now) to pay radio (called satellite radio.) And we could see that there were increasing negative articles appearing about off-color comments by everyone from Stern colorful characters like Rush Limbaugh. But Don Imus and his producers ignored the signs of this market shift and continued to push their Success Formula.
Then, last week, it all came down. Mr. Imus said something that got under the skin of too many people. In a week, his sponsors (advertisers that paid for him to be on radio) refused to support him any longer. His revenue dried up, and he was fired from his show.
Why did this happen? Because he (and his producer and his station CBS) were so Locked-in to the Success Formula, which was working, that they ignored the signals of market shifts. They kept right on going until they fell off the proverbial cliff. That’s what happens to Locked-in businesses. Too often, they work that Success Formula right up until it fails. Rarely do we see an example that is so dramatic and quick. But now, we have a very good example of the risk of following your Success Formula and ignoring market Challenges and shifts.
