by Adam Hartung | Jan 5, 2007 | General, In the Rapids, Innovation, Leadership, Lifecycle
Boy, Motorola‘s stock had a rough day today. The company announced lower than expected earnings, and the price dropped 7.8%! A recent chart (see here) shows this has been the extension of a slide that started back in October, with the latest decline bringing the free fall to over 25%! Wow. Meanwhile the DJIA and NASDAQ 100 have all gone up substantially. This is ugly. Should you sell the stock if you’re an investor?
If you’ve read this blog a while, you probably know that I’m recommending you don’t sell Motorola. In fact, consider buying more. Why would I say that – and what do I see that all these other investors don’t? Well, just take for example the MarketWatch article on Motorola (see here). It’s all about mobile phone handsets. Although volume is up, and Motorola is taking share from competitors, it’s prices have gone down and thus revenue and profit have been hurt. The companion article on new products at Motorola (see here) also talked only about handsets. Merrill Lynch issued a report on Motorola, cutting its rating to Neutral from Buy, and through several pages of analysis the only discussion was about sales of mobile handsets. All of these would lead you to believe that all Motorola does is make and sell mobile handsets. But we know that’s not true.
Why, just before Christmas (12/21/06) Motorola announced its acquisition of Tut (see here), a company that helps Motorola’s Network and Enterprise unit expand its market in IPTV and the "connected home" marketplace. Tut helps telephone companies get into the TV business, and enriches the communications at the home. Tut built upon Motorola’s earlier acquisition of Symbol Technologies (9/20/06 see here.) And that, of course, had expanded the acquisition of General Instruments in 2000 that made Motorola a major player in the DVR business (see here). Don’t forget, Motorola also bought Good Technology (11/11/06 see here) which gave them a boost in the mobile communicatinos business we think of now as "blackberry." Now Motorola is not only in the network, data and video technology for businesses, but home use as well. Both growing at double digit rates annually.
Simultaneously, Motorola has been expanding its R&D in new ways. They have expanded development operations in Brazil (see here) as well as India (see here.) And don’t forget their 2006 partnerships with Kodak and Google to develop and launch new products (see here.)
And the company has expanded other very large and growing businesses. Have we forgotten that Motorola makes the infrastructure equipment for mobile phones (and all other mobile devices) and they recently won the deal to rebuild the Sprint network (8/9/06 see here.) Have we forgotten that Motorola is #1 (by a huge amount) in the radio systems for Police, Fire, Ambulance and other safety services? And that business got a shot in the arm after 9/11/01 when the government asked to connect these systems – leading to Motorola’s launch of MotoVision as a product which can link these emergency services and is now rolling out across the U.S. (see here.)
Motorola is much more than a handset business. And even that is growing – and gaining share on all competitors. Motorola isn’t a story of a company stalling. It’s a company that has been investing in multiple White Space projects simultaneously as it expands into new businesses and finds new opportunities. Yes, these need to produce higher revenues and higher profits. And it is important Motorola learn how to forecast its sales dollars and earnings to help investors know what to expect. But we must not lose sight of the fact that Motorola is a company that is growing, at double digit rates, and earning above market average rates of return on its sales. It has put in place a new management team (new CEO and new Marketing head – see articles on Zander as 2006 CEO of the year here and on Keller here ) who are willing to bring Challenges to the fore and use Disruptions to drive new innovation.
Motorola has attacked old Lock-ins head on. It has established White Space, and is developing new markets to expand its sales. Now, and in the future, mobile handset sales are only a part of the business. It’s time Wall Street analysts, news reporters and investors take a broader view of Motorola. Anyone who does should see "a future so bright they need to wear shades."
by Adam Hartung | Jan 3, 2007 | General, In the Rapids, Innovation, Leadership, Lifecycle, Lock-in
Did you buy any CDs this Christmas? If you did, the odds re you didn’t buy as many as you did in previous years. A freefall in sales of physical music products (CDs and music DVDs) has been going on since 2000. (For more data see Chicago Tribune article here.) That year CD sales peaked at 942 million units. By 2005, the volume was down to 705 million – a full 25% decline! And sales were off an additional 15.7% in the first six months of 2006.
Meanwhile, according to the Recording Industry Assocition of America, Sales of digital singles increased 71.3% in the first half of 2006. Since inception in 2003, sales of iTunes have reached a staggering 1.5BILLION songs – making Apple Computer Company the 4th largest music seller in the U.S. According to ComScore networks (see more data here), sales at iTunes increased a whopping 84% in the first 3 quarters of 2006. According to the V.P. of communications at RIAA, Jonathan Lamy, "This is a markeptlace that went from nothing 3 years ago to this year surpassing a billion dollars in retail revenue" (quote from Tribune.)
You have to wonder, why is Apple capturing all these sales and all this value? After all, they didn’t invent MP3 technology – the format that made digital music possible had been around for several years before Apple created its iPod version of the music storage and playback device. Likewise, Napster had gone on to great infamy demonstrating the huge demand for a digital music site years before iTunes was launched. Obviously it wasn’t a technology breakthrough that gave Apple this big success.
Furthermore, before Apple launched either iPod or iTunes Sony had already been a long-term leader in consumer electronics. Sony’s famous Walkman, Discman and other products had pioneered portable music. Sony had a global distribution for its products in stores of all types, including its own. And Sony was a brand synonymous with quality in consumer electronic devices and music playback. Sony even owned its own music label, and a huge archive of popular songs as well as contracts with several popular artists. Sony had all the pieces to create and dominate the digital music business. But it didn’t.
Sony was, and is, trapped in its Lock-in. The company had two separate division for hardware and software (music), and the two didn’t talk to each other. Worse, both divisions committed to the old music industry Success Formula, and had Locked-in on the physical distribution method for selling music (CDs). [For White Paper on music industry Success Formula and Lock-in visit here.] Both feared cannibalization more than they sought breakthrough solutions, as Sony joined EMI, RCA and others in suing Napster into oblivion during 2000, hoping it would stop digital music sales and help them regain sales and profits.
Today the traditional music companies are still Locked-in, and Apple is making enormous profits. Like Southwest in the airline industry, Apple is simply doing what the market wants and is reaping huge benefit because the most likely, and most powerful, competitors are more interested in preserving Lock-in than succeeding. Just because competitors are large, and well funded, and full of good product development does not mean you can’t effectively compete against them. When markets shift Lock-in often means that the most logical activity – that of existing competitors reaping the benefit – is often NOT what occurs. And it makes enormous markets available for new competitors to develop new Success Formulas that create above average returns.
by Adam Hartung | Dec 31, 2006 | Defend & Extend, General, In the Swamp, Innovation, Leadership, Lock-in
I’m almost 50, and if you’re age is anywhere near mine, and you’ve lived in the U.S.A., you probably have a really bad attitude toward electricity created by nuclear power. Back in the 1970s electric utilities set about building nuclear power plants which cost up to 10 times (not 10% more, 1,000% more) than they forecast. As a result, electric rates were shooting up beyond everyone’s expectations in order to pay for these enormous cost overruns. Additionally, construction timelines were extended out 2x to 5x expectations, causing power shortages which further drove up rates. And then, on top of all of this, serious concerns about safety developed as we saw various problems in nuclear operations – not the least of which was the core exposure at Three Mile Island which put a scare in everyone across the U.S.A. as we all genuinely feared a Chernobyl-style meltdown and radiation leak.
The electic utility leaders of the 1970s made a series of mistakes when they went about implementing nuclear power. Not the least of these was a complete lack of standardization. As a famous study at the time reported, in the U.S.A. no two nuclear power plants were the same. Successful nuclear programs in France, Germany and Japan had demonstrated that by utilizing the same engineering, the same plans, and learning from each and every build then improving those plans, they had developed extremely cost effective nuclear powered electricity which was proving to be extremely safe. As a Harvard Professor (definitely not a hotbed of support for nuclear power) reported, the French program was producing electricity at rates so low that you could completely encase the spent fuel rods in platinum 3 foot thick and blast it into outer space, or bury it into a core hole 15 miles below the earth surface, and the added cost would still make their cost per kilowatt hour a fraction of the cost of fossil fuel generators in the U.S.
But, that was then. What about now? As recently reported (see Chicago Tribune article here), nuclear power is starting to make a U.S. comeback. Fossil fuels are more expensive than ever. And, this time the industry seems to be intent upon utilizing all the lessons from the past 50 years. Yes, that’s right, we’ve been making electricity from nuclear fuel for 50 years (the U.S. wasn’t first, but even here nuclear power is over 40 years old). But will this program move forward?
That all depends upon our Lock-in. As a country, we can choose to remain locked-in to our previous assumptions about nuclear power. Assumptions based upon a single history (the U.S. experience versus the global experience), and based upon a very poor implementation. Or, we can view recent world events as a Disruption to our thinking. We can view the 5 year old war in Iraq as at least partially connected to our need for secure fossil fuel reserves. We can view the breakdowns in domestic offshore supplies from storms in the Gulf of Mexico as indicative of the risks inherent in our fossil fuels based supply system. We can view the ongoing reports of global warming as having at least the potential of being accurate (and if so, potentially deadly). We can utilize these market challenges to our energy supply strategy as creating within us a need to disrupt our approach to energy production in the U.S.A.
If we do this, we then can see the validity in using White Space to restart a nuclear energy program domestically. We should not wholesale change strategy – we need to learn. We should set aside Permission for a handful of companies to utilize all the accumulated knowledge on nuclear power to begin implementing some new plants. We should observe these projects closely. Monitor their progress and results. Learn from them as much as possible. And ADAPT in these White Space projects to develop solutions which work. Then, we can begin to MIGRATE toward a nuclear power as an effective part of our national energy policy.
As a nation, we’ve been Locked-in to an "anti-nuclear" energy strategy. But, 30 years have passed since Three Mile Island, and a lot has been learned. Our approach, our strategy, is being Challenged by a range of forces. What we must do now is see these Challenges as reason to Disrupt ourselves – our approach – and realize we must move beyond our Lock-in. We can use White Space to give Permission for trying a new solution, and potentially develop a new Success Formula for American energy supply.
by Adam Hartung | Dec 22, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
I’ve talked a lot about the business lifecycle, but not recently. For newer BLOG readers, I describe the business lifecycle as being like a river. Companies start out in the Wellspring, looking for a working Success Formula. After it hits on a functioning business model, it enters the Rapids where it uses innovation in all parts of its business to fully develop the Success Formula and make maximum returns while growing. Then the company hits a growth stall, and enters the Flats – where paddling suddenly becomes critical. Hoping that they can now extend their life by doing more of the same, they hope to stay in the Flats. But, unfortunately, in today’s economy there is no energy in the Flats and companies find themselves rapidly in the Swamp, where they become so obsessed with killing mosqitos and fighting alligators that they forget entirely what the Rapids were like and their real objective is to find fast moving water again. Finally, they fall into the Whirlpool when competitors simply pull them into failure.
I’m often asked how to identify transitions in companies across these sectors, and I point to how Lock-in during the Rapids leads to the stall in the Flats. Look at Lock-ins, and adherence to Lock-in even after the market has shifted and the Success Formula results are deteriorating. As focus becomes all about Lock-in adherence, even as results have become mired, and you see companies in the Swamp. Very few recover from the Swamp – the use up their resources as competitors push them toward the Whirlpool.
WalMart has exhibited all the traits of a company deeply in the Swamp. Despite their poor results, chronicled in this blog, Walmart rigidly sticks to its doctrine and hopes the market will bring them fresh water so the paddling isn’t so tough. A great example showed up recently, in the form of WalMart’s business cards. In the midst of it’s worst monthly and quarterly performance in over a decade, WalMart chose to react by reducing the physical size of their business cards (see Forbes article here.) Yep, amidst a crisis in growth this management team has reacted by cutting costs – it’s core Success Formula Lock-in – in the trivial area of business cards. WalMart is schrinking the cards in order to lower the paper cost and ink cost in printing employee cards. Give me a break – this is going to make any difference in the competitive problems with Target, Kohl’s and JCPenneys?
This joins the pantheon of key indicators that investors, employees and suppliers can use to identify a company in deep strategic trouble. I used to call it "the paper clip memo phenomenon." Look for the CEO of a troubled company to send out an email telling employees to be sure to save and reuse paper clips before discarding materials. This memo has come in many forms – such as "please start printing on the back side of paper as well as the front side", or "from here forward printing documents in color is forbidden," to "we are reducing all email archive space by 75% in order to save on server costs in IT." All real world examples of business leaders who are effectively telling the world they have no idea how to deal with the strategy problems they face, and they hope to survive as long as possible by adhering to Lock-in.
WalMart is huge and it won’t fail tomorrow. Heck, if we get a recession next year (predicted by several economists) WalMart might even see an up-tick in business and a jump in it’s stock price as customers go on a cost-saving binge. But, longer term, WalMart has demonstrated that it is out of touch with its customers and competitors – and it’s low cost no matter the consequences strategy is not the path to growth. Sometimes, the smallest things can demonstrate the biggest strategy problems. Just look at their business cards.
by Adam Hartung | Dec 11, 2006 | General, In the Rapids, Innovation, Leadership, Openness
The Phoenix Principle is not just for big or old companies. Any business, even small and family owned ones, can greatly increase their success using The Phoenix principle. And a great all-American example of this is NASCAR and the phenomenal growth it has achieved. (Read more about the success of NASCAR here.)
Forty years ago stock car racing was tied closely to blue collar guys with a set of wrenches and a desire to drive faster than the cops would allow – without getting caught. When we went to watch stock cars on hot nights you got muscled-up street cars driven with a fair bit of abandon. Most races were interspersed with local beauty pagents, and more than an occasional demolition derby. Sometimes you wondered if you came for the races, or for the crashes. A good time to watch, but not the stuff of big business. Not, at least, until the France family decided to try some new things.
The elder Mr. France realized that by linking all these fans to sponsors there could be money in this sport. As long as anyone could drive, the purse would be low and the competition would be less than stellar. So he didn’t start with cars, instead he started buiding his own tracks, where the environment could be safe and he could control who got on the track and what they drove. Then he helped good drivers find sponsors who would pay for the cars in exchange for advertising. Using personalities like Richard Petty, France slowly took stock car racing from broken down Pontiacs ready for the salvage yard (and modified cars coming from Detroit’s auto companies) into the world of Winston Cup Racing. And big money brought faster cars, better drivers and more fans. All of these ideas born of his family’s imagination and a relentless effort to find ways to get the winning purses up.
Now, his son Brian France is continuing to innovate. It’s no longer Winston Cup – with ties to cigarettes, the South, and old fashioned notions of stock car racing. Now its the Nextel Cup with ties to being national, technology, and innovation. And he truly understands the importance of recognizing Challenges and breeding White Space. As he said "The time to make changes in my view is when you don’t have to. If you’ve got a situation where you have to change, that’s a much tougher environment. You get more momentum when you don’t have to change." Now those are great words of advice for businesses seeking growth and long-term success.
Did you know that NASCAR racing is the second most watched television sport in the U.S.? (Surpassed only by the NFL). But if you go to the track (owned by France, don’t forget) you get even more. Attendees can actually get visuals from inside the car – see the race like the driver does – while getting real time stats on the race. And Mr. France is constantly pushing for changes in cars, including recently allowing Toyota to race on what has long been considered the asphalt dedicated to "big American iron." Why? Well, after all, have you seen "The Fast and the Furious"? All those young fans are driving a very different "hot car" than I grew up with – and they want to see on the track what they get in and drive home! It’s all part of trying new things, seeing what will work, and moving forward.
Seventy-Five years ago America’s sport was baseball. Babe Ruth and Joe Dimaggio, then Mickey Mantle and Roger Marris dominated our lives. Now, it’s a much more competitive world for athletic entertainment. Football, basketball, and hockey have all become major U.S. sports. Every four years the World Cup of soccer gets more U.S. fans as the children of "soccer moms" grow up. Golf has seen another emergence as Tiger Woods has reinvigorated watchers. It would have been easy for stock car racing to simply become a niche like watching billiards, darts or horseshoe pitching. But it’s not. And it’s not because this family-owned business recognized the Challenges which existed in attracting fans, Disrupted itself by constantly seeking out new sponsors and new competitive dynamics, and never stopped using White Space to find a better Success Formula that would help it grow.
The opportunity exists for any family-owned company to be long-lived and highly successful. And if you follow the model of the France family you could find your business very successful indeed. It’s not about vision and dedication. It’s about experimenting, feeling paranoid about competition, and never stopping the use of White Space to find a better Success Formula.
by Adam Hartung | Dec 4, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
So what business is Sears in? I don’t think anyone knows any more. But it is certain that without a direction, Sears will burn through its cash and leave shareholders with nothing soon enough.
After months of whipping Sears management in this blog for extending its Lock-in to failing retailing practices, in my last Sears post I recognized that I finally could see the management team was milking Sears and KMart of cash. They weren’t trying to actually compete with Target, JC Penneys, Kohl’s and WalMart. They are interested in pulling as much cash out of Sears and KMart as possible. Recently the Chicago Tribune reported (see article here) that Sears was in fact using its "excess cash" to invest in derivatives. Buying into the equities of other companies in a fashion so that no one, not even Sears’ investors, would know what Mr. Lampert and his team is buying.
What’s wrong with this picture? Well, to start with, businesses no longer have some extended lifetime where they can sit back and "clip the coupons" as they rake in the cash. Sure that was possible in the less dynamic era from the 1940’s through the 1970s when competition was dominated by huge players (like Sears) who grabbed market share and then simply held onto it by erecting barriers to competition. But today the flow of products, money and information is so fast that no barrier actually holds back the tide of competition. Sears and KMart have to contend with all the old competitors, all the emerging new traditional retailers, and all the on-line retailers. And they are doing so without the benefit of a powerful supply chain like WalMart. When you go to "milk" the business, the poor cow finds itself malnourished and no longer producing a lot faster than most people predict. WalMart is too busy cutting prices to feed its machine, while Target and Kohls are out finding the latest new products and fashion goods. There isn’t much of a storehouse of value in a brand when everyone can see the number of stores declining, the costs and prices rising, and the employees less satisfied than at competitors. "Milking" the business was a strategy for the 1980’s and before – not really applicable today.
And is Mr. Lampert’s team using this cash flow to invest in something where they can achieve competitive advantage? Well, we simply don’t know. All we know is he’s investing in lots of derivatives – and hiding his investments from anyone to see. What’s wrong with this picture? Well, firstly, do investors have a right to know how their money is invested? I seem to recall investor information being a bedrock of importance to publicly traded companies.
"But what about Warren Buffett and Berkshire Hathaway?" you may ask. Alas, we know that the go-go era of Berkshire Hathaway was at a time when Mr. Buffett and his cash stockpiles could be used to rescue situations where management was somewhat desperate. He offered a White Knight approach to helping those with cash needs to rebuild their business. But today, with the flourishing of Private Equity and Hedge Funds the marketplace is awash in dealmakers with lower capital costs hunting for the kinds of opportunities that were delivered to Mr. Buffett for most of the 1980s and 1990s. The value of such opportunities has shrunk so low that even Mr. Buffett himself, in the Berkshire annual reports, has stated that there are insufficient opportunities for him to keep Berkshire’s capital effectively employed for investors.
Beyond deals, Berkshire Hathaway has made almost all its money in insurance. Berkshire is a primary player in the sophisticated, and highly analytical, world of insurance underwriting and re-insurance (that’s insuring the insurers). Several times Mr. Buffett has explained that the primary profit generator for Berkshire comes from understanding risk and insurance products and knowing how to be the low-cost player in the insurance business. Something Berkshire has mastered and maintained for over 20 years. His investments in other companies, such as Pier One, have done no better than the overall marketplace – and at times far worse. In the end, his whole acquisitions of companies such as Dairy Queen have produced cash for investing into insurance – a target business where Berkshire Hathaway is not only low cost but also the most innovative company in the industry.
So where does that leave Sears? Their plans to "milk" the Kmart and Sears stores for cash I don’t buy into at all. As every quarter has demonstrated, revenues are falling and costs are rising faster than management can predict. Opportunities to sell the real estate into a REIT or other cash producer have not developed, and the real estate market has long ago peaked. Its plan to be a public "hedge fund" holds little promise of long-term above average returns or growth in an ever increasingly competitive world for "deals" where they are no better than any other sharp team of MBAs with a lot of cash from a pension fund or elsewhere. And there is no business, like Buffett’s insurance, where Sears management team claims to have any leadership or innovation.
Otherwise, Sears is a great company. The fact is, management has not really stepped up to any of the Challenges which faces the company in retailing, or in hedge fund investing or in identifying a new business which can grow and return above average profits for years into the future. There is no White Space at Sears, no effort to find a new business with advantage. Right now, Sears is just a vainglorious story of a CEO who wants to spend other people’s money. As Cramer says on Mad Money "You buy Sears to buy into my friend Eddie Lampert." With a below market average Return on Equity of 10.7%, a low Return on Assets of 3.9% and an above average Price/Earnings multiple of 22 – that’s a very risky buy.
by Adam Hartung | Nov 30, 2006 | General, In the Swamp, Innovation, Leadership, Lock-in
WalMart prides itself on great execution. For years management has bragged about the company’s ability to get things done quickly and cheaply. But now the company has run into problems. Revenue growth has slowed, and the future is very unclear. A five year stock chart shows declining equity value of about $80billion. WalMart is finding out that when innovating, it’s execution skills are greatly lacking.
This week it was reported (see Tribune article here) that WalMart is going to report that it’s November sales actually FELL for the first time in a decade. This is just the latest in a string of bad news. Included is the fact that WalMart is planning to cut back its expansion plans in response to its declining year-over-year same store sales. The company’s foray into more trendy fashion goods has flopped, with those products being pulled. It’s taking on the drug retailers with flat price generic pharmaceuticals – largely to a market yawn. Net – WalMart monthly sales are up only half of Target‘s (who’s 5 year chart shows they found the $80B Walmart lost).
Readers of this blog know I’ve long stated that WalMart‘s future is dicey for investors and employees. Totally Locked In to its strategy of low cost, management has pruned any skills at innovation. Long gone are the people who in the 1960s helped Sam Walton pioneer the innovations to drive the low cost strategy. So now, when it needs to innovate, WalMart doesn’t have the right people to do the job. To paraphrase an old southern expression "even if the mind is willing, the flesh is weak."
WalMart desperately needs to change. But to do that the company needs to implement White Space. It needs to first own up to its Challenges. It needs to tell employees, vendors, investors and customers that they see a need to change and fully intend to. Then management needs to put in place a team that has the permission to develop a new Success Formula, reporting directly to the CEO (outside the existing management system), and fund that team with enough resources to really try something different. All these piecemeal ideas are getting lost in failed implementations by an organization too massive and tightly directed to do anything more than run the old Success Formula. The White Space group needs permission to develop a new store concept. To test things their own way and prove out the new Success Formula – not just a new tactic here or there. And then, instead of trying to push the tactic into the massive WalMart the company must migrate the traditional stores toward what works in the new Success Formula.
WalMart has done this right before. Sam’s Club is a huge success – a pioneer in the club store concept. There WalMart followed all the rules of White Space and created a Success Formula that worked.
If they will hire some new managers, and give them the kind of White Space they gave the Sam’s Club team, WalMart could migrate toward a more successful future in a matter of months. But if management keeps doing all these tactical actions they’ll only succeed in confusing everyone. Much to all of our dismay.
by Adam Hartung | Nov 22, 2006 | Disruptions, In the Rapids, Innovation, Leadership, Openness
When asked about companies that are great examples of Phoenix Principle companies I like to discuss Virgin. For years Virgin was considered a small company, but it is a great example of a small company that has become very, very big by following The Phoenix Principle. There is no doubt that the company founder, Richard Branson, had a lot to do with the company’s enormous success (just as Steve Jobs has had a huge impact on the success of Apple and Pixar). But we can look beyond the flamboyance of Branson to see that the success has had everything to do with avoiding Lock-in to a particular Success Formula and instead accepting Disruptions to constantly create and then manage White Space.
Virgin was founded as a "publishing" company, putting out its first magazine in 1968. In 1970 I guess you could say it became a "media" company as that’s when it entered mail-order music sales. By 1971 Virgin expanced into hard assets by opening its first retail record store, and then in 1972 opening its own studio to actually produce its own content, leading to the Virgin label introduction in 1973. In 1976, Success Formula expansion continued with the opening of a nightclub in 1977. In 1979 Virgin ignored the thinking of everyone else in the "music" industry by signing on The Sex Pistols – an outrageous band which made Virgin a well known label and very wealthy. By 1980, Virgin was pretty well established as a publishing/media/music company with enormous profits and great success. This could easily have Locked-in Virgin.
Then, in 1984 the company realized it had to expand or stagnate. But it didn’t select just one project. The company opened a potpouri of new White Space. Virgin Atlantic Airways was opened to haul passengers, and Virgin Cargo to haul goods. A hotel was opened in Deya, Mallorca. And Virgin Vision opened shop with a 24 hour satellite music channel. What do these have in common? Nothing more than each was a new opportunity to expand the company into high growth industries. The businesses did not even share the goodness of being in high margin businesses – as practically all were markets where profits were extremely rare to nonexistent. Thus, the second great Phoenix Principle axiom was applied. Virgin did not dictate how these projects would succeed. Rather, they were each given resources and permission to find a new Success Formula in markets where Locked-in competitors did poorly.
In 1994 Virgin Cola was launched as a company to compete with Coke and Pepsi. In 1996 Virgin opened Virgin Bridal, the first mass-retail approach to the formerly cottage industry of bridal shop goods. Virgin also partnered with a company winning the contract to build the Channel Tunnel rail link between the UK and Europe. In 1997 the company got into the rail business full bore with 15 lines in England and plans to expand. That year the company also launched Virgin Vie – a cosmetics company. And Virgin Direct banking was opened in the U.K. Why do I mention these? Because they were just some of the projects launched in the 1980s and 1990s that did not become wildly well known successes. Part of creating and managing White Space is trying things that don’t work out. Portfolio management says that we need a mix of projects, yet most organizations cannot stand the thought of investing in something that does not succeed. At Virgin, managing White Space does not just mean starting new things – it also means knowing when to sell or otherwise get out.
This all got my attention recently because Virgin America will be going into service soon, carrying air passengers across the U.S. (See full article in CIO Magazine here.) The project is a marvel at how to manage White Space, culled from decades of doing it well. Simplification is a cornerstone, as the new enterprise is ignoring long-held "beliefs" about what works with airlines – an industry in which 160 air carriers have gone bankrupt since the deregulation in 1978. Virgin relies heavily on vendors and contractors/consultants to get things done in the early days. Rather than use "industry standard" software packages for critical applications like bookings/reservations and scheduling they are literally building their own; and using Linux open source code rather than proprietary source from companies like Oracle or Microsoft. And much of the work is being done in India by companies that has never worked previously for an airline. Virgin is demonstrating that competing means doing what your competitors don’t – in order to be more flexible and develop a new competitive advantage.
Great companies are no accident. What they have in common is a willingness to Disrupt their Lock-in and use White Space to create new Success Formulas. Long-term, success does not come from understanding your "core competency" and optimizing it (if that were true Virgin would likely have followed the path of Playboy magazine or Sun records – the fabled company that launched Elvis but is now gone), but rather from overcoming market Challenges and developing new solutions to compete. To this day Virgin follows this path, fearing no new markets and entering with their own unique Success Formula developed in White Space. And anyone can participate, on the company web site is a link where you an submit your own Big Idea for consideration – always on the lookout for Disruptions and opportunities.
by Adam Hartung | Nov 10, 2006 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
I’ve long said that any company can innovate and grow. ANY company. This week we saw an example of a stodgy company, in one of the stodgiest industries, explain how it’s possible to take the steps toward improving its long term success. That company is Allstate – best known for it’s insurance business and its decades old tag line "your in good hands with Allstate." (See complete Chicago Tribune article here.)
I’m optimistic about Allstate, and do think it shows a high likelihood of outperforming its peers. And not because I think they have better underwriters, better risk managers and better agents. Nor because they are looking at all kinds of new products like pet insurance and identity theft insurance, as well as others. Nor because they are planning to roll out new "hipper" office decor.
I’m optimistic because the fellow who’s taking over as CEO shows the willingness to create and manage White Space within Allstate. Starting in 1999, Thomas Wilson took a look at Allstate Financial and wondered why it only sold unregistered products like life insurance and annuities rather than a larger suite of products including mutual funds. He could have studied on this question, pondered the potential market, hired consultants and generally analyzed the question unendingly. But, instead, in his own words he said to the unit leaders "Here’s $10million. Talk to me every two weeks."
With this small act ($10million is relatively small in a $33billion company) and short directive he created White Space in Allstate. He gave the unit permission to try new things, and the funds to execute. He also had the unit report to him, not somewhere down in the company where potential product line conflicts would eventually destroy the innovations. And he started his experiments in an important business, but not the legacy business, so that this unit could demonstrate success without contradicting too rapidly or strongly existing Lock-in.
He did it again in 2003. After decades of advertising, Mr. Wilson felt the advertising was insufficient and ineffective. So he tripled the budget, and told the ad agency to put in place a new team to develop a new program. Not an incremental act, but instead the granting of permission to try something new and plenty of budget to make it work. And again, he took responsibility.
Mr. Wilson wasn’t "born and raised" in Allstate. He worked in accounting, venture capital, investment banking and even the oil business (Amoco – later bought by British Petroleum [BP]) before joining this venerable company. That may have helped him to see the need for White Space, and to take actions to create it at this huge, analytically-driven company. Whatever has driven his actions, like a cross town fellow CEO Ed Zander at Motorola, Thomas Wilson is imbuing Allstate with White Space, and that portends very good things for investors, employees and customers.
by Adam Hartung | Nov 3, 2006 | Defend & Extend, In the Swamp, Leadership, Lock-in
OK, I guess I’m dense. For months I’ve been asked what I thought of the management at Sears. And I have been pretty brutal, saying that Sears was not a viable long-term competitor against Wal-Mart, Target, Kohl’s and other major retail players. Especially as that competition intensifies. Why Sears can’t even get it’s own partners in Canada to go along with an acquisition of that unit (see article here).
But in October, I finally "got it" regarding Sears. Many newspapers reported that Sears equity value was jumping on the notion it would buy Home Depot, or another big company (see Chicago Tribune article here.) And I realized that Mr. Lampert wasn’t trying to develop a strategy to have Sears compete Sears long-term. Nor was he converting Sears into a Real Estate Investment Trust for long-term value. Instead, he’s "draining the Swamp" to get all the cash out of it he can before it rots.
Sears and KMart are at the end of their lives. Years of bad management has locked them into weak operations. But in American business, we never know how to deal with a business once it’s trapped in the Swamp – too busy killing mosquitos and fighting alligators to remember the primary mission. What we need to do is get the cash out. And that is clearly what Mr. Lampert is doing. He’s getting the cash out of Sears and its many holdings.
So, does that mean I’ve changed my mind on investing in Sears? Not really. It’s certainly OK to decide to exit a business in a fashion that actually creates a positive return (rather than keep running the business badly until Chapter 13 wipes out the investors and creditors). But Sears Holdings’ value has to be based upon what Mr. Lampert will do with this cash he plans to get out of Sears. That we don’t know. What will Lampert’s team do to create growth? He can’t create a positive future merely as the grim reaper. There has to be growth for investors to create long term value. Today, you would pay a heady 23x earnings for a company who’s future we know nothing about. That’s quite a premium to place on an unknown horse.
Will he invest wisely like Warren Buffet – the person he loves to be compared with? Will he invest in growth oriented enterprises like Buffet did in insurance, and later in public investments such as Coca-Cola? We don’t know. All we know is that like Berkshire Hathaway – which is named for the textile mill Mr. Buffet bought decades ago – Sears will soon enough stop being a brand name retailer and instead become something else.
In being smart about draining the Swamp – getting out of KMart and Sears with maximum cash – the Sears management team is doing something few business people in America do. For that, they are to be applauded.
If you’re a supplier to Sears, you’d better start looking for new customers to grow. For customers, they would be wise to realize that Sears and KMart will never again be what they once were – and we don’t know what they will be. For investors, the story is yet to be told. Will Sears pay out massive dividends giving investors a great return? Or will they invest in businesses at very low valuations that show great growth opportunities? Or will they invest the money poorly? Only time will tell. But we can be certain that Sears is no longer a retailer – it is now a diversified investment vehicle for Mr. Lampert and his management team. And only one of those kinds of companies has done well – a tough act to follow.
