by Adam Hartung | Aug 28, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in, Quotes
I need to thank one of my readers for bringing to my attention a recent BusinessWeek article on Dell (see article here.) As he pointed out, this article comes almost exactly 3 months after I talked about how Dell’s Lock-in was disastrous. There are some great quotes worthy of sharing:
Regarding Lock-in:
- "Dell remained slavishly loyal to its core idea of ultra-efficient supply-chain management and direct sales to consumers, even as rivals have stepped up their game and markets have shifted to take away some of Dell’s key advantages. Instead of adapting, critics say, Dell cut costs in ways that compromised customer service and, possibly, product quality."
Some readers may recall on April 16, 2006 when I pointed out Wal-Mart’s problems and discussed the risk of being a 1-Trick Pony:
- "They’re a one-trick pony. It was a great trick for over 10 years, but the rest of us have figured it out and Dell hasn’t plowed any of its profits into creating a new trick."
Regarding identifying Telltales of big problems that indicate a company is moving into the Swamp – or Whirlpool:
- "Dell’s culture is not inspirational or aspirational," says Geoffrey Moore, a tech consultant and author of Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution. "This is when they need to be imaginative, but [Dell’s] culture only wants to talk about execution."
Of course, in an execution focused company there is no room for White Space, and you don’t get innovation:
- "They don’t feel they’re part of something at Dell, and they generally leave because they feel frustrated," says Snyder. "Dell is not a fun place to work, and it’s less fun now than it used to be."
- "Even the CEO admitted so in 2003 – "There are some organizations where people think they’re a hero if they invent a new thing," he said. "Being a hero at Dell means saving money."
- "Inside Dell, ideas that break from the model are discouraged, say former Dell managers. Notes one: "You had to be very confident and thick-skinned to stay on an issue that wasn’t popular. A lot of red flags got waved—but only once."
Lock-in makes you an easy target for competitors:
- "But it was clear some time ago that Dell’s model was not keeping pace and was not going to be such a big advantage in the future… And while experts believe Dell got the best prices on components when it was outgrowing all of its rivals, these days newly ascendant HP and Asian rivals Lenovo Group (LNVYG) and Acer are offering plenty of growth themselves."
Once a company commits to a Defend & Extend strategy, it becomes so structurally Locked-in it becomes almost powerless to change:
- "So why hasn’t Michael Dell—clearly a brilliant guy—changed tactics? For starters, say rivals and Dell alums, shifting gears would upset investors who expect hyper-profitability from Dell’s hyper-efficiency. And having stuck to his guns in the past, he can’t risk letting customers think that "Direct from Dell" is no longer the cheapest, smartest way to go."
By following the Siren’s song of "operational excellence" Dell adopted a Defend & Extend strategy that has placed it at great risk. Now it lacks the tools for innovation that could help the company to have a longer, more successful future. Without a serious Disruption, and new leadership that can implement and manage White Space Dell’s future is easy to predict.
by Adam Hartung | Aug 17, 2006 | Defend & Extend, General, In the Whirlpool, Lifecycle, Lock-in
Here in Chicago we have a convenience chain called White Hen. The stores have been a fixture in Chicago for 4 decades. But they are about to all disappear. That is, the remaining ones. Although the chain is being bought by the much larger 7-11 chain, there is no premium being paid for the company. On the contrary, investors are losing money on the sale. Sold in 2000 to Clark (a gas station operator) for $80million, the company went bankrupt and was acquired by management in 2002 for $45million. Now, 7-11 is paying $35million. So what happened?
During those 6 years, White Hen shrunk from 245 stores to 206 in Chicago. This may not sound like a huge problem, but for a debt-laden acquired company losing 16% of capacity is enough to drown it. In short, the management of White Hen spent too much focus on trying to generate fast profits, and not enough recognizing the need to grow. They kept trying to cut size and cost to create more profits, and in the end they simply cut cash flow and killed the company.
White Hen is a microcosm of what we see in far too many companies today. They forget that either you win, or you lose. You can’t simply "mark time" and try to tweak the profit model. Competitors today won’t let you do that, they are too smart and too capable. Today, you have to keep innovating, meeting Marketing Challenges, creating new Success Formulas — or you lose. There is no tie. You win, or you lose. And the leadership of those companies trying to follow the example of White Hen (such as Sara Lee and Sears) should take note of this example.
by Adam Hartung | Aug 15, 2006 | General, In the Swamp, Lifecycle, Lock-in
Today WalMart announced that for the first time in a decade it’s quarterly earnings actually declined. The stock is down again, remaining a very poorly performing equity investment since the company peaked back around 2000. Since then, investors have not been rewarded for staying with the Locked-In strategy of the world’s largest retailer.
Did you see it coming? You should have. For over a year this blog has been pointing out that Wal-Mart is horribly Locked-in to its old ways, and unwilling to use White Space to create a new Success Formula. Although it’s impossible to predict the day when things will demonstrably go south, it isn’t hard to predict the trend if you pay attention to White Space – or lack thereof.
When announcing these poor results, Wal-Mart blamed high gasoline prices. Let’s see, for 3 years now we’ve had high gas prices, and Wal-Mart has blamed petroleum costs for its problems. You’d think by now, if management was as good as it claims, the company would have adjusted to the reality that gasoline is most likely to remain expensive. At the very least, they should have executed contingency plans to react to such a market Challenge. Instead, they plod forward with the same Success Formula, fail to meet expectations, then blame circumstances that they long ago should have planned for and dealt with.
Worse, Wal-Mart leadership blamed this specific quarterly failure on selling off WHITE SPACE projects in Germany and Korea. Wal-Mart is a company that desperately needs to find a new future. To overcome its Lock-in. Yet, once again, we see they have decided to exit markets where they should be learning and growing. If they can’t succeed the Wal-Mart way, then they leave. If there was ever a big, bright red flag that says this company is in trouble, missing earnings forecast while exiting White Space and blaming the cost of White Space for their earnings problems – while ignoring market challenges like high oil prices – has got to be it.
This should be a clarion call to avoid this company as an investment, as an employer, and as your primary customer – unless you want to suffer prolonged poor performance. If they miss forecasts again next quarter they will officially enter a growth stall, and that will put them in the category of having less than a 10% chance of ever maintaining growth of a meager 2%. The chances of a turnaround are nil, simply due to demonstrated Lock-in, and the odds of a growth stall just jumped dramatically.
by Adam Hartung | Aug 9, 2006 | Defend & Extend, General, In the Rapids, In the Swamp, Innovation, Leadership, Lock-in, Openness
Once again we have the opportunity to view the tale of two companies. Both troubled, yet capable of success if they do the right things.
Motorola was struggling a few years ago. Then, a new leader came on board and started Disrupting the old Success Formula. Simultaneously, he opened up White Space all around the company. Sales went up, and so did innovation. While everyone knows about the success of RAZR, Motorola also built its business in digital video recorders and networks. Now, today, we learn that Motorola has further grown its success, winning a $3billion deal to build out a wireless data network for Sprint/Nextel. (See full article here.)
Sara Lee found itself also struggling a few years ago. They also hired a new leader. But this leader chose to disturb the organization without really changing the Success Formula – focusing on cost cutting and selling businesses without creating any new White Space. Now, today, we find out that the leader is conceding she won’t meet her margin goals (even as the business shrinks more than 50%), and isn’t really sure when the company will be growing again. (See full article here.)
Motorola is up over 30% in market value. Sara Lee is down more than 30% in market value. Those who read this blog know that I was a very early fan of Motorola’s turnaround, and recommended it as an investment. They also know I’ve been a longstanding pessimist of Sara Lee. Why? It’s as simple as White Space. At Motorola you could observe a leader attacking the Lock-in and implementing White Space. At Sara Lee there was no attack on company, or industry, Lock-in to old formulas and there was absolutely no White Space.
A successful turnaround absolutely requires fast action to Disrupt and implement White Space. It is the single best predictor of whether a company will overcome its growth stall, or not. Any time you need to decide whether to invest in, join, or supply a troubled company follow one simple rule – Follow the White Space.
by Adam Hartung | Jul 30, 2006 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
When I was young (40 years ago) GM and Ford made cars and trucks. Harley Davidson made big, loud motorcycles. Boeing and Cessna made airplanes. Briggs and Straton made the engines for lawn mowers and other yard equipment. Today, you pretty much can make those same statements.
In the 1960s a company named Honda came to America with a little 50cc motorcycle. No one knew much about this company or what it did. But today, Honda does a lot. Motorcycles, all terrain vehicles, personal watercraft (jet skis), automobiles, full size pick-up trucks, electric generators, lawn mowers and garden tractors, outboard boat motors, water pumps, scooters, snowblowers, robots and airplanes. So, what market are they in?
Honda eschewed the commonly held notions of "core market" and "core customer". They don’t try to be #1 or #2 in their markets (they are the #3 Japanese auto company, for example). You can’t define them in any easy way. Just that they keep growing well above the market average, they keep making money, and they keep providing a doubling our tripling of value for their investors every 7 years or so (quite better than the market average.)
So what drives this success? A focus on innovation as a tool to avoid Lock-in. Let’s look at their recent move into jet airplanes (could you imagine GM, Ford, Harley Davidson or Briggs & Stratton announcing they intend to make and sell airplanes?) The project is led by the V.P. of North American R&D – not the Marketing or Strategy head. His approach has been to apply innovation. Honda is using unique engine mounting (top of wing instead of on the fuselage), building with composite material instead of aluminum and implementing a unique wing shape which achieves a larger interior cabin, higher cruising speed and greater fuel efficiency.
Of course, the competition is belittling this new Honda entry with statements like "It’s a brand new territory for Honda… It’s very different than the consumer market." OK. Sounds a lot like what the original players said when Honda entered the motorcycle market, the auto market, the lawn/garden market, the full-size pickup market and then the outboard motor market. Yet, in each, the innovations Honda brought to market allowed them to attract customers for their products at a good price and a great margin.
Honda does not fixate upon its "core markets", it’s "core capabilities" or even its "core customers". Instead, it constantly looks for new opportunities to innovate and add value. It does not fear new markets, but rather sees each new market as an opportunity to Disrupt itself and create White Space for a new solution. Then, they are merciless in their efforts to do what no previous competitor has done to create value for customers. And now, they are far more successful than #1 or #2 in almost every market they compete.
by Adam Hartung | Jul 22, 2006 | Disruptions, General, In the Swamp, Innovation, Leadership, Openness
Everyone wants an evergreen company – one that is constantly growing and self-renewing, generating more revenues and profits year over year. One such company is Illinois Tool Works. Have you heard of it? Do you know what they do?
One of the most important things ITW does is avoid Lock-in. ITW has no fixation with core markets, core customers, core products nor core competencies. In fact, the company is a collection of over 600 small businesses around the world, in a wide range of businesses. They don’t seek imagined synergy and push for consolidations and mergers, instead allowing each business to each maximally develop their customer opportunities and markets. Headquarters does not dictate the strategy or markets for these businesses. ITW doesn’t even try to limit its businesses to being in similar markets, functions, technologies or product lines.
What ITW does is consistently grow, and consistently make more money. For 90 years. Revenues grow at about 10%/year, earnings at about 15%/year and earnings per share about 14%/year.
How? Like I said, the company first and foremost avoids Lock-in. Leadership isn’t trying to follow fad definitions of new markets, or catch the latest wave of analyst hot buttons. They disrupt themselves by constantly looking into new markets, new technologies and new product opportunities. They don’t focus their acquisitions on cutting products or quickly generating more money with cost reduction, instead relying upon customers to help define how they can improve market performance leading to financial performance. By not seeking "optimization" of their acquisitions (like Tyco), they remain constantly in a disruptive state of enquiry. And each and every business is allowed to operate in its own White Space – free of dictates from a hierarchy or home office about how to succeed. Results are what matter at ITW – not slavish response to structural or behavioral Lock-ins.
And the company lauds innovation. Innovators are sought out, and rewarded. ITW is one of American’s largest patent filers, and patent holders, and it works hard to maintain that position – even if you’ve never heard of them. They want White Space projects in their businesses, and they reward the efforts as well as the results.
ITW defies all the rules of best management practice. They don’t optimize. They don’t "focus on the core." Instead they live without Lock-in, constantly innovate and Disrupt, and allow White Space to flourish all over the company. And for that they achieve innovation on the scale of an IBM, and returns like an old-fashioned (Jack Welch era) GE. And the result is an Evergreen Company that grows beyond average and makes above average rates of return.
by Adam Hartung | Jul 16, 2006 | Disruptions, In the Swamp, Leadership, Lock-in
There has been much written lately about Carlos Ghosn. Some are thinking that with Kirk Kerkorian’s urging, this fellow is likely to be the next head of GM. Of course, there’s a lot required for this to happen, but would it make any difference?
Mr. Ghosn is considered an auto industry turnaround expert. How? Does he ride in with a program to slash costs by cutting marketing and R&D and killing new products – vis-a-vis Chainsaw Al Dunlap of Scott Paper infamy? Does he randomly implement across the board cost cutting? Hardly.
At Nissan, he quickly disrupted the company by killing off the Japanese keiretsu system of long-term relationships.. This opened the door for a dramatic series of actions which threw the company into White Space. For example, new competitive bidding teams were created for sourcing, and a wave of innovation programs were started. In one year, the company went from a loss to a record profit. That has been followed with 6 years of record profits.
Never one to stop disrupting, Mr. Ghosn recently took the dramatic action of moving Nissan’s U.S. headquarters from Southern California – the legacy location of headquarters for all Japanese auto companies – to Nashville, TN, much closer to the company’s plants. While this has upset a lot of industry watchers, there is no doubt he has used the move to change the leadership and the processes of Nissan U.S.A.
If he follows the same plans at GM, Mr. Ghosn could be a tremendously beneficial change for America’s largest car company. Like Ed Zander when he arrived at Motorola, Ghosn is likely to Disrupt the status quo, and implement White Space. Being a master disruptor is one of the most valuable traits of a good leader. Especially one needing to turnaround a behemoth. Just look at the Disruptions implemented by Lou Gerstner at IBM, which saved the company from the brink of disaster.
Given the incapability of GMs leadership to attack its Lock-in and create White Space for generating future opportunities, there is no doubt change is needed. Given his record, Mr. Ghosn would make dramatic change in GM by attacking its Lock-in and implementing White Space. And that would be good for everyone. If Mr. Ghosn gets the top job at this venerable company, give investing in GM another long hard look.
(Link here for more information on Mr. Ghosn courtesy of the Chicago Tribune.)
by Adam Hartung | Jul 8, 2006 | Disruptions, General, In the Swamp, Leadership, Lifecycle
General Motors has seen its stock value grow almost 40% in the last 3 months. Why? Many analysts and investors believe that GM management has been Disrupted, and is moving into White Space for new solutions to its problems.
Is it for real? Well, first the Disruption. Kirk Kerkorian bought almost 10% of GM and then put his representative on the Board. As outsiders, they have been screaming for change in how management leads the company. And it has started making a difference, as GM has started doing several things differently.
GM has changed some of its approaches to workers. Its recent employee buyout was 30,000 oversubscribed indicating a successful tactic for both the company and labor. And, GM is working with Delphi (its largest parts supplier) and the union to create a unique solution to the bankrupt company’s problems. Lastly, GM leadership is now entering talks with Renault and Nissan to possibly create a new merged company.
Successful White Space requires (1) permission to discover new solutions outside the historical Lock-in. This seems to be happening in some of these fledgling projects. Successful White Space also requires (2) committed resources in advance to develop the new Success Formula. That we have not yet seen. While there is progress being made to sell GMAC and raise additional cash, we haven’t yet seen the commitment to actually invest in White Space and create a more competitive future. Until we see management internally Disrupt itself, following Mr. Kerkorian’s lead, we won’t likely see real investment or commitment to creating a new Success Formula.
If the outcome of negotiations with unions, and other companies, is just more cost reduction in support of the old Success Formula then Mr. Kerkorian’s Disruptions will be for nought. Combining GM, Renault and Nissan just to achieve additional "scale" will do no more to create value than combining KMart and Sears. What’s required is the creation of a new company that is more attuned to customers, designs cars better, gets them to market faster and creates more profit on smaller unit volume. And that will require lots of White Space projects with wide permission to change and extensive resources.
by Adam Hartung | Jun 28, 2006 | Disruptions, In the Swamp, Innovation, Leadership, Lock-in
Readers of this BLOG know I have been no fan of Roger Deromedi and Kraft. So, you probably think I’m delighted with his ouster this week by Altria (effective parent of Kraft). Actually, I’m unconvinced whether it will matter.
There is no doubt that Kraft was locked-into a Defend & Extend strategy which was producing declining results. The stock price had declined 30% since 2002, and the CEO had no plans for growth. Deromedi laid off 14,000 people and closed 40 factories in 2.5 years. His plans could be summed up in his own quote "strong execution of our strategies will deliver improved results in 2006 and beyond." Just like it had done in 2004 and 2005 – right. Obsessing about execution is one critical telltale signal of a failing, locked-in strategy. There was no plan for growth, sooner or later, as he kept selling brands and investing more money in no-growth categories like cheese. The Chairman of Kraft, currently the CEO of Altria, finally realized that there was no interest in an independent no-growth Kraft, so he’d better make some changes or the spin-out of Kraft was never going to be completed.
But, what’s needed at Kraft is a Disruption to the Lock-in, and replacing the CEO is more of a Disturbance than a Disruption. Changing the CEO doesn’t inherently change anything beyond the sign on the door. And the new CEO, for all the praise now heaped upon her, is a 20-year returning veteran of Kraft. She spent barely 1 year running Frito-Lay, so despite her $2.5million compensation, she wasn’t there long enough for us to know what difference she made, or might have made.
We do know that she left the job running Kraft North America, which was a $30B revenue business to later run Frito-Lay, only a $10B business. That indicates she was no fan of Deromedi when she split, nor most likely of his then co-CEO Betsy Holden. Nonetheless, her career was a pretty straightforward development up the management ranks of what has long been a low-innovation enterprise. But is she ready to create some growth engines inside this behemoth? Does she know how?
Top marketing gurus around Chicago have weighed in, calling for the first steps to include changing the culture toward product innovation from brand extensions, and using portfolio planning to milk some brands for cash while investing in growth with other brands and a refocusing on innovation and new product launches.
What is required, as I said earlier, is a Disruption. Kraft must stop viewing itself as being self-satisfied, and realize there are external Challenges to its brands and its business. Older Americans are changing their diets to live longer, and younger Americans no longer look to these old brands when thinking of meals. A great past does not assure a great future – just look at Brach’s candy company (bankrupt), ConAgra or Sara Lee (themselves drastically downsizing). The new CEOs first step must be to avoid reassuring the people of Kraft, and rather to hlep them see that these Challenges are placing Kraft – soon to be an independent company – at risk of having a viable future. There is no growth in Kraft, and without it the company is doomed to a very unhappy competitive reality.
And she must Disrupt Kraft. The mechanisms which keep Kraft acting like Kraft. She needs to attack Kraft’s critical metrics, its hiring practices, its centralized decision-making processes, its arrogant approach to retailers and end-users, its focus on "do no harm" brand tactics, its rewarding of "farmers" and punishment of "explorers" in the workforce, its deep hierarchy that vets out ideas which don’t look like guaranteed wins (and thus little more than extensions of old businesses), and its obsession with cost reductions. Of course, not all of these should be attacked at once. But, she must attack them. She must identify the Status Quo Police and reduce their numbers while gutting their influence – be they in finance, HR, or marketing. She must create a pattern interrupt in Kraft; she must Disrupt the old Success Formula.
And, she must put in place White Space. Something completely lacking at Kraft. We need to see her create project teams which have explicit permission to behave differently, outside the old Lock-ins. And she must show us that she is dedicating resources, in advance, to these teams so they have the wherewithal to actually create new Success Formulas for the company.
We must keep our eyes on Kraft. When Mr. Zander joined the cross-town company Motorola he too faced a seriously Locked-in organization. Yet, within only 6 months he effectively Disrupted Motorola and put in place White Space projects that almost immediately began changing the fortunes of the company. Let’s hope Ms. Rosenfeld does the same – so Kraft can once again take its place among the leading consumer goods companies of the world.
by Adam Hartung | Jun 23, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
As readers of this BLOG, you know that I find McDonald’s a risky company that is horribly Locked-in to its old Success Formula. So, I wasn’t surprised when I recently read about McDonald’s latest plan to grow.
McDonald’s is planning to pump up sales by opening a series of drive-through units in China (see Chicago Tribune article.) Sounds like a decent idea you say? Well, let’s see, only 10% of all food in China is eaten out (and 90% of that comes from full service restaurants.) People in China don’t view their cars as eating places, and they still prefer to sit together and eat. The largest western food chain in China is KFC (remember that the next time someone says Asian bird flu is a detraction to their sales), with about 3x the number of units McDonald’s has.
But McDonald’s is ready to predict great success. Why? Well, firstly 74% of people in the U.S. get their McDonald’s from a drive-through, so surely the Chinese will do the same thing – right? (Lock-in #1, people want drive-throughs). Secondly, they have found a company willing to be their partner, the state-owned gasoline retailer, so that insures success – right? (Lock-in #2, McDonald’s is a franchising company so it loves partners that will roll out units for it.) McDonald’s has to be appealing to the skyrocketing Chinese middle class, who are buying cars like won-ton noodles, right? (Lock-in #3, the McDonald’s brand is appealing to middle-class consumers globally.)
McDonald’s has passed on a number of growth opportunities. Remember the hot growing Chipotle’s chain that McDonald’s shipped out the door? Remember the McCafe concept that was to challenge Starbucks but that can’t get beyond 30 units opened? The fact is that McDonald’s will only attempt growth ventures which fit inside its Lock-in. Will the Chinese venture work? The odds look long given the approach McDonald’s is taking. Only when viewed through the lens of McDonald’s Lock-in does this venture look like something to brag about.
Cut cost, extend product lines and go to new markets – that’s the same strategy Krispy Kreme said would turn around their lagging fortunes. That was before they went bankrupt. There’s nothing insightful about that strategy, and it’s not likely to put the fizz from its soda into McDonald’s stock price either. It’s a Defend & Extend strategy, when what McDonald’s needs is more White Space, the ability to listen to changing market needs, and some really new ideas for growth.
