by Adam Hartung | Feb 28, 2006 | General, Innovation, Leadership, Lifecycle, Lock-in
I’m a midwestern guy – born in Oklahoma, college in Kansas and now a long-time resident of Illinois. I love Chicago. But, I have to admit, some things have been concerning me lately.
Illinois lost jobs last year. In fact, Illinois has had a net job loss since 2000. That’s a Telltale of problems. The marketplace is shifting, and it’s not clear Chicago is creating an effective new Success Formula.
Across the business landscape, there are lots of signs of problems. Former bellweather Kraft has been locked in a turnaround for 5 years, without much progress. In 2004 the company closed 20 plants and laid off 5,500. Recently it’s announced plans to shut another 20 plants and lay off 8,000 more. Crosstown, Sara Lee has been struggling as it has sold off business after business in search of "focus," yet it has not been able to improve results. Revenues are predicted to halve over the next 5 years in this prolonged turnaround effort – apparently in plans to shrink itself into success.
Sears has shown misstep after misstep since being acquired by K-Mart. It announced in 2005 it would convert 400 KMart stores into Sears Essentials – but as sales fell 20% in the first 40 conversions that decision has now been abandoned. Sears can’t even buy it’s own Canadian operations, having had its offer turned down by the Canadian Board! And McDonald’s is under attack for everything from bad fat in its food, to unannounced ingredients causing asthma attacks and a 30-something hedge fund manager trying to force management to restructure its operations in order to add value to a stuck stock.
For years, I’ve heard people talk about "midwestern paternalistic companies," "mature management in mature industries," and "old fashioned values exemplified by careful management" when talking about Chicago. Unfortunately, these are a pleasant veneering over of unpleasantly Locked-in management teams. Too many companies are blaming a "midwestern culture" for an inability to Disrupt their failing Success Formulas and implement White Space. Too few new products are being created and introduced, and too few new innovations are being introduced into operations.
Do midwesterners lack innovation? Of course not. Go to any of a number of Chicago area angel investing groups, or entrepreneur groups, or venture clubs and you’ll see, literally, dozens of new ideas for businesses of all types. Ask those entrepreneurs where they go for corporate support and you hear "the coasts. None of these big Chicago companies want to get involved with local innovators." And, alas, you don’t see these companies sending representatives to any of these networking events. These venerable laggards keep looking inward for all the answers, instead of looking outward – where White Space creates a flourishing market of innovation.
I would think that the apparent Challenges – the loss of jobs, or the declining stock prices, or the frustration of limited growth – would lead these company executives to do something different. To Disrupt their ineffective operations. But so far, they have remained Locked-in to those old Success Formulas – and the price is being paid (quoting a famous line from It’s a Wonderful Life) "by those people who do most of the working, and eating, and living, and dying in this town."
by Adam Hartung | Feb 22, 2006 | General, In the Swamp, Leadership, Lock-in
Recently GM announced with pride that it had reduced it’s IT expenditures by 25%. The company’s IT spend to sales ration has dropped from 2.4% to 1.6% – a 33% decline. This was held up as a sign of great progress. But, as Baseline recently reported, because GM is looking at the wrong metrics this fact doesn’t matter much.
During this same period, GM’s employment declined by nearly 50%. And the amount of work outsourced (as a percent of revenue) increased from 67.7% to 75%. As a result, the number of transactions undertaken at GM declined markedly. So, while IT costs declined, at the same time the business supported by IT declined even faster. The net? IT costs per transaction actually INCREASED by almost 74%.
Businesses tend to Lock-in on the metrics used, just like they lock-in on behaviors and processes. If they keep looking at the old metrics, they miss the changes necessary to actually improve the business. Often one of the most critical Disruptions is Disrupting the metrics used. In the case of GM, they were caught bragging about peformance on an out-of-date metric. Another demonstration of Defending and Extending a broken Success Formula when what’s needed are entirely different measures to drive new behavior.
by Adam Hartung | Feb 22, 2006 | In the Swamp
McDonald’s has been in the news a lot lately. There is a hedge fund operator pushing the company to spin out its company owned stores. They just had to re-evaluate the fat content in their products, and discovered that "bad fat" is greater than previously reported. Then they had to report that there were other foodstuffs in their fries, which has led to lawsuits from allergy sufferers. And, while all this is happening, McDonald’s management is saying "hold the course, all is moving smoothly."
Welcome to the Swamp. "It’s always something" Roseann Rosanadana used to say on Saturday Night Live. And so it is in the Swamp. Even though management keeps saying things are fine, there is in fact a never ending litany of problems. Some appear small, and some appear large. But the fact is there are lots of unanticipated problems developing – and management seems to be forced to react from one problem to the next. Regularly on the defensive.
The Success Formula is in trouble. It’s no longer able to produce the desired results. Yet Lock-in is keeping the company implementing the same formula, seemingly unable to get ahead of problems. Because management is spending its time Defending and Extending the broken Success Formula, it’s not able to see that these problems will just keep coming and coming.
McDonald’s desperately needs to Disrupt its Lock-in and create a new Success Formula. That’s the only way to renew itself and get away from all these problems. It’s impossible to predict what the next problem will be, but it’s clear that from Mad Cow to bad fat they will simply keep coming. And for investors, the best thing is to steer clear of management trying to Defend and Extend what isn’t working.
by Adam Hartung | Feb 13, 2006 | Disruptions, General, In the Swamp, Leadership, Lifecycle, Lock-in
My three weeks in India were fantastic. I visited twenty-some companies, all developing new business models in their pursuit of new revenues. From company to company, I saw people working in White Space as they sought out Success Formulas that would provide short-term gains and create long-term advantage. Even for companies with tens of thousands of employees, it was clear that operations in India are constantly disrupting themselves as they seek to compete with each other, and continue driving enhanced value.
While there, I thought about all the U.S. companies that are blissfully ignoring this phenomenon. What I saw in India wasn’t just low-cost competitive undercutting, but in fact people doing the work differently – and as a result creating considerable new value for not only themselves but their customers. I kept wondering, "why do so many U.S. and European business leaders remain so unmoved by what is happening here?"
Then I recalled the story of CSC. Entering 2000, CSC had a robust commercial consulting business with revenues reportedly over $1B. According to industry analysts, this consulting division was by far the most profitable part of CSC, contributing nearly 3 times the profit for its revenue base compared to other divisions. Further, it was claimed to be growing at nearly 20%+ year.
Now, just 6 years later that same division is reported to be under $200M revenues (an 80% decline). And insiders say it has operated at losses to break-even since 2001. The division simply ignored the oncoming avalanche of opportunity being created by the internet and offshore IT services vendors – an avalanche they could readily see from their perch creating e-business opportunities and installing new technologies.
Unfortunately, as they missed the first wave of offshoring their revenues slumped and their profits vanished. In reaction, they brought back a President who had left during the dot-com days in order to provide new "focus" to the business. Upon his return, this President declared that from his 20 years of experience he knew that customers wanted their IT services to be done locally. He re-opened a slew of local offices in the U.S. and moved the P&L from a national service line model to a geographic P&L. He expected these local offices to get into clients and "slug it out" for revenues against the competitors. And he repeatedly said that he knew this would work – because it had worked in the 1970s and 1980s.
He was Locked-in to his old Success Formula. Unfortunately, he was perilously ignorant of the oncoming wave of qualified IT consultants in India now available to his clients across the internet. Year after year he, and CSC, watched as business was lost to new competitors, layoffs followed to "stabilize" the business, only to be followed by more pressure on prices, and fewer revenues and more layoffs. A vicious circle that was inevitable.
To this day, CSC has practically no commercial consultants in India. While Tata has 60,000, Infosys 40,000, Cognizant 30,000 and WiPro 30,000 – the vast bulk of which are supporting U.S. clients. Not to mention the dozens of smaller companies doing everything from IT services to business processes. Even Accenture has nearly 20,000 and Office Tiger (both U.S. companies) has 6,000. In reaction, CSC has retrenched to large outsourcing contracts (the profitability of which is highly doubtful) and increased its federal government business – where it can avoiding competing with Indian firms.
Lock-in leads to blinders. Blinders lead to ignorance (as my teacher once said "ignorance can be fixed"). When CSC commercial consulting faced its Challenge (offshore competitors) leading to a big problem (declining margins and revenues) they did not use this Challenge to Disrupt their model and create White Space. Many American companies, such as Accenture and IBM, did just that – creating large and very viable Indian organizations supporting clients competitively. Those companies are using the White Space to develop their own new Success Formulas. But CSC has lost the commercial consulting market. And they are threatened in all their commercial business. They are under attack from hedge fund operators who want to split up the company and capture value before more is lost.
Ignorance is perilous. If we allow Lock-in to determine our behavior we lose the ability to Disrupt and face our Challenges – leading to failure. Instead, we have to use Challenges to Disrupt and open White Space so we can find new Success Formulas. And via that route, we can remain competitive in the new marketplace.
by Adam Hartung | Jan 15, 2006 | Disruptions, General, In the Rapids, Lifecycle, Lock-in, Openness
I’m a boomer, and for my generation going to the movies was a primary pastime. With only 3 channels of TV, we looked forward to the movies as an alternative. We also enjoyed the big screens, the color, and the immersion experience that the theatre provided. And all of it was available for as little as $.25 for a matinee or just a dollar or two for a weekend feature with your date.
My how times have changed. As demonstrated at the recent Consumer Electronics Show, one of the hottest items is home theatre. We now have huge screens, crystal sharp images, bone jarring audio systems and even the ability to put in place theatre seating to give viewers the "movie experience" right in our homes.
Yet, most movie producers still release movies to the theatres. Maybe that’s why movie viewership, revenues and profits were down in 2005. They are still following an outdated distribution model. For many of us, going to the movies means a trip to our family room. And the movie itself might come from the video store, or from the video showing up in our mail, or via a download from the cable or satellite TV company – or maybe even a download to our PC.
USA Today ran an article about changes in the wind. Small producers are starting to distribute their films straight to video (on-demand or on DVD) the same day they go to theatres. Why fight (and pay big bucks) for distribution to theatres if the majority of viewers are waiting for home release? While the big studios aren’t doing this yet, the appeal to most consumers is clear.
This is the way markets shift. Slowly, but following definitely, in an evolutionary road toward the needs of customers. Who fights this? Those most invested in the old ways and are Locked-in to them. Just like the music industry largely missed the shift from CD to MP3, the theatre operators and the large studios run the risk of missing this shift in movie viewership. The studios’ largest customers are the theatre operators, and they will trumpet their superior environments and the rare viewer that will watch a movie multiple times there. The risk to studios is they listen to these customers, who are ignoring the Challenges, and they too miss the shift until its too late.
The opportunity exists for the small player. The companies that can move quickly to meet customer needs with equipment (hardware and software) to augment the trend, and the new producers who aren’t vested in the old system of distribution.
For investors, the threats are real. Investing in theatres is very risky going forward. And investing in studios that don’t recognize the shift, and take advantage of it, has risks as well. The opportunity, likewise, exists for investing in those who will be leading this shift by offering the products that consumers want when they want them.
Today each of my 3 teenage sons has a home theatre audio systems, with those thumping subwoofers, that make the house shake. Their auto systems rival the ones in their rooms – and we have video in at least one car. They are acquiring better monitors all the time. They still like an occasional movie on a date, but 90%+ of their movie viewership is at home. What do you think movie viewership will be like in 10 years when they are in their own homes and starting their own families? Are you positioned for the shift – or are you planning on an extension of the past?
When markets shift, you can’t Defend and Extend your old Success Formula. And you can’t count on participants in your distribution channel to point out the shifts of end users – because they are busy defending their own business. You have to be very wary of emerging new competitors. And it is critical to create White Space to explore and learn about new ways to compete. The Challenge today is very real for Disney and other large existing players. Look for effective White Space in those companies – or find the new players who offer better opportunities for growth.
by Adam Hartung | Jan 15, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
The Chicago Tribune ran a great overview of the situation facing McDonald’s leadership today. In a nutshell, an upstart hedge fund manager (William Ackman of Pershing Square Capital LP) is pushing McDonald’s to restructure itself by spinning off restaurant operations, selling real estate and otherwise changing the company. He is supported by a large REIT (Vornado Realty Trust) which would like to participate in the real estate restructuring. McDonald’s management is fighting off these efforts.
The really interesting question is, how did McDonald’s get itself into this mess? Quite simply, Lock-in to the past has kept McDonald’s from seeing its real Challenge. McDonald’s business today is remarkably like it was in the 1960s. The company still franchises and operates a hamburger chain. While there has been an amazing amount of change in the last 40 years, little of it has affected McDonald’s as they have continued Defending and Extending their early success. Now McDonald’s is mired in the Swamp, unable to control its own destiny due to the attacks from outsiders.
McDonald’s has had lots of opportunities. It has bought other restaurant concepts (such as Chipotles), yet it never really supported their growth as it kept focused on hamburgers. It built expertise in franchising as well as food and restaurant supplies distribution strengths. But it never moved into those businesses beyond supporting its core business. And as nutritional habits have changed among its baby boomer customer generation has aged, while an entirely new generations of customers has come along, McDonald’s steadfastly ignored the Challenges and kept trying to grow its old Success Formula.
You can’t blame the hedge fund operators and REITs for taking aim at McDonald’s. Any time a company becomes a slave to its Lock-in it becomes an easy target. Management is too easy to predict, and their unwillingness to address Challenges with their resources makes those resources a juicy desire for outsiders. Sometimes competitors take advantage, and sometimes its unexpected outsiders – like in this case.
We all have a natural tendency to support the incumbent. They’ve worked hard to get their positions, and we want them to succeed. But when the incumbents can’t address Challenges and overcome Lock-in the interests of shareholders, suppliers, employees and customers are best served by those who would force a change in behavior.
by Adam Hartung | Jan 8, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Harley Davidson is a great, well known brand. But as one of my old professors used to say "a good product, and a good company, doesn’t necessarily make for a good stock."
Despite it’s brand image, for the last 2 decades things have been changing at Harley. Half of revenues now come from brand merchandise (like jackets) rather than motorcycles. The average age of its customers has kept rising, until now its over 50. Its new product introduction has been between anemic and nonexistent.
No one has done a better job of hiding an inherently no-growth story better than Harley Davidson. It has raised prices, faked shortages and found more ways to Defend and Extend its brand as it has done almost nothing to bring in a new generation of customers. Its big effort to move forward was the launch of the V-Rod 3 years ago with an engine, no joke, made by Porsche. Unfortunately, Harley’s dealers bad-mouthed the machine and wouldn’t sell it as they continued to stay Locked in to the old business (and the old-fashioned "hogs"). And Harley knuckled under, downplaying the new bike to appease these dealers. And a new generation of customers, to whom the new bike appealed, continued going to Honda and Yamaha.
Harley has had a P/E multiple of 25. Recently it has fallen to 14. Some folks think this might make Harley a value. I’d say that given the Lock-in, and the complete capitulation to Defend & Extend management at Harley, they have been merrily floating along the Flats not realizing how close they were to the Swamp. Fourteen might be a very high P/E once the market realizes how few 50 year olds are left looking for a $25,000 motorcycle based on 30 year old technology.
by Adam Hartung | Jan 8, 2006 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
Motorola has done it again. As reported by every news agency that attended the Consumer Electronics Show, Motorola has joined up with Google, Yahoo and Kodak to improve its products and make new products. This is, of course, after partnering with Apple months ago.
What’s really important about this news is it shows the ongoing effort to create White Space in Motorola. As I blogged a year ago, Motorola’s efforts to create White Space where new innovation can flourish is a key success factor for turning around the struggling behemoth. Now, it’s ventures not only are opening the product development doors for licensing and creation, but in fact the Kodak venture will co-locate people from both companies into a joint development facility.
Many people have pointed out that several new products, including the RAZR, were mostly developed prior to Zander showing up. So why am I such a fan of Zander? Why so eager to talk about these projects? Because Zander Disrupted Motorola and unleashed the creativity which was there. The sparks already existed, but previous leaders did not know how to Disrupt the environment, attack the Lock-ins that held Motorola hostage to its worn out Success Formula, and create White Space to migrate the company into a new Success Formula. What’s happening in Motorola’s turn-around isn’t just a product story. It’s a story about how to overcome Lock-in to the past and launch yourself forward. And for that a lot of credit does go to Mr. Zander.
A lot has happened at Motorola since Ed Zander took over. Most of it, from raising cash by selling automotive businesses to aggressively promoting DVRs to putting real pizzaz into the phone marketing and creating new ventures has all been good. This is a company to watch, and probably a stock to own.
by Adam Hartung | Jan 4, 2006 | General, Leadership, Lifecycle, Lock-in, Openness
2006 has started with the completion of Viacom’s spin-off of CBS. Since these two entities merged, their value has about shrunk in half. What was to be an integrated media company is trying to increase its value by dis-integrating. Even Sumner Redstone, the legendary investor, said on CNBC Tuesday January 2 (when interviewed by Bob Pisani) that "Synergy is dead."
For at least 4 decades business leaders have believed that getting larger, especially by acquisition, was a good thing. If you couldn’t generate growth, fake out investors by buying it. But now we’re seeing companies face the opposite. Carl Icahn is after Time Warner to break up its business. And Knight Ridder is being forced to bust up its newspaper empire. All in order to "unleash the value" hidden in these merged organizations.
Congratulations! This is a great move to help these companies reinvigorate themselves. Not because of "focus", but because they can now quit focusing inward, trying to optimize their business models, and get back to the job of pleasing customers and adjusting to market requirements. The era of conglomeration was built on false assumptions that large companies could control their destiny and through optimization generating ever larger returns. Not! Instead, these companies lost touch with customers, became out of phase with their markets and prey for more nimble competitors while destroying shareholder value (not to mention the economic impact of thousands of lost jobs from downsizing, needless outsourcing and considerable "economic dislocation" for suppliers.)
Now, CBS and Viacom each needs to get about the job of creating a new Success Formula that aligns with customer needs. If they use this split as a Disruption, and put in place some White Space for new ideas to emerge, they have a great opportunity to catch up lost ground on emerging competitors and regain lost customers. They’ve moved the batter to first base – it’s time to see if they can move him around the bases to score.
by Adam Hartung | Jan 2, 2006 | Disruptions, General, In the Rapids, Innovation, Leadership, Lifecycle
Most people I know think Howard Stern is an oddity. Although he’s had a loyal following for 30 years, most business people never listen to his show. And they can’t believe he’s being offered $500M to change his broadcast to satellite radio. Of course, few of them listen to satellite radio, either.
But, I think anyone who uses radio advertising had better get serious about Sirius. Many electronics stores (Best Buy, Circuit City) sold out of satellite radio equipment this Christmas. Sirius now has over 3 million subscribers. XM Radio (the competitor) has over 5 million subscribers. Quarterly subscriber growth, before Christmas, exceeded 20%.
Back when Ted Turner launched 24 hour news, and "America’s Team" (the Atlanta Braves) to fill programming for his cable TV stations most people thought cable TV was an oddity. Now, the networks have long lost their grip on market share as customers flock to targeted stations on cable TV and increasingly avoid commercials with Tivo and other Digital Video Recorders. Do we think the transition in radio will be slower, or faster? History would say that the adoption rate of similar technologies is exponentially quicker.
If you own stock in a radion station, and think people want "local programming", you’d best be taking stock of Sirius and XM. This is a serious shift in behavior. Sirius only needs 1 million new subscribers to make the Stern offer profitable. Since they added nearly 360,000 new listeners in the third quarter that looks pretty likely.
Challenges to business don’t often present themselves like a hurricane. They are subtle. Business people have to read the Challenges to catch winds early and make changes. The Telltales are showing that something is happening in radio-land. Don’t take long to prepare. If you invest, or if you depend on radio advertising, you had better pay close attention and start making your contingency plans. As shocking as Howard Stern is, he won’t cost you money like the shock of missing the lastest shift in behavior.
You don’t want to be committed to CDs when iTunes hits. You don’t want to be long on newspapers when Google’s classified ads start making inroads. And right now, I’d be paying close attention to listener behavior in radio — and thinking about how it will impact your business and investments.
