by Adam Hartung | Aug 30, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Warren Buffet is often called the Oracle of Omaha. His track record at making money for investors in his company – Berkshire Hathaway – was remarkable for several years. Many have heard the story about how a mere $1,000 invested inthe late 1970’s is worth over $80,000 today. But, if you look closer, you’ll see that the company stock is about the same today as it was in 1998. Buffet really hasn’t made a lot of money for investors the last several years.
It’s foolish to attack an investing legend, yet it is worthwhile to look at whether what worked for Buffet for years is still working. As we know, the future is not the past and any company is subject to lock-in and deteriorating returns.
Last year Buffet’s Berkshire made a big investment in Pier 1 Imports. This helped prop up Pier 1’s stock price for a few months, but since then the company’s value has declined about 50%. This year the company suffered it’s first quarterly loss in history. According to Business Week, the company’s CEO has admitted he’s ashamed of company performance. Oops! Buffet hasn’t commented.
About 8 years ago Buffet’s Berkshire made a big investment in Coca-Cola. Such a large investment they put him on the Board. After that investment Coke’s market value doubled by 1998 – but then it started a slide that has Coke’s value back again to about what Buffet paid. Other than dividends, Berkshire hasn’t made any money. Oops! (And if you invested after Buffet you would have lost money.)
Buffet made a huge fortune with a strategy that worked incredibly well. But will it work going forward? He enjoyed buying companies that had a large asset which he perceived as undervalued and then hanging on while that asset rose in value. But increasingly these kinds of assets aren’t able to regain their old value. Companies like Pier 1 and Coke have hit growth stalls that have been deadly. Attempts to implement short-term fixes to their business models have been ineffective in the face of larger challenges to those models.
No one bats 1.00 (to use a baseball analogy) on their investments. But it’s increasingly obvious that Berkshire Hathaway’s strategy hasn’t been hitting so well. Their insurance and re-insurance investments aren’t producing like before, and even Mr. Buffet has been required to give testimony on intercompany relationships with scandals such as AIG. Oops! (This is not to impune Mr. Buffet – there have been no accusations of wrong doing by him or Berkshire Hathaway.)
Has Berkshire Hathaway hit a growth stall itself? Is the Oracle of Omaha locked-in, and possibly missing opportunities to improve shareholder return? Time will tell, but short term (looking at the last 10 years) Buffet shows all the signs of lock-in, and a stall – and that would trouble me if I owned Berkshire Hathaway stock. Mr. Buffet well deserves his opportunities on the public stage, yet it’s worth some hard thinking the next time you’re tempted to follow his lead on investments.
by Adam Hartung | Aug 20, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Some of you may remember the old war movies in which the soldiers say "it’s the bullet you don’t hear that gets you." There have been a lot of movies in which the people who are killed make the point that it’s not what you see that gets you, it’s what you don’t see. There is no "Cry of the Banshee" prior to receiving the deadly blow. In business, it’s the same thing. It’s not the factors you plan on that kills your profitability, it’s what you don’t see. It’s not the threat from the direct competition that makes you business model unviable – it’s something that you never expected.
During 2005 there are two remarkable businesses that never saw it coming – and now they are facing great pain. They are household names with tremendous legacy and unbelievably profitable histories. But I can’t find any analysts who think they have growth in their future – and even the companies themselves admit they are facing a lower growth future. And their market values, employees, vendors and customers are all facing difficulty
Wal-Mart and Merck.
Wal-Mart has done about everything a discount retailer can do right. They’ve cut costs, appealed directly to their customers with lower prices. Created tremendous careers for their employees. But what they didn’t predict was a tripling of gasoline prices taking a relatively huge bite out of the discretionary incomes of their target customers. Now, with energy costs eating up the money they’d spend at the Wal-Mart stores the company is struggling to find a way to keep up its growth history.
Merck was the darling of Wal-Street in 1987. It was the highest P/E in the DJIA. It’s growth was spectacular. Not one analyst thought you could go wrong by buying Merck stock (and in all fairness if you bought it then you would have made a lot of money). But no one ever figured that one questionable drug (Vioxx) could destroy billions of dollars in shareholder wealth. The Merck business model made them rich while improving the lives of millions of people. But that same business model pushed Merck to aggressively market drugs directly to patients (rather than to doctors only), and to possibly push drugs into market use a bit quicker. And now the very health of Merck itself is in question.
Both these companies have been undeniably successful. World leaders. And they honed and pruned their business models to perfection for the competitive marketplace they were in. They locked-in that business model, and worked to defend and extend it as fast as possible. And that lock-in to the successful past practices meant they never saw it coming – they didn’t see what would cause them to stall. They didn’t see what could eventually knock them off their top spots.
by Adam Hartung | Aug 20, 2005 | In the Swamp, Leadership, Lock-in
This story hurts almost too much to tell.
This last spring a friend of mine for 25 years called asking for help with his small 2-year old business. He was competing in a fiercely competitive wireless data marketplace, where the rewards were potentially huge but no sure thing. His ambition was high, but his performance was struggling.
I met with him, and all too quickly realized that he was locked into management practices he had learned 15 years earlier as a successful executive in a very, very large wireless company. He was trying to run his new company, his much smaller company, the same way he ran the very large division of the much larger corporation. He wasn’t nimble, he wasn’t agile. He wasn’t holding the door open for extensive innovation amongst his 80 person staff, but instead he was trying hold to "hold everyone’s feet to the fire on performance" (against standards he was setting.) He wasn’t experimenting with new options, new ways of competing and disruptive market practices – instead he was trying to compete head on with much larger and better healed (although unprofitable) competitors.
I worked with him for two weeks trying to increase his agility. I offered him lots of options. He wasn’t willing to try new approaches, but rather he wanted someone to help make his business model more productive (and successful). At one point I pointed out that he wasn’t being as flexible as he might consider, to which he responded "I’m not inflexible, it’s just that there’s only one way to do this kind of business."
He stayed locked in to his business model, to his behavioral model and to his single-minded approach. I learned within the last two weeks that he’s now out of his company (his investors pushed him out) and the company is floundering – likely to be shut down shortly.
Lock-in can afflict any company of any size or age. Lock-in doesn’t only apply to large and mature organizations. And no matter where lock-in takes hold, it is both painful and deadly.
by Adam Hartung | Jul 21, 2005 | General, In the Rapids, Leadership
Since you’re reading this on-line, odds are very high you’re reading it via Internet Explorer from Microsoft – your web browser. Do you remember who invented the first web browser and took it to market? Spyglass – a Chicago company. They were rapidly followed by Netscape and only months later by Microsoft. Netscape was bought by AOL and disappeared from view. What happened to Spyglass? You probably think it went belly-up.
Wrong. When Microsoft launched IE they simultaneously brought everyone into the world of the web. They made surfing common. And they crushed their competition. But the leadership of Spyglass didn’t simply die. While most high-tech entrepreneurs get so wedded to their Success Formula that they let such market changes doom their enterprise, Spyglass didn’t (See article in Chicago Tribune).
Spyglass used the lost market share and financial losses to spur a Disruption, and then they redirected their energies into new markets. They moved from PCs to specializing in internet access for TVs, cell phones and other devices. The company was sold to OpenTV in 2000 for $2.4billion – right, billion. After their market position was destroyed by Microsoft.
All businesses have to be ready to disrupt and adapt. Not just big, mature companies. Even small companies have to watch their markets and remain flexible to develop new success formulas. And smart leaders that can sustain success across years are like the leaders at Spyglass – flexible, adaptable and ready to use White Space.
by Adam Hartung | Jul 21, 2005 | Defend & Extend, General, In the Swamp, Innovation, Leadership, Lifecycle
Motorola announced a great profit leap this week. Sales keep going up in all markets, and most notably sales of Motorola handsets have been gaining share. It was just 2 years ago that most analysts had given up on Motorola. They tagged the company as unresponsive to customers and a bad investment. But now, analysts all over are trumpeting the success at this aged, but recovering, company and recommending investors buy the stock (as well as the products).
Unfortunately, the same can’t be said for Kodak. Since dropping off the DJIA Kodak has been struggling to re-orient the company toward markets and renewed growth. Kodak announced a loss last quarter, and longer delays before returning to profitability. Although Kodak has been working on its "turnaround" for over 5 years (from film to digital photography) they still are saying that reaching their goals is at least 18 months away. Eighteen months ….. that’s longer in the future than Motorola has been executing its turnaround. And analysts are far from optimistic about the Kodak’s future.
Motorola is opening two new R&D centers, while Kodak is planning to lay-off 20,000+ employees.
Last January (2004) Motorola undertook a pattern interrupt and launched a host of new white space initiatives. The new leader (Ed Zander) escshewed massive layoffs in favor of reigniting his employees and seeking new growth markets. In fairly short order, Motorola has unleashed creative energy trapped in the organization and taken new products to market which are growing the company again. Motorola, in about a year, moved from the Swamp back into the Rapids by effectively disrupting itself then creating and managing White Space projects.
On the other hand, Kodak keeps trying to Defend and Extend its old business while "transitioning" to a new future. The leaders at Kodak won’t let go of the past and unleash their own organization to seek the future. Kodak has plenty of talented people, a great brand, and good distribution. But it keeps trying to defend its past instead of taking the actions to reignite growth in new markets. Its a shame, since Kodak was one of the early pioneers in digital imaging (they held many of the first patents) and its employees have had a clear view of "the future" for 20 years. But management has let lock-in to an old success formula keep them from unleashing their own resources.
Two big and "mature" companies found themselves stuck in the Swamp. Growth had stopped and financial results tanked. One followed the Phoenix Principle, and the other followed traditional management practices. One is now regaining share and growing again, the other remains seriously troubled.
by Adam Hartung | Jul 15, 2005 | In the Rapids
Apple Computer has done something rather amazing. Fewer than 10% of companies that hit a growth stall ever regain growth. But Apple has done it spectacularly.
Just a few years ago Apple was described as one company caught in the grips of the Innovator’s Dilemma by Clayton Christensen. Sales of Macs became so large that the company abanded its efforts to develop what became the very large PDA market (remember the Newton?). Apple began focusing on Defending and Extending its Mac business, and innovative product markets were abandoned. Then Macs fell victim to a market shift toward Wintel PCs and Apple faultered horribly – with layoffs and a risk of failure.
Now, after a series of CEO changes, Apple has taken the lead in the on-line digital music business with its iPod. Third quarter sales were up 75% versus a year ago, leading to a five-fold increase in profits (see Chicago Tribune report.) And share prices are near 5 year highs. That’s great…. so long as Apple doesn’t succumb to the siren’s song of now trying to be just an iPod company. What turned around Apple was using white space to find a new product market overlooked by Sony and other traditional music industry players trying to defend and extend their outdated business model.
What Apple must do is continue disrupting itself, creating white space projects and developing new product markets. In the fast cycle-time world of personal electronics, the requirements for success are applying the Phoenix Principle and avoiding the lure of trying to defend and extend a hit product/market.
by Adam Hartung | Jun 29, 2005 | Defend & Extend, In the Whirlpool, Lock-in
Can you recognize a leadership team (and business) in the Whirlpool?
Today’s Chicago Tribune quoted UAL as saying their losses were the result of "brutal" fuel costs. If it just wasn’t for those darn high fuel prices, why they could break-even.
And if pigs could fly….
For many years United’s management has had one excuse after another as to why they couldn’t make money. Unions, too many planes, high gate costs, insufficient ridership, too much competition…. fuel costs… Their business model is broken and it can’t make money. They have no idea how to fix it. They keep trying to find a way to Defend what they’ve done and Extend it in some fashion that will save the company. But nothing works. And it won’t. Yet, they can’t seem to get the gumption to disrupt themselves and try to really do something new before everyone loses their jobs (they already wiped out the shareholders) and leave creditors owning a bunch of planes.
Why, if they could just get those pigs to fly….
by Adam Hartung | Jun 24, 2005 | Defend & Extend, In the Swamp, Lock-in
McDonald’s is spending $20M this week to feel better about itself. Unfortunately, it won’t help shareholders. McDonald’s hit a growth stall 4 years ago, and ever since has been trying to use Defend & Extend management to regain growth. That’s included selling off assets and shutting stores.
Now it includes McDonald’s bringing 5,000 store managers (most at franchisee expense) to Vegas in an effort to pump them up and thereby improve store execution. The goal? To regain a future by focusing on better execution in the store. But, even the North American President admits "the U.S. would continue with ‘solid’ sales next year but probably not the double-digit growth..seen at times during the recent past."
So, a big chunk of one of America’s largest training budgets is going into a straightforward Defend & Extend program. Why? According to the Chicago Tribune, "The store managers’ performance will largely determine just how successful McDonald’s is going forward." Amazingly, we’re to believe the future of this DJIA multi-billion dollar corporation’s growth relies on the execution of 5,000 front line store managers in making and delivering Big Macs? "Results are [expected to be] evident through better execution of procedures in the restaurants." Where’s the leadership in that?
McDonald’s cannot rely on execution to regain its growth rate. The company heritage – consistency – is all focused on execution. So it’s comfortable for leadership to lean on execution as ‘the fix.’ But McDonald’s needs more than new chicken sandwiches – it needs to find a way to compete with the likes of Starbucks. And that won’t come from doing magic shows for 5,000 store managers in Vegas.
by Adam Hartung | Jun 23, 2005 | Defend & Extend, Disruptions, In the Swamp, Leadership, Lifecycle
Readers of my BLOGs might think I am always opposed to layoffs. It is true that the majority of layoffs are efforts to Defend & Extend outdated Success Formulas with short-term cost reductins that do not effectively address Challenges. Those layoffs (such as across the board reductions) do nothing to improve a business and are difficult to support. They simply push the business closer to the Whirlpool. But, layoffs can also be important Disruptions tied to turning a troubled company around.
Troubled Success Formulas are turned around by White Space projects. And White Space requires both permission and resources. But where is a troubled company supposed to get the resources? In many cases, it requires making tough decisions to STOP doing some things in order to refocus the business on developing a new Success Formula. Layoffs targeted at redirection and resource generation for new projects are very effective Disruptions that can unleash new innovation and move toward renewed success.
HP and Time Warner have both stalled. They must undertake serious redirection. And both are taking Disruptive actions intended to generate Pattern Interrupts plus unleash resources to be invested in White Space.
According to BusinessWeek, HP is going to redirect what it sells and how it sells it. An action intended to get much closer to customer needs – something HP desperately needs to do. And in order to finance this action it will likely layoff 15,000+ workers.
TimeWarner is selling its cable business in order to invest in AOL. A risky move – but one to applaud. Cable franchises are not high growth businesses. Capitalizing the future value of cable into current cash creates a treasure chest for developing new growth opportunities — which likely lie in AOL as it moves aggressively to reposition and compete with Yahoo!
Both companies are far from out of the Swamp and back into the Rapids. But both are doing exactly what they need to do to prepare themselves for the transition. Investors may applaud these moves simply because these changes raise cash that will improve the balance sheets of both firms. What investors should cheer is raising cash to invest in transitional White Space projects that could return both companies to higher growth.
by Adam Hartung | Jun 8, 2005 | Disruptions, In the Rapids, Innovation, Leadership
It’s easy to beat up on old businesses. But lately, a very old business is making some very smart moves.
The venerable New York Stock Exchange came under some severe attacks last year. It Chairman was accused of improper compensation and the Exchange Board was accused of improper oversight. Things weren’t looking too good as prosecutors went after specialists and floor traders.
But hand it to the new CEO. He used the troubles to create an internal Disruption. The NYSE’s troubles were more a reflection of its inabilities to address its challenges from the NASDAQ than malfeasance (although the latter is still being argued.) So he used the attacks to rethink the future of the exchange.
Viola – in a master stroke the new Chairman of the 200 year old exchange has acted to revitalize the NYSE by buying Archipelago. Instead of taking actions in defense of the past, he is moving quickly to push the Exchange into the forefront of trading for the new millenium. This acquisition is a classic example of using a Disruption to create White Space – and develop a new Success Formula for an old business.
In the hectic pace of change in business, many have paid little attention to this action. But it’s a great example of a new leader identifying the real challenge to the business – rather than reacting to its problems. And then taking actions to create a pattern interrupt and new opportunities to learn. And possibly saving a venerable, and horribly locked-in, organization.
This is a great move for the NYSE – and a stellar example of The Phoenix Principle in action.
