by Adam Hartung | Nov 27, 2004 | Defend & Extend, Disruptions, In the Whirlpool, Leadership, Lifecycle
Does anyone think KMart + Sears = a better company? It doesn’t look that way. Most experts say the company is worth nothing more than it’s inventory value plus the real estate. Too bad, for both companies started as tremendous innovators in American retailing.
Kmart pioneered the discount store concept. And Sears pioneered the retail catalog, store credit, private label tools and appliances, and lifetime warranties. Both companies saw tremendous growth during their cycles of innovation.
Was it inevitable that they would both be relegated to below average returns? Absolutely not. Both simply stopped innovating. They turned to defending and extending what they already knew, while other competitors attacked them with new innovations.
But why not change the game now? The bankruptcy of KMart opened the door to new options – including the acquisition of Sears. If the two chains view this latest action as a chance to simply defend and extend their outmoded businesses, they will both simply die off. But if they view this as a major disruption to their business, and realize success will not come from chasing the two entrenched leaders (Wal*Mart and Target), they have the chance to create substantial value for their investors, employees and customers.
The new company needs to open its organization to innovation. The new CEO, coming from restaurants, should eschew the conventional merchandisers and strike out for something new. With the stock worth no more than the real estate, he has nothing to lose and everything to gain.
We haven’t yet heard the new CEO make any claims about the future. If he heads down the road of putting Craftsman in KMart and Martha Stewart in Sears – with great goals of a turn-around – run for the hills! Investors should sell the stock and employees find new jobs. But if he creates a new company that innovates away from the old business and toward something brand new he has a chance of creating a new company that could produce great returns.
The fate of KMart and Sears is not cast in concrete. But the leadership must act quickly while the cement is still wet! They must use this disruption to create something new — not defend and extend "the best parts" of what’s already not working.
by Adam Hartung | Nov 1, 2004 | In the Rapids, Innovation, Leadership
Starbuck’s has been breaking the rules ever since it was brewed up in the mind of founder Howard Schultz, and it looks like they are doing so again. Many of Starbuck’s innovations have been product-related breakthroughs such as Frappuccino and adding Music CD’s to the store’s inventory. These have been profitable innovations, but the first time the company really challenged its success formula is when it added wireless internet connectivity. Now the company is opening dozens of “media bar” stores that will enable customers to listen to and burn custom CD’s while they slurp down that Venti no-foam non-fat caramel Latte. This is a dramatic entrée into a new success formula that speaks loudly of Starbuck’s commitment to reinventing itself.
How are they able to do this when other companies struggle with even small innovations? I think there are three key elements. The first is the company’s commitment to ongoing innovation. CEO Schultz has created a climate where innovations are valued and can come from anywhere in the organization. For instance, the idea for Frappuccino came from two store managers who were experimenting with a frozen coffee drink.
A second factor is that the identity of the company is sufficiently large that many different strategic directions are possible. Rather than narrowly define itself as a coffee bar, Starbucks sees itself as a “third place”—a destination where people can escape from the rat race and other troubles, relax and experience a sense of well-being and community. Music is a natural addition to the sense of leisurely self-indulgence.
The third element is passion. I think passion is the secret ingredient in every really great success story. Why? Because business is about people, and people are passionate to their very core. Employees who are passionate about the business will give more energy, more creativity and will be more productive than the norm. Customers can tell when passion is in the air—it’s infectious and they start to catch it too. Passionate customers inspire employees in a positive feedback loop. Passionate customers also breed new customers. Someone who is crazy about your business will tell their friends and very nearly drag them to your store. In practically every early morning meeting I attend, someone is drinking from a Starbucks cup and telling somebody how they “never miss their Starbucks run in the morning.”
How much passion do you have for your business? How much passion do your employees and customers have for your business? In my experience, passion is something that leaders must consciously nurture. And it’s rare. I mostly experience it in growing companies that are still in the Rapids. Most mature organizations feel dead and (gasp!) business-like to me. Yuck! I want to feel a buzz in the air, some excitement, and people who are really happy to be doing their job that day. I get that sense at Starbucks, at CiCi’s Pizza, and at Discount Tire. It’s missing at McDonald’s, Pizza Inn, and Firestone. I’ll pick the first three over the second three at every chance, and I’m betting that most of you do too.
by Adam Hartung | Oct 18, 2004 | In the Rapids
Haircuts. Now there’s a market with nothing new to be added, right? Don’t say that to Sports Clips, which has been identified as one of Entrepreneur magazine’s fastest growing franchises. This company is a great example of looking at the same boring market as everyone else and seeing it differently. The result is a novel store model that has resulted in tremendous growth.
“We are changing what men perceive as a commodity to an experience,” says Gordon Logan, CEO and founder of Sport Clips. “We’ve done what no one else has – targeted 50% of the market.”
What does the company offer that’s so unique? It is designed solely for guys—a market segment that has had to choose between old-style barber shops and full-service hair salons, neither of which do a good job of providing great, affordable haircuts in an environment that is comfortable for guys (try to find a guy-oriented magazine in a hair salon!). That’s the essence of business opportunity, and Sports Clips has filled it admirably. Here’s their approach:
“Targeting men and boys, Sport Clips operators provide high quality haircuts in a fun environment, complete with TVs at every stylist’s station tuned to sports. Every Sport Clips has specially trained stylists who focus on providing the highest level of service to every client.”
Colleen Gaiser, manager of my local franchise store, gave me a tour last week. From the big screen TV broadcasting a college football game in the foyer, to the sports magazines, to the neck and shoulder massage; this place was custom-tailored for men. And it’s succeeding, with $25 million in sales and expectations to continue doubling in size. Companies in the Swamp, take notes: this is a case study in how to recognize a need and develop a custom designed solution.
by Adam Hartung | Oct 18, 2004 | Defend & Extend, In the Whirlpool
Blockbuster’s competitors are making it difficult for the company to make strides toward profitable growth. Netflix, the leading online DVD rental business, just announced a price cut in an attempt to double the size of its business (a bad move, but that’s another story…). And Blockbuster, in order to not be under-cut, dropped its own prices in response.
This is the problem with Defend and Extend management. While Blockbuster is busy fending off competitors to its current business, it is consuming scarce investment dollars and organizational attention that cannot be applied to meeting the real threat, which is video on demand.
Even if Blockbuster succeeds against Netflix, how will they out duel Wal-Mart on price in this space? And now Amazon.com is rumored to be getting into the market, and Netflix may find a deep-pocketed buyer. Can Blockbuster keep this up indefinitely? Of course not. Instead of chasing around after paper-thin margins in a business that has no future, the company needs to wake up to the reality that it doesn’t have a Success Formula that can win in the long run and act now to reinvent it.
by Adam Hartung | Oct 14, 2004 | Defend & Extend, In the Whirlpool
What do you think; does Blockbuster’s Success Formula have a chance of being saved? The company IS innovating and CEO Anitoco’s recent investor tour was centered around convincing shareholders that the company has a plan to reinvigorate the business… but really, who are they kidding (besides themselves)?
Blockbuster’s innovations are clever and will certainly put some more dollars on the top-line (at least temporarily). These include increasing game rentals (competing with stores such as Gamestop), allowing people to trade-in their old movies, a subscription service to allow people to keep movies indefinitely (to compete with Netflix). Ultimately, the company is saying that it is changing its business from “a place you rent a movie to a brand where you rent buy or trade movies and games, used or new, in-store or online.”
We don’t think its going to be enough. Why? Because there are too many alternatives for renting movies, but the really big show-stopper is a disruptive technology: video on demand. Blockbuster claims that it has certain advantages over video on demand such as a two-month lead on getting new movies. But even this is based on the assumption that movie theaters fear cannibalization of retail sales. And that can change overnight.
Blockbuster’s actions won’t work over the long-term because they aren’t addressing the challenge. In essence they are just extending the old business model which is to have lots of brick and mortar retail outlets providing entertainment-related products for home use. It’s the lock-in to all the real estate that’s killing the company. What will happen when sales drop precipitously due to the rising popularity of streaming video that can be downloaded in the comfort of your home? It’s inevitable.
What else could they do? Stop investing in their dead business model–the current business model is in the Whirlpool and has no future. Instead it can start selling off valuable real estate and use the money to experiment with leading-edge business concepts. What would you do if you were CEO?
by Adam Hartung | Oct 13, 2004 | Lifecycle
As companies age, they lose their flexibility and their appeal to customers in the marketplace. We have described this aging process with a metaphor and created the River Lifecycle Model. Your organization’s (product, business unit, process, etc.) location on the “river” is indicative of how effective you’re being, and what it’s going to take to reinvent yourself. So that’s pretty useful to know, is it not? Well there are many ways to tell, but a clear indication is the cultural “tone” and general behavior of the employees. Take this test for yourself, which of the qualities below describes your business (department, product line, process, etc.)?
River Lifecycle Model
Qualities in Stages of the Lifecycle
Stage———People are—–Cultural tone
Wellspring —Adventurous– -Hopeful
Rapids——–Cocky———-Enthusiastic
Flats———-Arrogant ——Sarcastic
Swamp——-Defensive——Cynical
Whirlpool—–Desperate——Hopeless
(Thanks to Marsha Clark for the suggesting some of these terms.)
by Adam Hartung | Oct 8, 2004 | Disruptions, In the Swamp
Belo’s problems continue with a whole raft of shareholder lawsuits. So what do you do when you have a problem? You solve them.
So, when Belo admitted to the inflated circulation, it set out to solve the problem. They did that by finding guilty parties and firing them, and they made restitution to their advertisers. And in focusing on the problem they made a big (and excruciatingly common) mistake. They didn’t look for the external challenge that is the root cause behind all these problems.
What’s the challenge? The company’s Success Formula has become obsolete and they are struggling financially. So, is firing some guilty parties going to solve that? No. Maybe those people should have been fired. Fine. Now what? What will Belo do about the challenge?
Just as I wrote about Merck’s crisis, Belo has the opportunity to really take advantage of this situation. They could create a disruption by seeing this as an indictment of their strategic assumptions and decide to reinvent them. However, if they stick with the actions they’ve taken thus far, this whole unsavory event will amount to a mere disturbance—an annoyance that the company has to deal with so they can get on with business as usual. And if that happens, we may not have to wait long for the next negative headline…
by Adam Hartung | Sep 30, 2004 | In the Rapids
Napster absolutely must start making its profits now—regardless of what it does with its Success Formula. This will require that the company focus less on growth and more on efficiency and effectiveness so that it can make its profits now. But wait, you say. Isn’t market share the eventual pathway to profits and long-term success?
Well, no. That would be another aspect of the Myth of the Flats. There is little evidence to support that merely being big has any advantages at all for generating above average performance. It is well documented) that the company with the largest market share in an industry does not have a better likelihood than pure chance of having the highest performance in the industry. Companies must be distinctive in a way that matters in the market, and it’s becoming increasing difficult for big companies to do so.
Another basic tenet of the Phoenix Principle is Reap in the Rapids. There’s no evidence anyone is making profits in the online music industry during its current growth phase, which is a common mistake driven by The Myth of the Flats. According to the myth, companies should grab market share and not worry much about profits while growing. Then when the market slows, the dominant companies will be able to control margins and earn huge profits. Well, that’s a myth. In today’s copycat economy, there are no above-average profits in the Flats, you have to earn them on the way up—you must “Reap in the Rapids.”
So what should Napster do? One thing it could do is pursue any of the well-documented approaches to operational effectiveness available in the marketplace today. Another, less obvious but equally important action to take is to change its staffing mix.
People can be loosely grouped into two types, Explorers and Stabilizers. Explorers are hard-wired to be more comfortable with change and ambiguity and tend to be dominant in the early lifecycle stages, which is why efficiency takes a back seat. In contrast, Stabilizers are mentally wired to prefer making processes and practices consistent and dependable. Stabilizers are important in the early stages of the business—the Wellspring and the Rapids—to provide operational stability. Many companies in the Internet boom failed because they lacked the discipline and cautiousness that Stabilizers provide.
It is possible that Napster can make the changes needed to ensure enduring success. Whether they do or not depends on how locked in they are to historical methods for competing and seeking long-term success.
What are your thoughts: is Napster’s strategy solid or a setup for failure?
by Adam Hartung | Sep 29, 2004 | In the Rapids
After terrorizing the recording industry and almost single-handedly ushering in the future of the music business, Napster is going mainstream. Gone are the rule-breaking, paradigm-busting pioneers—replaced by traditional thinkers and strict adherence to the law. Napster lost its battle with the music industry and for a while lingered in bankruptcy, and now wants to play by the rules and make a go of it as a legal music service. Unfortunately, it is no more likely to succeed this time around.
Why? Even though Napster is a small startup in a hip new industry, it is already racing ahead to the Flats portion of the business lifecycle, and will soon be entering the Swamp along with all the other players in the online music market. Roxio, Inc. purchased Napster with the intention of leveraging its famous name into a large share of the music download market. That’s a tenuous hope at best.
One of the basic tenets of the Phoenix Principle is “be distinct or be extinct,” and Napster is not yet distinct. This is a crowded market with very little differentiation among the players, and new companies are still getting into the market. The latest heavy-weights to enter the fray include Microsoft, Virgin, and Yahoo (through its purchase of Musicmatch). Napster’s strategy, to provide subscription services, is already being offered by established music services and it puts forward nothing new there. Nor are its marketing ploys such as pre-paid gift cards and targeting college students with giveaways likely to distinguish it from the crowd. These are simply too easy to copy.
The online music services industry is still in high growth mode, projected to grow at a double-digit rate for several more years. That puts it in the Rapids, so all the players should enjoy high growth for a while. But what happens when the music stops (so to speak), that is, when growth slows and the market becomes saturated? Commoditization, that’s what. When that happens everyone who doesn’t have a differentiated service offering will be plunged into the Swamp, and companies will begin to fail or consolidate in a Defend & Extend effort to find and preserve some profits.
Napster isn’t earning any profits now and won’t for a while, so Roxio is depending on $100 million in cash to keep it afloat. That won’t be enough. Napster needs to revisit its Success Formula now and devise a truly distinct value so that when the industry stops growing, it will remain strong. For instance, it could leverage its bad boy image in many ways—constantly “tweaking the nose” of the majors might help it develop a huge and loyal following among the rebellious youth.
The Phoenix Principle predicts that Napster is already set up to fail and the clock is ticking. Perhaps it would have been better for this industry icon to remain a martyr than to end up as just another business model gone belly-up.
by Adam Hartung | Sep 1, 2004 | In the Swamp
Krispy Kreme is dead in the water. Two years ago a friend of mine was looking at the stock price chart for Krispy Kreme Donuts (KKD) and asked me if it was still a good investment. The stock had gone from it’s IPO of around $10 in early 2000 to $45 by end of 2001. Was the 2002 pullback a good buying opportunity? Not likely, I commented.
Krispy Kreme has been a “one-trick pony.” The company had a simple Success Formula: open more stores. A good product, a good concept, and they were using investor dollars to geographically expand as fast as possible. I asked my friend, “what will this company do when we have enough donut shops? What will happen when tastes change; and it won’t take much of a change when you live on one product sold 24 hours a day?” Krispy Kreme was putting no energy into understanding how locked-in they were to a fragile Success Formula built upon great promotion for their one product. They were projecting all the future by merely extrapolating the past.
Surely, the challenges came. Atkins diets became a challenge to a carb-laden product. As good as Krispy Kreme’s were, their expansion was taking them head-on into markets already laden with donut shops (including Dunkin’ Donuts) and grocers capable of “jumping on the bandwagon” in their local markets. Now, KKD execs are saying they have too many U.S. shops. Growth has disappeared as they are trying to find “profits” rather than “growth.”
Their one-product, simple success formula was too fragile for a dynamic marketplace, and too easily targeted by other competitors. What profits were to be made in their shops needed to be made during the rapid growth. Finding more profits now will be very, very difficult. They have gone from a growth company, to a retrenchment company. Krispy Kreme missed their golden opportunity to make the company into a great long-term brand. They should have found new avenues to build and grow. But, instead they locked-in and now they are struggling to compete.
For those who bought on the IPO, the stock is within a hair of the offering price. If you bought it then, and held it, you would have made a little capital gain (provided the price slide stops), but no dividends. If you bought anytime after the IPO – you’ve lost money and received no dividends. The lesson learned is to not invest in small companies with narrowly defined success formulas that are tightly locked-in to their competitive model. The risks are too great for any long-term investor.
