by Adam Hartung | Jun 10, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
As I've given presentations around the country the last year I'm frequently asked about the role of leadership in Phoenix Principle companies. All people can bring Phoenix Principle behaviors to their work teams and functional groups. Yet there is no doubt that organizations do much better when the leaders are also committed to Phoenix Principle behaviors.
Unfortunately, all too often, top leaders are more interested in Defend & Extend Management. BusinessWeek's recent article "How to Succeed at Proctor & Gamble" talks about replacing CEO icons such as Charles Schwab, Michael Dell and Jack Welch. Unfortunately, only one of these was a real Phoenix Principle leader – and the others ended up coming back to their organizations when the replacements tried too much D&E behavior – leaving their shareholders with far too low returns and only dreams of rising investment value. Even more unfortunate is the fact that too many management gurus simply love to wax eloquently about leaders of big companies – regardless of their performance. Such as Warren Bennis's description of A.G. Lafley at P&G as "Rushmorian." Those at the top are given praise just because they got to the top. Yet, we've all known leaders who were far from being praise-worthy. Even the mundane can be loved by business reviewers that rely on them for money, access, ad dollars and influence.
There's a simple rule for identifying good leadership. Grow revenues and profits while achieving above average rates of return and positioning the organizations for ongoing double digit growth upon departure. It's not the size of the organization that determines the quality of a leader, it's the results. We too often forget this.
Back to departing P&G CEO, Mr. Lafley. Preparing to retire, he's taken the high ground of claiming to be "Mr. Innovation" for P&G. Experts on innovation classify them into Variations, Derivatives, Platforms or Fundamental. Using this classification scheme (from Praveen Gupta Managing Editor of the International Journal of Innovation Science and author of Business Innovation) we can see that Mr. Lafley was good at driving Variations and Derivatives at P&G. But under his leadership what did P&G do to launch new platforms or fundamental new technologies? While variations and derivatives drive new sales – "flavor of the month" marketing as it's sometimes called – they don't produce high profits because they are easily copied by competitors and offer relatively little new market growth. They don't position a company for long-term growth because all variations and derivatives eventually run their course. They may help retain customers for a while, but they rarely attract new ones. Eventually, market shifts leave them weaker and unable to maintain results due to spending too much time and resource Defending & Extending what worked in the past. Mr. Lafley has done little to Disrupt P&G's decades-old Success Formula or introduce White Space that would make P&G a role model for the new post-Industrial era.
Too often, bigness stands for goodness among those choosing business leaders. For example, GM is replacing departed CEO Rick Wagoner with Ed Whitacre according to the Detroit Free Press in "Former AT&T chief to lead GM." Mr. Whitacre's claim to fame is that as a lifetime AT&T employee, when the company was forced to spin out the regional Bell phone companies he led Southwestern Bell through acquisitions until it recreated AT&T – as a much less innovative company. Mr. Whitacre is a model of the custodial CEO determined to Defend & Extend the old business – in his case spending 20+ years recreating the AT&T judge Green took apart. Where a judge unleashed the telecommunications revolution, Mr. Whitacre simply put back together a company that is no longer a leader in any growth markets. Market leaders today are Apple and Google and those who are delivering value at the confluence of communication regardless of technology.
Today, few under age 30 even want a land-line – and most have no real concept of "long distance". Can the man who put back together the pieces of AT&T, the leader in land-line telephones and old-fashioned "long distance service" be the kind of leader to push GM into the information economy? Does he understand how to create new business models? Or is he the kind of person dedicated to preserving business models created in the 1920s, 30s and 40s? Can the man who let all the innovation of Ma Bell dissipate into new players while recreating an out-of-date business be expected to remake GM into a company that can compete with Kia and Tata Motors?
Any kind of person can become the leader of a company. Businesses are not democracies. The people at the top get there through a combination of factors. There is no litmus test to be a CEO – not even consistent production of good results. But in far too many many cases the historical road to the top has been by being the champion of D&E Management; by caretaking the old Success Formula, never letting anyone attack it. They have avoided Disruptions, ignored new competitors, and risen because they were more interested in "protecting the core" than producing above-average results (often protecting a seriously rotting core). Much to the chagrin of shareholders in many cases.
Now that the world has shifted, we need people leading companies that can modify old Success Formulas to changing market circumstances. Leaders who are able to develop and promote future scenarios that can guide the company to prosperity, not merely extend past practices. Leaders who obsess about competitors to identify market shifts and new opportunities for growth. Leaders who are not afraid to attack old Lock-ins, Disrupting the status quo so the business can evolve. Leaders who cherish White Space and keep multiple market tests operating so the company can move toward what works for meeting emerging client needs. Leaders like Lee Iacocca, Jack Welch, Steve Jobs and John Chambers. They can improve corporate longevity by shifting their organizations with the marketplace, maintaining revenue and profit growth supporting job growth and increased vendor sales.
by Adam Hartung | May 27, 2009 | Current Affairs, Defend & Extend, Disruptions, General, Leadership, Lock-in, Openness, Quotes
"The Need for Failure" is a recent Forbes article on why it is bad – really bad – to prop up failing institutions. The author is an esteemed economics professor at NYU. He says "too big to fail is dangerous. It suggests there is an insurance policy that says, no matter how risky your behavior, we will make sure you stay in business." Rightly said, only it creates a conundrum. Large organizations are not known for taking risky actions. Large organizations are known primarily for lethargic decision-making which weeds out all forms of risk – right down to how people dress and what they can say in the office. When you think of a big bank, like Bank of America or Citibank, you don't think of risk. You think just the opposite. Of risk aversion so great they cannot do anything new or different.
What I'd add to the good professor's article is recognition that large organizations stumble into risk they don't recognize, by trying to do more of the same when that behavior becomes risky due to market changes. My dad said that 100 years ago when my grandfather was first given pills by a doctor he decided to take the whole bottle at once. His logic was "if one pill will help me, I might as well take the whole lot and get better fast." Clearly, an example where doing more of the same was not a good idea. Then there was the boy who loved jumping off the railroad bridge into the river. He did it all the time, year after year. Then one month there was a draught, the river level fell while he was busy at school, and when he next jumped off the bridge he broke his leg. He did what he always did, but the environmental change suddenly made his previous behavior very risky.
Big corporations behave this way. They build Lock-ins around everything they do. They use hierarchy, cultural norm enforcement, sacred cows, rigid decision-making systems, narrow strategy processes, consistency in hiring practices, inflexible IT systems, knowledge silos and dependence on large investments to make sure the organization cannot flex. The intent of these Lock-ins is to make sure that historical decisions are replicated, to make sure past behaviors are repeated again and again with the expectation that those behaviors will consistently produce the same returns.
But when the market shifts these Lock-ins create risk that is unseen. Bankers had built systems for generating their own loans, and acquiring loans from others, that were designed to keep growing. They designed various derivative products as their own form of insurance on their assets. But what they did not recognize was that pushing forward in highly unregulated product markets, as the quality of debtors declined, created unexpected risk. In other words, doing more of the same did not reduce risk – it increased the risk! Because the company is designed to undertake these behaviors, there is no one who can recognize that the risk is growing. There is no one who challenges whether doing more of the same is risky – only those who would challenge making a change by saying change is risky!
Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and AIG all created a much higher risk than they ever anticipated. And they never saw it. Because they were doing what they always did – and expecting the results would take care of themselves. They were measuring their own behaviors, not the behavior of the market. And thus they missed recognizing that the market had moved – and thus doing more of the same was inherently risky.
(The same is true of GM, for example. GM kept doing what it always did, refusing to see the risk it incurred by ignoring market shifts brought on by changing customer behaviors, rising energy costs and offshore competitors.)
That's why big company CEOs feel OK about asking for a bail-out. To them, they did not fail. They did not take risk. They did what they had always done – and something went wrong "out there". Something went wrong "in the market". Not in their company. They need protection from the marketplace.
Of course, this is just the opposite of what free markets are all about. Free markets are intended to allow changes to develop, forcing competitors to adapt to market shifts or fail. But those who run (or ran) our big banks, and many of our big industrial companies, haven't see it that way. They believe their size means they are the market – so they want regulators to change the market back. Back to where they can make money again.
So how is this to to be avoided? It starts by having leaders who can recognize market shifts, and recognize the need for change. In an companion Forbes article "Jamie Dimon's Straight Talk Has A Good Ring" the author takes time to review J.P. Morgan Chase's Chairman's letter to shareholders regarding 2008. In the letter, surprisingly for a big organization, the JPMC Chairman points out market shifts, and then points out that his organization made mistakes by not reacting fast enough – for example by changing practices on acquiring mortgages from independent brokers. He goes no to point out that several changes have happened, and will continue happening, at JPMC to deal with market shifts. And he even comments on future scenarios which he hopes will help protect investors from the hidden risk of companies that take actions based on history.
Mr. Dimon's actions demonstrate a willingness to implement The Phoenix Principle. For those who don't know him, Mr. Dimon has long been one of the more controversial figures in banking. He is well known for exhibiting highly Disruptive behavior, yet he has found his way up the corporate ranks of the traditional banking industry. Now he is not being shy about Disrupting his own bank – JPMC.
- His discussion of future scenarios clearly points to expected changes in the market, from competitor shifts, economic shifts and regulatory shifts which his bank must address.
- He sees competitors changing, and the need for JPMC to compete differently with different sorts of institutions under different regulations. Mr. Dimon clearly has his eyes on competitors, and he intends for JPMC to grow as a result of the market shift, not merely "hang on."
- He is espousing Disruptions for his company, the industry and the regulatory environment. By going public with his views, excoriating insurance regulators as well as unregulated hedge funds, he intends for his employees and investors to think hard about what caused past problems and how important it is to change.
- He keeps trying new and different things to improve growth and performance at the company. It's not merely "more of the same, but hopefully cheaper." He is proposing new approaches for lending as well as investing – and for significant changes in regulations now that banking is global.
Very few leaders recognize the risk from doing more of the same. Leaders often feel it is conservative to not change course. But, when markets shift, not changing course introduces dramatic risk. People just don't perceive it. Because they are looking at the past, not at the future. They are measuring risk based upon what they know – what they've failed to take into account. And the only way to overcome this problem is to spend a lot more time on market scenarios, competitor analysis and using Disruptions to keep the organization vital and connected with the market using White Space projects.
by Adam Hartung | May 26, 2009 | Current Affairs, Defend & Extend, General, Lifecycle, Lock-in, Openness
Today I was hit by a market shift that left me baffled as to what I should do next.
Everybody, every work team, every company has Lock-ins. Lock-ins help you operate quickly and efficiently. And they blind you to potential market shifts. I have as many Lock-ins as anyone. Some I recognize, and some I don't. It's always the ones we don't recognize that leave us in trouble.
For 18 years I've listened to only one radio station in Chicago. WNUA 95.5 smooth jazz. I like jazz, and I've just about quit listening to anything else musically. I grew accustomed to the people who played the "light jazz" music on WNUA, and so enjoyed it I even listened to the station on my computer when traveling out of town. I was a stalwart, loyal fan. My whole family knew that when I was driving the car, the channel would be 95.5.
Then, after a long weekend out of town, I got in the car this morning. I pushed the button for 95.5, and for some reason there was Hispanic music. I couldn't figure it out. This didn't make any sense. So I turned off the radio and went about my business. When I returned home I logged onto WNUA.com to find a letter from a Clear Channel Chicago executive telling me that WNUA was no longer broadcasting as of 10:00am on Friday, May 22. The web site was gone, only this one HTML page existed. I was stunned.
I quickly did a Google search and found an article published by the media critic at The Chicago Tribune dated May 22, "WNUA Swings to Spanish Format." I immediately thought "this can't be right. There has to be something I can do to get back my radio station. Maybe if I email Clear Channel?" See, I quickly wanted to defend my radio selection, and extend the life of the product I personally enjoyed.
But then I read the article. Turns out there are a lot of smooth jazz lovers who were loyal to WNUA. But, unfortunately, that number has not been growing for a while. The channel management had tried many things to boost listeners, but none had worked. The market just wouldn't grow, despite their efforts. The jazz radio listener market had stalled – and was showing signs of (oh my gosh) decline! I was getting older, and apparently us old Chicago smooth jazz hounds aren't creating new jazz followers.
But, the station had done a lot of analysis as to what was growing. Hispanics now outnumber African-Americans as the largest minority group in the country. Clear Channel Chicago did a full scenario about the future, thinking about what would be needed to fill the needs of Chicago's biggest listener groups in 5 years. Looking forward, there was no doubt that smooth jazz wasn't going to grow – but the opportunity for an Hispanic station was "crystal clear". Competitively, they would continue losing revenue playing smooth jazz, and although the cost of shifting would be great – the opportunity to be part of a growing market had much more to gain. Chicago is the 5th largest Hispanic population in the USA and growing, with 28% of the current population Hispanic. Clear Channel management did both scenario planning and competitor analysis before deciding to make this switch – just what a Phoenix Principle company is supposed to do!
KaBoom. The market was shifting, and I saw it, but I didn't think about the impact on my own life. I just assumed WNUA would always be there playing jazz for me. But the people at Clear Channel looked at the market shifts, and how they could best use their 5 stations to service the most people. That is good for Chicago, and good business for Clear Channel. If they wanted to keep growing, WNUA had to be replaced. I would bet the hate mail has been extreme. The longing for our old station must be felt by several thousand people around Chicago. It's hard to let go of a Lock-in.
Oh, I feel terrible about not having my radio station. But the right move was made. I should have thought about this more, and seen it coming. I could have scouted out other radio stations, and started looking for other music styles that I'd like to listen to. But I wore blinders – until the market shifted and left me in the cold.
I'm curious, have any of you readers found yourself the unfortunate loser due to a market shift? Did some favorite aspect of your life or work disappear because the market went a different direction – and you found yourself in a small segment unprofitable to serve? I'd love to hear more stories from folks whose Lock-in left them unprepared for a change in lifestyle or work.
As for me, I guess there's always CDs. Or NPR (I'm getting old enough to like the news). But those would be D&E behaviors intended to ignore the shifting market. So, maybe I should start letting others in my family select the radio stations so I could climb out of my cave and learn what more modern musicians are doing these days. It would do me good to update my music knowledge – get me closer to people who have music appreciation beyond jazz, and probably make me a lot more likable as a driver. It's never too late to open up some White Space and learn what's new in the world you couldn't see because of your old Lock-in.
by Adam Hartung | May 24, 2009 | Current Affairs, Defend & Extend, General, Lifecycle, Television
One of the hardest things for leaders to do is recognize market shifts. The tendency to remain focused on Defending & Extending what was always does is so great that market shifts which demand change are overlooked in the urge to improve what was always done – even as results fade.
An obvious example is Playboy enterprises. "Playboy denies report of $300M price tag" was a Chicago Crain's headline, as rumors that the company (now publicly valued at only $90M) was being shopped for a new owner. Playboy was founded as a "lifestyle" media company intended to meet the emerging needs of "sophisticated" adult males in the 1960s. To the surprise of many publishers and government leaders, Playboy became a huge success. Its magazines outsold expectations. The company grew by opening clubs in major cities where businessmen entertained. Even resorts were founded as vacation destinations. As the company expanded it moved its headquarters from Chicago, where government officials disliked the hometown anomaly, to LA. And the company acquired a 727 as the corporate jet. As revenues and profits expanded, the company went public. As recently as 2000 the company was worth nearly $1.2billion (chart here).
But, the market changed. Women entered the workforce as one primary contributor to the clubs becoming passe, leading to their close. Likewise, the resorts closed as competitors – clubs catering to young men and couples, such as Club Med – did a better job of meeting their needs. The magazine became less and less viable as market shifts led to a split between pornography magazines for those who wanted photos and serious mens journals ranging from Stereophile and Autoweek to GQ. Market shifts ranging from America's attitudes about how to treat women, to what was needed in a serious current events or hobbyist journal, left the company's products less and less interesting. As the founder aged, the company lost track of its primary target and failed to identify a new target market. And the new CEO, the founder's daughter, was unable to develop future scenarios identifying a viable direction – or products – to keep the company growing.
At this point, Playboy has no clear market, has suffered from decades of declining revenue and profits, and investors have no reason to expect an improved return on investment. Why anyone should want to buy the company, especially as we observe that all print journalism is shrinking dramatically, is unclear. Playboy is at the vanguard again – but this time of demonstrating the end of print media and the losses capable from ignoring market shifts. Had Playboy long ago dropped the salatious pictures and moved itself toward a growing readership – providing insights to men's lifestyle issues in sports, fashion, electronics, autos or any number of topics – it had a chance of maintaining its success. But now the brand represents a complete out-of-synch with market needs and is more likely a negative than a positive; of no value. Playboy leadership should take the money and run, distributing what it can to investors, from whatever fool is willing to throw away its money on an acquisition.
Meanwhile, a recent Wall Street Journal Blog was titled "Skype Gets the Oprah Treatment". The WSJ blooger seemed perplexed that Oprah Winfrey's show would choose to run an entire episode by interviewing people on Skype. His implication was strongly that the episode was some sort of technology endorsement in disguise.
But, to the contrary, we can see where Ms. Winfrey and her producers are much smarter than her media CEO counterpart at Playboy. This episode gave viewers a firsthand experience with new technology which is available and usable by her target audience. People were able to recognize how the technology works, and why you would use it to communicate with others – possibly in remote locations.
Although Ms. Winfrey is "50ish" her company is keeping her product very current. Her audience is learning how to use new technology that will help them be better connected to family or business associates. And save money doing so, compared to traditional telephonic tools. Ms. Winfrey and her leadership team could continue to do what they always did, but this kind of new show helps them keep Harpo Enterprises and one of its products – The Oprah Show – in the forefront of competitivesness. That's why Harpo can lay claim to reaching even more people in Asia and Europe than in the USA! Thus Harpo keeps viewer numbers high, and advertisers willing to foot the bill.
Harpo Productions and Ms. Winfrey are demonstrating their willingness to shift with the marketplace. They are trying new things, and are willing to branch out with changes to stay connected to markets as they shift. Doing so is a requirement in lifestyle products, like media. She benefits her customers by willingly shifting with the market, and those lucky enough to work for Harpo or supply the company, will benefit by its willingness to remain connected to changing markets – by staying on the forefront.
Many CEOs and their leadership teams would do well to understand the failure of remaining Locked-in, like Playboy did. And to recognize the value of remaining abreast of market shifts and keeping products current with changing market requirements, like Harpo Productions and is famous CEO. Sometimes being criticized for being too avant garde is a good thing, because it shows you aren't afraid to change in the pursuit of keeping current with market shifts.
by Adam Hartung | May 19, 2009 | Current Affairs, Defend & Extend, General, Leadership, Lock-in
Have you ever heard of a company paying an employee to die? Hard to figure out how that's "pay for performance." Yet, many companies have executive compensation agreements with "golden coffin" provisions which agree to pay the executive's estate substantial sums in the event that executive dies. I first heard about this with the company AM International, which I profiled in my book Create Marketplace Disruption. AM International's Chairman/CEO Merle Banta had a provision in his contract which continued his pay, and guaranteed his bonus, even if he died! This was somewhat remarkable, because during the years he led AM it went bankrupt twice (the last time ending the company), and he laid off thousands of employees. It was hard for the people at AM to understand why this provision existed, since they not only lost their jobs but also their pension fund when Mr. Banta put it all into a company ESOP that went under with the company,
This still goes on today. Probably a lot more than many of us guess. Today's headline "Golden Coffin proposal narrowly defeated at XTO" covers how some shareholders tried to kill the "pay to die" provision for company executives. The Chairman received $1.63M in salary, and $30M in bonus last year – and the Golden Coffin provisions for him are worth more than $90M!!! But I ask you, do you think XTO Energy did well because of the decisions made by Chairman Bob Simpson – or because oil prices spiked to record levels having nothing to do with the management team at all?
When you get paid to hammer nails, or insert rivets, or spot weld, or wash dishes piece pay can make sense. The harder and smarter you work, the more you get done and you can make more money. This is pure pay for performance.
But does this make sense for executives, or even most managers, in a modern corporation? According to its bio, XTO energy owns oil and gas reserves (some proven, some not) under the ground. No matter what management does, the value of those reserves goes up or down with the value of oil and gas. Why should an executive be rewarded if oil jumps to $150/barrel? Sure, his company can be very profitable, but did he have anything to do with it? A 5 year chart of XTO demonstrates that the value of the company is mostly tied to the value of its commodity asset (oil), and not much else.
And the same can be said for most companies. The current value is tied to many factors, including decisions made years before, as well as shifting markets. Companies are quick to point this out when "other factors" conspire to do the value poorly, and they pay executive bonuses anyway. But when the value goes up, there's a willingness to pass along a big chunk of that value to the executives as if they caused it. In reality, about the only thing an executive can do to affect value in the short term (meaning less than 2 or 3 years) is cut R&D, cut product development, cut marketing, cut sales expenditures, outsource functionality to low cost centers, sell assets and lay off employees. Most actions which pad the short-term bottom line but each of which can fatally doom the organization's future. Compensation that's tied to short-term results reinforces doing more of the same, Defending & Extending the company's past, and ignoring needs to invest in shifting the company along with dynamic markets.
Good management keeps its eyes on markets so the company keep can keep positioning itself for growth as markets change. Good management obsesses about competitors so it isn't caught off guard by current or emerging players that drive down returns. Good management disrupts the organization so it is able to shift with markets, rather than getting stuck in behaviors and decision making processes that become outdated and unable to create value. And good management maintains White Space where new products, services, operating practices, metrics and behaviors are tested in order to keep the company evergreen. But how do you tie compensation to these behaviors?
I recently had coffee with someone who worked at AM International when it was declining. He still remembers, painfully, how executive compensation was not linked to what the company needed to do to survive. He told me how later, after AM, he was working for a large manufacturer in central Michigan and he could not believe how every Director, V.P. and other management personnel tied every decision to maximizing their bonus. Eventually, he grew tired of the self-centered behavior and he's now an entrepreneur.
If we are to believe in pay for performance, management bonuses should lag by 1 to 5 years. Bonuses should be based on results – and the results of management decisions actually come to fruition over time. They aren't like pounding nails. This sounds absurd, but we all know that the real impact of executive decisions are seen years after the decision. If CEO incentive compensation for 2009 were tied to performance in 2012 or 2013 do you think the behavior and decisions of executives would change? Would they be more likely to focus on making decision that are for the business's long term health than trying to maximize short-term pay?
Those who've won the CEO lottery have done much better than those who have not. It's very hard to say we "pay for performance" when huge bonuses are paid to the departing chairman of GM, or the CEO who quit launching new products at Motorola to maximize Razr sales. Clearly, they were not paid for performance. And it's unimaginable how paying someone to die makes any sense. When compensation on the downside is guaranteed, and on the upside is maximized by short-term actions or market events not even tied to management decisions, the whole discussion of pay for performance becomes fairly absurd.
I was always struck that the founders of Ben & Jerry's Ice Cream came up with a formula that paid everyone based upon rank – and there was a set ratio between ranks. As a result, the CEO's pay could not go up unless the pay of a worker on the line went up. The inherent fairness was extremely hard to argue with. And it meant everyone did better, or worse, as markets shifted and they either shifted with them – or not. It would seem like the time has long come when we should reconsider exactly what we base pay upon. And when measuring performance is as complex, or time lagged, as management we need to rethink the entire concept. Maybe we should go back to compensating people for doing the right things, with most pay in salary, and tying people together for the long-term company interest.
by Adam Hartung | May 18, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in, Web/Tech
"Newspapers face pressure in selling online advertising" is today's headline about newspapers. Seems even when the papers realize they must sell more online ads they can't do it. Instead of selling what people want, the way they want it, the newspapers are trying to sell online ads the way they sold paper ads – with poor results.
We all know that newspaper ad spending is down some 20-30%. But even in this soft economy internet ad spending is up 13% versus a year ago. Except for newspaper sites. At Gannett, NYT and McClatchy internet ad sales are down versus a year ago!
People don't treat internet news like they do a newspaper. The whole process of looking for news, retrieving it, reading it, and going to the next thing is nothing like a newspaper. Yet, daily newspapers keep trying to think of internet publishing like it's as simple as putting a paper on the web! What works much better, we know, are sites focused on specific issues – like Marketwatch.com for financial info, or FoodNetwork.com. Also, nobody wants to hunt for an on-line classified ad at a newspaper site – not when it's easier to go to cars.com or vehix.com to look for cars, or monster.com to look for jobs. Web searching means that you aren't looking to browse across whatever a newspaper editor wants to feed you. Instead you want to look into a topic, often bouncing across sites for relevant or newer information. But a look at ChicagoTribune.com or USAToday.com quickly shows these sites are still trying to be a newspaper.
Likewise, online advertisers have far different expectations than print advertisers. Newspapers simply said "we have xxxx subscribers" and expected buyers to pay. But on the web advertisers know they can pay for placement against specific topics, and they can expect a specific number of page views for their money. As the article says "if newspapers want to get their online revenue growing again, once the economy recovers, they have to tie ad rates more closely to results, charge less for ads and provide web content that readers can't get at every news aggregation site."
When markets shift, it's not enough to try applying your old Success Formula to the new market. That kind of Defend & Extend practice won't work. You're trying to put a square (or at least oblong) peg into a round hole. Shifted markets require new solutions that meet the new needs. You have to study those needs, and project what customers will pay for. And you have to give them product that's superior to competitors in some key way. Old customers aren't trying to buy from you. Loyalty doesn't go far in a well greased internet enabled world. You have to substantiate the reason customers need to remain loyal. You have to offer them solutions that meet their emerging needs, not the old ones.
Years ago IBM almost went bust trying to be a mainframe company when people found hardware prices plummeting and off-the-shelf software good enough for their needs. IBM had to develop new scenarios, which showed customers needed services to implement technology. Then IBM had to demonstrate they could deliver those services competitively. Only by Disrupting their old Success Formula, tied to very large hardware sales, and implementing White Space where they developed an entirely new Success Formula were they able to migrate forward and save the company from failure.
Unfortunately, most newspaper companies haven't figured this out yet. They don't realize that bloggers and other on-line content generators are frequently scooping their news bureaus, getting to news fans faster and with more insight. They don't realize that on-line delivery is not about a centralized aggregation of news, but rather the freshness and insight. And they haven't figured out that advertisers take advantage of enhanced metrics to demand better results from their spending. The New York Times, Gannett and other big newspaper companies better study the IBM turnaround before it's too late.
by Adam Hartung | May 17, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
"Gannett to shut down print version of Tucson newspaper" is the latest headline. Yet another newspaper either cutting staff, cutting content, cutting print days, or stopping printing altogether. That this would happen isn't really surprising. Even Warren Buffett recently said he didn't see any way newspapers could make money. (Yet, according to Marketwatch Berkshire Hathaway still owns shares in Gannett – primarily a newspaper company.)
What's surprising is that Gannett isn't doing anything to change the company. A quick visit to www.Gannett.com and you'll learn that the company has almost no on-line business. They company's profile says that it's online business consists of a 50% ownership in CareerBuilder.com and Shoplocal. That's it. No financial news site, no social networking site, no food site, no sites dedicated to the TV stations owned by Gannett, or the newspapers owned by Gannett. A visit to the page dedicated to the Gannett online network is actually a page where you can ask for a salesperson to call you for placing an ad on USAToday.com.
Everyone today has to deal with market shifts. Everyone. The newspapers are in a position where their very survival depends upon making a shift. This isn't new. It's been clear for several months – and for those in the media actually well known for a few years. So why hasn't Gannett done anything to reposition its business? Over the last year equity value has declined 85% – some $6Billion of lost value. Since June, 2007 the equity value has dropped from $60/share to $4/share (a loss of some $10Billion in value) [see chart here].
Leadership should not be allowed to behave like the lonely deer, caught on a rural road in the evening. The proverbial animal caught staring into the headlights of the car speeding directly at it – and sudden death. Leadership's job is to react to market changes in order to keep the business viable. Gannett has succumbed to Lock-in – unwilling to take actions necessary to keep its customers (advertisers and readers) engaged. Unwilling to help employees mobilize toward a new future, and help vendors identify growth opportunities. By simply doing more of what the company has always done, leadership is dooming the investors to lose their money, and their employees their jobs and pensions.
Everybody knows that the future for newspapers is bleak. All of us will face these sorts of market shifts in our careers. Doing nothing is not an option. Leadership must engage the workforce in open dialogue about what the future holds, taking great pains to discuss competitors and how they are changing the market. And leadership is responsible to Disrupt the Lock-ins, attacking them, so that new ideas can be brought forward and new investments can be made in White Space where the company can grow and migrate to a new Success Formula.
If somebody steals $100 that's a crime. But if you lose $10Billion in market value that's not. When market shifts are as obvious as those in newspapers, and management doesn't take action to reposition the company and engage employees in transition, not taking action seems criminal. No wonder shareholders file class action lawsuits.
by Adam Hartung | May 15, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle
"Chrysler delivers the bad news to 789 dealers" was yesterday's headline. Today the headline read "GM notifies dealers of shutdowns" as the company sent 1,100 dealers the notice they would no longer be allowed to stay in business. Thousands are losing jobs. Chrysler is bankrupt, and GM looks destined to file shortly. But wait a minute, GM was the market share leader for the last 50 years!! These big companies, in manufacturing, were supposed to be able to protect their business and become "cash cows." They weren't supposed to get beaten up, see their cash sucked away and end up with nothing!
About 30 years ago a fairly small management consultancy that was started as a group to advise a bank's clients hit upon an idea that skyrcketed its popularity. The fledgling firm was The Boston Consulting Group, and its idea was the Growth/Share matrix. It created many millions of dollars in fees over the years, and is now a staple in textbooks on strategic planning. Unfortunately, like a lot of business ideas from that era, we're learning from companies like GM and Chrysler that it doesn't work so well.
The idea was simple. Growth markets are easier to compete in because people throw money at the companies – either via sales or investment. So it's easier to make money in growing businesses. Market share was considered a metric for market power. If you have high share, you supposedly could pretty much dictate prices. High share meant you were the biggest, which supposedly meant you had the biggest assets (plant, etc.) and thus you had the lowest cost. So, low growth and low share meant your business was a dog. High growth and low share was a question mark – maybe you'd make money if you eventually get high share. High growth and high share was a star. And low growth but high share is a cash cow because you could dominate a business using your market clout to print money – or in the venacular of the matix – milk the money from this cow into which you put very little feed.
In the 1970s/80s, looking at the industrial era, this wasn't a bad chart. Especially in asset intensive businesses that had what were then called "scale advantages." In the industrial world, having big plants with lots of volume was interpreted as the way to being a low-cost company. Of course, this assumed most cost was tied up in plant and equipment – rather than inventory, people, computers, advertising, PR, viral marketing, etc. The first part of the matrix has held up pretty well; the last part hasn't. We now know that it's easier to make money in growth. But it doesn't turn out that share really gives you all that much power nor does it have a big determination in profitability.
We know that having share is no defense of profits. The assumption about entry barriers keeping competitors at bay, and thus creating a "defensive moat" around profits, is simply not true. Today, companies build "scale" facilities overnight. They obtain operating knowledge by hiring competitor employees, or simply obtaining the "best practices" from the internet. Distribution systems are copied with third party vendors and web sites. Even advertising scale can be obtained with aggressive web marketing at low cost. And so many facilities are "scale" in size that overcapacity abounds – meaning the competitor with no capacity (using outsourced manufacturing) can be the "low cost" competitor (like Dell.).
Thus, all markets are overrun with competitors that drive down profits any time growth slows. As GM learned, even with more than 50% share (which they once had) they could not stop competitors from differentiating and effectively competing. Not even Chrysler, with the backing of Mercedes, could maintain its share and profits against far less well healed competitors. When growth slows, the cash disappears into the competitive battles of the remaining players. Unfortunately, even new players enter the market just when you'd think everyone would run for the hills (look at Tata Motors launching itself these days wtih the Nano). Competitors never run out of new ideas for trying to compete – even when there's no growth – so they keep hammering away at the declining returns of once dominant players until they can no longer survive.
Competition exists in all businesses except monopolies, and threatens returns of even those with highest share. Today it might be easy to say that Google cannot be challenged. That is short-sighted. People said that about Microsoft 20 years ago – and today between Apple, Linux and Google Microsoft's revenue growth is plummeting and the company is unable to produce historical results. People once said Sears could not be challenged in retailing. Kodak in amateur photography. And GM in cars. Competitors don't quit when growth slows – until they go bankrupt – and even then they don't quit (again, look at Chrysler). High share is no protection against competition.
And thus, there is no "easy cash in the cow" to be milked. It all gets spent fighting to stay alive. Trying to protect share by cutting price, paying for distribution, advertising. And if you don't spend it, you simply vanish. Really fast. Like Lehman Brothers. Or Bennigans.
The only way to make money, long term, is to keep growing. To keep growing you have to move into new markets, new technologies, new services – in other words you have to keep moving with the marketplace. And that produces success more than anything else. It's all about growth. Forget about trying to have the "cash cow" – it's like the unicorn – it never existed and it never will.
by Adam Hartung | May 8, 2009 | Current Affairs, Defend & Extend, Disruptions, Food and Drink, General, Innovation, Leadership, Lock-in, Openness, Television, Web/Tech, Weblogs
Where the people go, advertisers will follow. Why pay for an ad at the end of a never traveled dead-end street? The purpose of advertising is to reach people with your message. And now "Forrester: Interactive Marketing to grow 11% to $25.6 Billion in 2009" reports MediaPost.com. When print advertising is dropping (direct mail down 40%, newspaper down 35% and magazines down 28%), the on-line market is growing and expected to reach over $50billion by 2014. Search ads is the biggest, with over half the market, but social media is expected to grow the fastest at over 34%/year.
Such a market shift indicates that those who buy ads need to be very savvy about what works. Like I said, you don't want to be the fool who jumps into billboards, only to get placed on the one at the end of a dead-end road. Success means Disrupting your assumptions about advertising, and learning what work by entering White Space with tests and measurements.
In "Mobile Marketing Won't Work Here" Bret Berhoft explains why GenY simply won't tolerate intrusive ads – especially on their mobile devices. Social media are different conduits, with different users and different behaviors. Where older folks (and our parents) were content to be interrupted by ads – such as on TV – the avid users of new media aren't. And they've been known to create counter-movements attacking advertisers that don't adhere to their on-line behavior requirements.
What won't work is trying to do what Sears has done. Instead of learning how people use social media, and how you can connect with them to meet their needs, "Sears to Launch Social Networking Sites" we learn. Where everybody is using Facebook, MySpace, Twitter, Linked-in, etc., Sears decided to open two new sites called MySears.com and MyKmart.com. They hope people will go to these sites, register, and tell stories about their experiences in both retail chains. Then Sears intends to flow through good comments to Sears.com and KMart.com sites.
The horribly Locked-in Sears management keeps trying to Defend & Extend its outdated model. As people have left Sears and KMart in droves for competitors, they aren't looking for a site to "connect" with other people who are Sears centric. People use social networks to learn, grow, exchange ideas, keep up with trends. They don't register for a site because their parents used to shop there.
Sears has missed the basics of Disrupting its old Success Formula, so it keeps trying to apply it in ways that don't work. It keeps doing what it always did, only trying to do it in new places. These sites aren't White Space projects trying to participate in the social networks that are growing (like everything from illness questions to home how-tos). Rather, they are still trying to take the position that Sears is at the center of the world, and people want to be part of Sears.
Exactly how advertisers will capture the attention of participants still isn't clear. Some ideas have gone "viral" producing mega-returns for minimal investments. Other ideas have flopped despite big spending. The market is shifting, and variables keep changing (Marketers Search for Social Media Metric.) But for those who Disrupt their old Lock-ins, those who attack their assumptions, they can use White Space to learn what does work.
"Pizza Hut 'Twintern' to Guide Twitter Presence" is a great example of creating White Space to study social media advertising by participating. The new position will interact with Twitter users, and be a leader in how to interact with Facebook and other sites – even the notorious YouTube! where user content can include the very bizarre. By participating where the customers are, these leaders can develop insights to how you can consistently advertise effectively. Already Sony and Dell have demonstrated they can achieve high recall (Word of Mouth goes Far Beyond Social Media) beyond Social Media with their on-line efforts. These participants, who Disrupt their assumptions and bring in others to work in White Space will be the winners because they aren't trying to Defend & Extend the old Success Formula. They are trying to create a new one to which they can migrate the old business.
by Adam Hartung | May 7, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
Good public policy and good management don't always align. And the banking crisis is a good example. We now hear "Banks must raise $75billion" if they are to be prepared for ongoing write-downs in a struggling economy. This is after all the billions already loaned to keep them afloat the last year.
But the bankers are claiming they will have no problem raising this money as reported in "The rush to raise Capital." "AIG narrows loss" tells how one of the primary contributors to the banking crisis now thinks it will survive. And as a result of this news, "Bank shares largely higher" is another headline reporting how financial stocks surged today post-announcements.
So regulators are feeling better. They won't have to pony up as much money as they might have. And politicians feel better, hoping that the bank crisis is over. And a lot of businesses feel better, hearing that the banks which they've long worked with, and are important to their operations, won't be going under. Generally, this is all considered good news. Especially for those worried about how a soft economy was teetering on the brink of getting even worse.
But the problem is we've just extended the life of some pretty seriously ill patients that will probably continue their bad practices. The bail out probably saved America, and the world, from an economic calamity that would have pushed millions more into unemployment and exacerbated falling asset values. A global "Great Depression II" would have plunged millions of working poor into horrible circumstances, and dramatically damaged the ability of many blue and white collar workers in developed countries to maintain their homes. It would have been a calamity.
But this all happened because of bad practices on the part of most of these financial institutions. They pushed their Success Formulas beyond their capabilities, causing failure. Only because of the bailout were these organizations, and their unhealthy Success Formulas saved. And that sows the seeds of the next problem. In evolution, when your Success Formula fails due to an environomental shift you are wiped out. To be replaced by a stronger, more adaptable and better suited competitor. Thus, evolution allows those who are best suited to thrive while weeding out the less well suited. But, the bailout just kept a set of very weak competitors alive – disallowing a change to stronger and better competitors.
These bailed out banks will continue forward mostly as they behaved in the past. And thus we can expect them to continue to do poorly at servicing "main street" while trying to create risk pass through products that largely create fees rather than economic growth. These banks that led the economic plunge are now repositioned to be ongoing leaders. Which almost assures a continuing weak economy. Newly "saved" from failure, they will Defend & Extend their old Success Formula in the name of "conservative management" when in fact they will perpetuate the behavior that put money into the wrong places and kept money from where it would be most productive.
Free market economists have long discussed how markets have no "brakes". They move to excess before violently reacting. Like a swing that goes all one direction until violently turning the opposite direction. Leaving those at the top and bottom with very upset stomachs and dramatic vertigo. The only way to avert the excessive tops is market intervention – which is what the government bail-out was. It intervened in a process that would have wiped out most of the largest U.S. banks. But, in the wake of that intervention we're left with, well, those same U.S. banks. And mostly the same leaders.
What's needed now are Disruptions inside these banks which will force a change in their Success Formula. This includes leadership changes, like the ousting of Bank of America's Chairman/CEO. But it takes more than changing one man, and more than one bank. It takes Disruption across the industry which will force it to change. Force it to open White Space in which it redefines the Success Formula to meet the needs of a shifted market – which almost pushed them over the edge – before those same shifts do crush the banks and the economy.
And that is now going to be up to the regulators. The poor Secretary of Treasury is already eyeball deep in complaints about his policies and practices. I'm sure he'd love to stand back and avoid more controversy. But, unless the regulatory apparatus now pushes those leading these banks to behave differently, to Disrupt and implement White Space to redefine their value for a changed marketplace, we can expect a protracted period of bickering and very weak returns for these banks. We can expect them to walk a line of ups and downs, but with returns that overall are neutral to declining. And that they will stand in the way of newer competitors who have a better approach to global banking from taking the lead.
So, if you didn't like government intervention to save the banks – you're really going to hate the government intervention intended to change how they operate. If you are glad the government intervened, then you'll find yourself arguing about why the regulators are just doing what they must do in order to get the banks, and the economy, operating the way it needs to in a shifted, information age.
