by Adam Hartung | May 4, 2009 | Current Affairs, Defend & Extend, General, In the Swamp, Innovation, Leadership, Openness
Today Yahoo.com picked up on Mr. Buffett's recent comments, with the home page lead saying "Buffett's Gloomy Advice." The article quotes Buffett as saying newspapers are one business he wouldn't buy at any price. Even though he's a reader, and he owns a big chunk of the Washington Post Company (in addition to the Buffalo, NY daily), he now agrees there are plenty of other places to acquire news – and for advertisers to promote.
I guess the topic is very timely given the Marketwatch.com headline "N.Y. Times hold off on threat to close Boston Globe". Once again, in what might remind us of an airline negotiation, the owner felt it was up to concessions by the workers, via their union, if the newspaper was to remain in business. After squeezing $20million out of the workers, the owners agreed not to proceed with a shutdown – today. But they still have not addressed how a newspaper that is losing $85million/year intends to survive. With ad revenue plunging over 30% in the first quarter, and readership down another 7% in newspapers nationally, union concessions won't save The Boston Globe. It takes something that will generate growth.
And perhaps that innovation was also prominent in today's news. "Amazon expected to lift wraps on large-screen Kindle" was another Marketwatch headline. Figuring some people will only read a magazine or newspaper in a large format, the new Kindle will allow for easier full page browsing. According to the article, the New York Times company has said it will be a partner in providing content for the new Kindle.
Let's hope the New York Times does become a full partner in this project. People want news. And the only way The Boston Globe and New York Times will survive is if they find an alternative go-to-market approach. Printing newspapers, with its obvious costs in paper and distribution, is simply no longer viable. Trying to defend & extend an old business model dedicated to that approach will only bankrupt the company, as it already has bankrupted Tribune Company and several other "media companies." The market has shifted, and D&E practices like cost cutting will not make the organizations viable.
It's pretty obvious that the future is about on-line media distribution. We've already crossed the threshold, and competitors (like Marketwatch.com and HuffingtonPost.com) that live in the on-line world are growing fast plus making profits. What NYT now needs to do is Disrupt its Lock-ins to that old model, and plunge itself into White Space. I'm not sure that an oversized Kindle is the answer; there are a lot of other products that can deliver news digitally. But if that's what it takes to get a major journalistic organization to consider switching from analog, physical product to digital on-line distribution as its primary business I'm all for the advancement. Those who compete in White Space are the ones who learn, adapt, and grow. Being late can be a major disadvantage, because the laggard doesn't have the market knowledge about what works, and why.
This late in the market evolution, the major print media players are all at risk of survival. While no one expects The Chicago Tribune or Los Angeles Times to disappear, the odds are much higher than expected. These businesses are losing a tenuous hold on viability as debt costs eat up cash. Declining readership and ad dollars makes failure an equally plausible outcome for The Washington Post, New York Times and Boston Globe. Instead of Disrupting and using White Space, as News Corp started doing a decade ago (News Corp owns The Wall Street Journal and Marketwatch.com, as well as MySpace.com for example), they have remained stuck in the past. Now if they don't move rapidly to learn how to make digital, on-line profitable they will disappear to competitors already blazing the new market.
by Adam Hartung | May 1, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
My book talks about Growth Stalls. Whenever a company sees two consecutive quarters of flat or declining sales or profits, or 2 consecutive quarters where year over year sales or profits were flat or declining, it is in a growth stall. Unfortunately, only 7% of companies that hit a growth stall will ever again consistently grow at a mere 2%. Yes, that's damning and almost unbelievable. And very worrisome given how many companies are now entering growth stalls.
Take a look at Motorola. They stumbled badly in mobile phones because they didn't keep pushing out new products into the market. They tried to Defend & Extend their popular Razr product, and eventually profits disappeared as they cut price. Then sales fell off a cliff as people shifted to newer products. The stall was created by the company insufficiently pushing innovation into the market, and the market shifted to new solutions.
Now "Motorola to cut more jobs as non-cell business weakens" according to ChicagoBusiness.com by Crain's. When the mobile business weakened, management took action to "shore up" the business. It went hunting for a buyer (none found), and it started cutting resources. Including monster layoffs. But it still had to keep investing or the business would collapse entirely. This had a cascading, spiraling negative effect on the rest of Motorola. With resources pushed into the failing cell phone business, there was less management attention and money spent on other businesses. Those also stopped pushing new innovations to the market. Now sales of network gear, set-top boxes, and 2-way radios are all down double digits.
So Motorola plans to cut another 7,500 jobs. More resource cuts, which will cause more cuts in innovation, fewer new products, less White Space. The process of Defending & Extending the past becomes more entrenched, because there are fewer resources around. What gets cut most is anything new. The stuff that could generate growth. Cuts lead to people hoping for an economic recovery that will somehow improve their competitive position. But it won't.
Motorola is now pinning its future on successful smart phone sales. But reality is that every quarter Motorola becomes a far more distant provider in mobile phones. While the best performer had flat volume last quarter, Motorola saw unit sales drop 46%. Motorola moves farther from the market, and into role of niche player. And even though cell phones is supposed to be for sale as a business, as we can see the company is diverting resources from the best part of Motorola (non-cell phones) to mobile handsets because they won't quit trying to Defend & Extend that business.
It's now clear that Motorola is in a vicious circle of cutting resources, losing sales, losing market share, discontinuing innovation, delaying new products, cutting more resources, losing more sales, losing more profits, doing even less innovation, offering up even fewer new products, …… Almost no one ever recovers from this spiral. By trying to Defend & Extend the old business, the actions – including layoffs – significantly harm the business. With less and less innovation, and fewer resources, the company slips into decline and failure.
And that's why growth stalls are deadly. They exacerbate Defend & Extend's weakness as a management approach. The lack of innovation, remaining Locked-in, was what caused the stall. Blaming a recession is just looking for a bogeyman so the business doesn't have to take responsibility for its own mistake. But after a couple of quarters of bad performance, the next wave of actions – the "best practices" to "shore up a problem company" – kill it. The layoffs and resource cuts – especially the delaying or killing of White Space projects and new products – cause customers to accelerate their move to competitors. And the company simply fails.
Today employees in those companies in growth stalls have a lot to worry about – as do their investors. If you hear leadership talking about job cuts and other D&E actions – while deflecting blame elsewhere besides the lack of meeting new market needs – then you're best off to find a new job and sell the stock. These companies will only continue to get weaker, and competitors will displace them as market leaders. An improving economy will be created by their growing competitors, not them, and their boat will not rise with the tide.
The solution is obviously not to practice D&E management. When you identify a growth stall is when all attention needs to be focused on rolling out new solutions to return to growth. Instead of cutting costs while trying to save the past, the business needs to move as rapidly as possible to the solutions needed in the future. Old businesses that caused the stall need to see dramatic resource constraints, while the new opportunities take front and center attention.
It wasn't "the economy" that got Motorola into desperate straits. It was Apple's iPhone and Nokia's relentless new product introductions. Without commensurate innovation, Motorola will never return to its former leadership position. And without resources, that cannot happen.
By the way, thanks Carl Icahn. You were the first to really push Motorola down this track of resource cutting. You're efforts to push Motorola this direction worked, even if you didn't get to lead the cuts. But the results are the same. And if Motorola isn't careful, the whole company may disappear as both halves of what now remain continue declining.
by Adam Hartung | Apr 29, 2009 | Books, Current Affairs, Defend & Extend, General, In the Swamp, Leadership, Lock-in, Openness
Today the U.S. Federal Reserve indicated that the worst of America's economic downturn may be over, according to "Fed stands pat, and says worst may be over" at Marketwatch.com. Fed officials seem to think that the rate of decline has slowed. Note, they didn't say the economy is growing. The rate of decline is slowing. They hope this points to a bottoming, and eventually a return to growth.
With interest rates between banks at 0%, and short-term rates for strong companies near that level, there really isn't much more the Fed can do to create growth. It will keep buying Treasury securities and keep pushing banks to loan. But growth requires the private sector. That means businesses – or what reporters call "Main Street."
The government doesn't create growth. It can stimulate growth with low interest rates and money that will stimulate business investment. Growth requires people make products or services, and sell them. Those who are waiting on the government to create a growing economy will never gain anything from their wait, because it's up to them. Only by making and selling things do you get economic growth.
Recent events, closing banks and massive write-offs, are a big Challenge to old ways of doing business. Those who keep applying old practices are struggling to generate profits. The tried-and-true practices of American industrialism just aren't turning out gains like the once did. And they won't. The world has shifted. Entrepreneurs in India, Malaysia and China – places we like to think of as poor and "third world" – are building fortunes in the information economy. American businesses have to shift. If you make posts to install on highway sides, well lots of people can do that and competition is intense. To make money you need to make products that help move more people on the highway faster and safer – some kind of post that perhaps can provide traffic information to web sites and aid people to look for alternate routes. Posts aren't what people want, they want better traffic flow and today that ties to more information about the highway, who's using it, and what's happening on it.
Growth will return when businesspeople move toward supplying the shifted market with what it wants. Like Apple with a solution for digital music that involved players and distribution. Or Amazon with a solution for digitally obtaining books, magazines and newspapers, storing them, presenting them and even reading them to you. These companies, and products, appeal to the changed market – the market that values the music or the words and not the vinyl/tape/CD or the ink-on-paper. The customers that want the information, not necessarily the tangible item we used to use to get the information.
For the economy to grow requires a lot more businesses realize this market shift is permanent, and adjust. During the Great Depression those who refused to shift from agriculture to industrial production found the next 40 years pretty miserable – as rural land prices dropped, commodity prices dropped and the number of people working in agriculture dropped. Agrarianism wasn't bad, it just wasn't profitable. And going forward, industrialism isn't bad – but to grow revenues and profits we have to start thinking about how to deliver what people want – not what we know how to make. You have to deliver what the market wants to grow sales – even if it's different from what you used to make.
Starbucks offered people a lot of different things. And the old CEO tried to capitalize upon that by expanding his brand into liquor, music recording, agency for entertainers, movie production, and a widespread set of products in his stores – including food. But then an even older CEO returned, and he said Starbucks was all about coffee. He launched some new flavors, and he pushed out an instant coffee product. But a year later "Starbucks profit falls 77% on store closure charges" reports Marketwatch.com. His "focus" efforts have cut revenues, and cut profits enormously. He's cut out growth in his effort to "save" the company.
By trying to go backward, Chairman Schultz has seriously damaged the brand and the company. He has closed 570 stores – which were a big part of the brand and perhaps the thing of greatest value. Stores attracted people for a lot more than just coffee. People met at the stores, and buying coffee was just one activity they undertook. So as the stores were shuttered, the brand began to look in serious trouble and people started staying away. The vicious cycle fed on itself, and same store sales are down 8%. No new flavor or packaged frozen coffee bits for take home use is going to turn around this troubled business. It will take a change to giving people what they need – not what Mr. Schultz wants to sell.
With more and more people working from home the "virtual office" for many small businesspeople can still be a local Starbucks. When you can't afford take a client out for a snazzy lunch you can afford to take them for a coffee. When your wasteline can't take ice cream, you can afford a no-cal hot coffee in a great environment. Starbucks never was about the coffee, it was about meeting customer needs in a shifted market. And when the CEO realizes this he has the chance to save the company by taking into the new markets where customers want to go. Not by bringing out new instant coffee granules.
Starbucks is sort of a model of the recession. When you try to do what you always did, and you blame the lousy economy for your troubles, you'll see results worsen. As businesspeople we must realize that the recession was due to a market shift. We went off the proverbial cliff trying to extend the old business – just like Apple almost did by trying to be the Mac and only the Mac. To get the economy growing we have to look to see what people really want, and supply that. And what they want may be somewhat, or a whole lot, different from what we used to give them. But when we start supplying this changed market what it wants then the economy will quit contracting and start growing.
So be more like Steve Jobs, and less like Charles Schultz. Quit trying to go backward and regain some past glory. Instead, look into the future to figure out what people want and that competitiors aren't giving them. Be willing to Disrupt your business in order to take Disruptive solutons to the market. And get your ideas into White Space where you can develop them into profitable businesses. Don't wait for someone else to turn the economy around – just to find out then it's too late for you to compete.
by Adam Hartung | Apr 28, 2009 | Defend & Extend, In the Whirlpool, Innovation, Leadership
"Chrysler Avoids Bankruptcy as GM steps toward it" is the Marketwatch.com headline. According to the article, Chrysler has a deal to manage its debt while Ford has never been as close to the edge as its two brethren. But GM is trying to get bondholders to take a 60% value reduction AND exchange the bond value for equity value – which of course has no assurance and could easily go to zero. The bondholders are squawking, and it's unclear they will agree. Which would plunge GM into bankruptcy. Are the bondholders just greedy? Or do they see the chance of getting some of their money back better via liquidation?
Ford has some of the most popular and fuel efficient vehicles in the world. They just aren't sold in the USA. But they've long had high share in Europe, where Ford has built smaller cars with both diesel and gasoline engines that have met market needs. Now Ford is preparing to build and sell those cars in the USA, which would move them a lot closer to recent market shifts than the worn out Lincoln line and the renamed 500 (rebadged as Taurus under the guise of the name making all the difference.) These European cars offer an opportunity for Ford to Disrupt the U.S. market and regain a positive footing.
Meanwhile, Chrysler has some of the most innovative cars on the market. Its 300, Charger and Challenger cars use technology that allows V8 engines to shut off 4 when not needed – allowing them to achieve over 30 MPG in a "large" and "performance" format. Further, for those seeking safety and control, the 300 and selected other models are available in all wheel drive, which has been proven to be the #1 safety enhancer possible. And of great value in northern climates where foul weather (rain and especially snow or ice) makes driving treacherous. All included in dramatic styling that appeals to American consumer tastes.
But GM? "GM to focus on four keeper brands" is the MediaPost.com headline. Most GM innovation is concentrated in Pontiac, Hummer, Saturn and Saab. The first of these is to be closed down for sure, and the latter 3 either sold or closed. As the CEO says "the company will focus on four brands it defines as core: Chevrolet, Buick, Cadillac and GMC." Anytime the CEO of a failing company says he plans to save the place by "focusing on the core" and thereby cutting back to some aged part of the company RUN, RUN, RUN. The past is the past, and you NEVER regain it. Making these brands exciting is about as likely as making Holiday Inn a high-end hotel chain.
Think about it. Remember Izod with those alligators on the breast plate? Would you consider buying those shirts in Macy's? Or how about resurrecting Howard Johnson's as the place to stay and eat while traveling? Or shopping at KMart? Or taking instant photos on a Polaroid? When the market moves on, it's moved on. No business can recapture past profit levels by "focusing" on old brands and products that were once great. The clock never runs backward. T he market has shifted, and companies have to shift with it – not try to pretend "focusing on the core" will create profits simply because they are dedicated and focused.
It's Ford's offshore innovation that may save the company. It's Chrysler's engine, drive train and styling innovations that may save it. But GM is getting rid of anything that looks like innovation – and anything that might look like a Disruption or White Space. It has no hope of ever regaining market strength. It's plan is faulty, and won't work. Even if bondholders accept the swap of debt for equity, in short order GM sales will continue declining (as will profits), and there's no way bondholders can sell all that equity in order to recover their invested value in the bonds.
by Adam Hartung | Apr 22, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Lock-in
Yesterday I discussed how Sun Microsystems nailed its coffin shut in the mid-1990s when it committed itself to hardware instead of following the market into software. Even though Sun was the then leader in Unix operating systems (Solaris) and internet application development (Java), the company chose to only offer its software on its own hardware (Solaris) – or give it away (Java). Had Sun recognized the market shift to valuing software rather than "systems" the company could have transitioned itself and avoided being gobbled up by Oracle – which is sure to close Sun's R&D facility and discontinue hardware sales.
Now we hear that the New York Times company behaved very similarly at almost the same time, putting itself at unnecessary risk that has destroyed huge value for shareholders and cost thousands of jobs. In 1995 NYT was worth between $1.5B and $2B. The Boston Globe recently reported in "What Went Wrong?" that same year the founder of Monster offered to sell a chunk of his new company to the Globe (which is owned by NYT) for $1million. And Monster would start cooperating with the Globe to offer help-wanted ads on-line as well as in the newspaper. At the time, help wanted ads alone was a $100million business at the Globe. For 1% of just one segment of the Globe's revenue – and a far lesser fraction of NYT sales and equity value – the company could have been part of the great migration to the web.
Globe and NYT management said no. And for the rest of the decade advertising growth remained on a tear, driving the value of NYT up to about $6.5 to $7billion by 2000. And even though the recession came in 2001, NYT's value remained in that range until 2004. But then, in 2004, early market shifts started to become pronounced. Like the proverbial snowball rolling downhill, internet usage had become a big market and advertisers were looking for lower cost and more capable options. Advertisers from auto companies to movie studies started moving ad dollars to the web – as did companies advertising for help. The value of NYT started to drop, and hasn't stopped yet. In 5 years more than $6billion of that value has evaporated – leaving the whole of NYT – including not only the Globe but the venerable New York Times worth a mere $700million (see 5year chart here). Value is dropping precipitously as losses mount ("New York Times loss widens; shares fall 16%" was headline on Marketwatch yesterday), and the company leverages its Manhattan real estate to try preserving its now unprofitable Success Formula.
When business was good NYT had the opportunity to Disrupt itself and invest in some White Space to help understand the direction of future markets. Instead, management clung to the old Success Formula and ignored impending market shifts. While the company racked up profits it eschewed investing in new projects, because there were no Disruptions causing it to consider White Space. And now that the market has shifted it very likely is too late to save the company (investor Rupert Murdoch with investments across all media, including the web, is licking his chops for the opportunity to take over these influential journals with which he has long tangled politically. Even if only to watch them decline and remove a thorn in his side.) Because of decisions made in 1995, when business was good, the nails were being driven into the coffin. Management failed to recognize how deadly those decisions were, because they were focused on Defending & Extending the past rather than exploring how markets might change.
The Sun and NYT story emphasize how easy it is to remain Locked-in. Profits during good times – often right at the peak of the business – become an excuse to do more of the same. But what we see over and over is that long-term success requires Disruptions during these best times. Companies that make the transitions don't wait for the crisis. When times are good they invest in new market opportunities, so they can learn what works and how to compete. They Disrupt their old model so they pay attention to market shifts, and invest in White Space where they learn and inform the entire organization about what's coming. Lock-in is very dangerous because it is so easy to ignore. But if you want to survive market shifts you must create an organization that can evolve with new markets. That requires you manage Lock-in by constantly Disrupting and keeping White Space alive.
PS – a note of thanks to reader Tejune Kang for pointing me to the Globe article about Monster. I encourage all readers to forward me your insights to companies Locked-in and at risk, as well as those practicing The Phoenix Principle.
by Adam Hartung | Apr 21, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in, Web/Tech
"With Oracle, Sun avoids becoming another Yahoo," headlines Marketwatch.com today. As talks broke down because IBM was unwilling to up its price for Sun Microsystems, Oracle Systems swept in and made a counter-offer that looks sure to acquire the company. Unlike Yahoo – Sun will now disappear. The shareholders will get about 5% of the value Sun was worth a decade ago at its peak. That's a pretty serious value destruction, in any book. And if you don't think this is bad news for the employees and vendors just wait a year and see how many remain part of Oracle. A sale to IBM would have fared no better for investors, employees or vendors.
It was clear Sun wasn't able to survive several years ago. That's why I wrote about the company in my book Create Marketplace Disruption. Because the company was unwilling to allow any internal Disruptions to its Success Formula and any White Space to exist which might transform the company. In the fast paced world of information products, no company can survive if it isn't willing to build an organization that can identify market shifts and change with them.
I was at a Sun analyst conference in 1995 where Chairman McNealy told the analysts "have you seen the explosive growth over at Cisco System? I ask myself, how did we miss that?" And that's when it was clear Sun was in for big, big trouble. He was admitting then that Sun was so focused on its business, so focused on its core, that there was very little effort being expended on evaluating market shifts – which meant opportunities were being missed and Sun would be in big trouble when its "core" business slowed – as happens to all IT product companies. Sun had built its Success Formula selling hardware. Even though the real value Sun created shifted more and more to the software that drove its hardware, which became more and more generic (and less competitive) every year, Sun wouldn't change its strategy or tactics – which supported its identity as a hardware company – its Success Formula. Even though Sun became a leader in Unix operating systems, extensions for networking and accessing lots of data, as well as the creator and developer of Java for network applications because software was incompatible with the Success Formula, the company could not maintain independent software sales and the company failed.
Sort of like Xerox inventing the GUI (graphical user interface), mouse, local area network to connect a PC to a printer, and the laser printer but never capturing any of the PC, printer or desktop publishing market. Just because Xerox (and Sun) invented a lot of what became future growth markets did not insure success, because the slavish dedication to the old Success Formula (in Xerox's case big copiers) kept the company from moving forward with the marketplace.
Instead, Sun Microsystems kept trying to Defend & Extend its old, original Success Formula to the end. Even after several years struggling to sell hardware, Sun refused to change into the software company it needed to become. To unleash this value, Sun had to be acquired by another software company, Oracle, willing to let the hardware go and keep the software – according to the MercuryNews.com "With Oracle's acquisition of Sun, Larry Ellison's empire grows." Scott McNealy wouldn't Disrupt Sun and use White Space to change Sun, so its value deteriorated until it was a cheap buy for someone who could use the software pieces to greater value in another company.
Compare this with Steve Jobs. When Jobs left Apple in disrepute he founded NeXt to be another hardware company – something like a cross between Apple and Sun. But he found the Unix box business tough sledding. So he changed focus to a top application for high powered workstations – graphics – intending to compete with Silicon Graphics (SGI). But as he learned about the market, he realized he was better off developing application software, and he took over leadership of Pixar. He let NeXt die as he focused on high end graphics software at Pixar, only to learn that people weren't as interesed in buying his software as he thought they would be. So he transitioned Pixar into a movie production company making animated full-length features as well as commercials and short subjects. Mr. Jobs went through 3 Success Formulas getting the business right – using Disruptions and White Space to move from a box company to a software company to a movie studio (that also supplied software to box companies). By focusing on future scenarios, obsessing about competitors and Disrupting his approach he kept pushing into White Space. Instead of letting Lock-in keep him pushing a bad idea until it failed, he let White Space evolve the business into something of high value for the marketplace. As a result, Pixar is a viable competitor today – while SGI and Sun Microsystems have failed within a few months of each other.
It's incredibly easy to Defend & Extend your Success Formula, even after the business starts failing. It's easy to remain Locked-in to the original Success Formula and keep working harder and faster to make it a little better or cheaper. But when markets shift, you will fail if you don't realize that longevity requires you change the Success Formula. Where Unix boxes were once what the market wanted (in high volume), shifts in competitive hardware (PC) and software (Linux) products kept sucking the value out of that original Success Formula.
Sun needed to Disrupt its Lock-ins – attack them – in order to open White Space where it could build value for its software products. Where it could learn to sell them instead of force-bundling them with hardware, or giving them away (like Java.) And this is a lesson all companies need to take to heart. If Sun had made these moves it could have preserved much more of its value – even if acquired by someone else. Or it might have been able to survive as a different kind of company. Instead, Sun has failed costing its investors, employees and vendors billions.
by Adam Hartung | Apr 20, 2009 | Current Affairs, Defend & Extend, Film, General, In the Swamp, Leadership, Lock-in, Television
How do you pick a movie to see – whether at the theatre or at home? The movie studios think you pick movies by what you see on TV ads, according to the Los Angeles Times "Studios struggle to rein in marketing costs."
I remember the old days when my friends and I grabbed a newspaper and shopped the ads looking for a flick to go see. And we were influenced by television ads as well. But, as time went by, we started asking each other, "Is that movie any good, or are all the best parts in the ad?" (Admit it, you've asked that question too.) Then we found out we could get sneak peaks from shows like "Siskel & Ebert at the movies," so one of us would try to watch that and see if we liked the longer scenes. And we didn't ever agree with the critics, but we could listen to hear if they described a movie we would like. Now, not only myself but my sons follow the same routine. Only we go to the internet looking for a YouTube! clip, and for reviews from all kinds of people – not just critics. Mostly when we see a TV ad we hit the mute button.
Everywhere, businesses are still wasting money on old business notions. For movie studios, they keep trying to get people to watch a big budget by advertising the thing. (To death. Until nobody watches the ad any more because they have it memorized. And get angry that the ad keeps showing.) But even the above article admits that studios know this isn't the best way any more. With the internet around, we all listen less to advertisements, and gain access to more real input. From web sites, or Twitter, or friends on Facebook, or colleagues on Linked-in. We watch a lot less TV, and what we watch is more targeted to our interest and available on cable. Or we download our TV from the web using Hulu.com. Yet, the studios are so Locked-in to their outdated Success Formula that they keep spending money on TV ads – even though they know the value isn't there any more.
So why do the studios spend so much on advertising? Because they always have. That's Lock-in. Lacking a better idea, a better plan, a better approach that would really reach out to potential viewers they keep doing what they know how to do, even as they question whether or not they should do it! The industrial era concept was "I spent a fortune making this movie, and distributing it into theatres, so I better not stop now. Keep spending money to advertise it, create awareness, and get people into the theatres." The studios see movie making as an industrial enterprise, where those who spend the most have the greatest chance of winning. Spend a lot to make, spend to distribute, spend to advertise. To industrial era thinkers, all this spending creates entry barriers that defends their business.
And that's why movie studios struggle. It's unclear how well those ideas ever worked for filmmaking – because we all saw our share of blockbuster bombs and remember the "American Graffiti" or "Blair Witch Project" that was cheap and good. But for sure we all know the world has now permanently shifted. Today, small budget movies like "Slum Dog Millionaire" can be made (offshore in that case – but not necessarily) quite well. The pool of new actors, writers, directors, cinematographers and editors keeps growing – driving production quality up and cost down. And distribution can be via DVD – or web download – between low cost and free. A movie doesn't even have to be shown in a theatre for it to be commercially successful any more. And any filmmaker can promote her product on the internet, building a word of mouth driving popularity and sales.
From filmmaking to recordings to short programs to books, the market has shifted. Things don't have to be big budget to be good. The old status quo police, like Mr. Goldwyn or Mr. Meyer, simply have far less role. Digitization and globalization means that you don't need film for movies – or paper for books. Thus, democratizing the production, as well as sales, of "media" products. Thus the old media companies are struggling (publishers, filmmakers, magazines, newspapers and recording studios) because they no longer have the "entry barriers" they can Defend to allow their old Success Formulas to produce above average returns. And they never will again. The world has changed, and the market has permanently shifted.
Is your business still spending money on things that don't matter? Does your approach to the market, your Success Formula dictate spending on advertising, salespeople, PR, external analysts, paid reviewers or others that really don't make nearly as much difference any more? When will you change your approach? The movie studios are preparing to spend hundreds of millions of dollars on summer ad promotions for new movies. Is this necessary, given that the downturn has increased the demand for escapist entertainment? Is your business doing the same?
If you want to cut your cost, you shouldn't cut 5% or 10% across the board. That won't help your Success Formula meet market needs better. Instead, you need to understand market shifts and cut 90% from things that no longer matter – or that have diminishing value. Quit doing the things you do because you always did them, and make sure you do the things you need to do. You want to be the next "Slumdog Millionaire" not the next "Ishtar." You want to be Apple, not Motorola. You want to be Google, not Tribune Corporation. Spend money on what pays off, not what you've always spent it on.
by Adam Hartung | Apr 16, 2009 | Current Affairs, Defend & Extend, Food and Drink, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
All of America may have learned the jingle "America spells cheese K*R*A*F*T", but that doesn't mean Kraft is a good investment. When the recession first began, investors were excited about buying companies that had well known brands – especially in food. The idea was that everyone has to eat, so food companies won't get hammered like an industrial company (think Caterpillar or General Electric) when the economy shrinks. Second, people will eat out less and in more so food might actually see an uptick in growth. Third, people will want well known brands because it well help them feel good during the depressing downturn. So, Kraft was to be a good, safe investment. After all, even though it's only been spun out of cigarrette company Altria a few months, this thinking was powerful enough for the Dow editors to replace failed AIG with Kraft on the (in)famous Dow Jones Industrial Average.
Too bad things didn't work out that way (see chart here). Although the stock held up through the summer near it's spin-out high at 35, Kraft's value fell out of the proverbial bed since then. Down about 40%. What's worse, as several companies have "bounced back" during the recent stock market rebound Kraft shares have gone nowhere. And now Crain's Chicago Business reports "Analyst downgrades Kraft on volume risk." This UBS analyst has noted that instead of going up, or sideways, sales (and volume) at Kraft have declined. While he might have expected a potential 1% decline, instead he's seeing drops of more like 2.5%. In light of this poor performance, he thinks the best Kraft can do for the next 12 months is a meager improvement – or more likely sideways performance.
Kraft has been in a growth stall for a long time. Since well before spinning out of Altria. The company stopped launching new products years ago. Instead, it has been trying to increase sales with line extensions of its existing products – things like 100 calorie packs of Oreos. There hasn't been a real new product at Kraft since DiGiorno pizza and Boboli crust some 10 years ago. Simultaneously, the company sold some of its high growth businesses, like Altoids, in order to "focus on core brands". All of which meant that while cash flow has been stable, there's been no growth. Turns out folks may be eating at home more, but they aren't paying up for worn-out brands like Velveeta, instead turning to store brands and generics. Shoppers are looking for new things to improve their meals during this recession – but Kraft simply doesn't have any.
Without innovation, Kraft has gone nowhere. For a decade the company has merely Defended & Extended its 1940s business model. It keeps trying to do more of the same, perhaps faster and better. It couldn't do cheaper because of rising commodity prices last year, so it actually raised prices. As a result, customers are quite happy to buy comparable, but cheaper, products setting Kraft up for price wars in almost all its product lines. And there's nothing Kraft can point to as a new product which will actually grow the top line. Just a hope in more advertising of its old products, doing more of the same.
When Kraft spun out the CEO was replaced in order for Kraft to revitalize its moribund organization. Good move. The previous CEO was so in love with D&E management that he bragged about his "strategy" of spending more on Velveeta and older brands – in other words he was wedded to the outdated Success Formula and had no plans to change it.
So he was replaced by a competent executive named Irene Rosenfeld. This was touted as a big move, by bringing in the Chairman of PepsiCo's Frito-Lay Division. PepsiCo is noted for its fairly Disruptive environment, instituted during the reign of Chairman Andrall Pearson who aggressively moved people around (and out) in his effort to "muscle build" the organization. But reality was that Dr. Rosenfeld had worked at Kraft for many years before going to PepsiCo, and was returning (according to her bio on the Kraft web site). And her leadership has been, well, more of the same. There have been no Disruptions at Kraft – no White Space – and no new products. So the growth stall that began during the Altria ownership has continued unabated.
Despite Kraft's lack of performance – and you could say poor performance given that sales and volume are down, as well as profits since she took the top job – Dr. Rosenfeld's salary was increased at the end of March (according to Marketwatch.com "Compensation rose for Kraft Foods' CEO in 2008"). It seems the Board of Directors was concerned that the stock options she was awarded in early February had fallen in value (because the share price dropped dramatically – hurting all investors) so they felt they had to raise her base pay. Since the "at risk" pay didn't pan out, well they felt compelled to make her compensation less risky. Then they invented some excuses to make themselves feel better, like they want the CEO to be paid comparably with other CEOs.
(I guess they don't care about the 20 other senior execs who have seen their base pay frozen. Say, do you suppose I could appeal to my publisher that I want pay like other authors? Like Barack Obama who got almost $3million in royalties last year? Or do you suppose the publisher might tell me if I want that much money I should sell more books – looking at my results to determine how much I should get? I rather like this "comparable pay" idea – sounds sort of like union language for CEO contracts.)
Kraft is going nowhere, and Dr. Rosenfeld is the wrong person in the Chairman/CEO job. Kraft is stalled, and investors as well as employees are suffering. Kraft desperately needs leaders that will Disrupt the organization, refocus it externally on market needs, become obsessive about improving versus competitors in base businesses while identifying fringe competitors changing the market landscape. And above all introduce some White Space where Kraft can innovate new products and services that will get the company growing again! Kraft has enormous resources, but the company is frittering them away Defending & Extending a 60+ year old Success Formula that has no growth left in it. More than ever in Kraft's long history, the company needs to overcome it's Lock-in to innovate – and the Board needs to realize that requires a change in leadership.
by Adam Hartung | Apr 9, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in, Web/Tech
$193billion dollars. An amount that seems only viable for governments to discuss. But that is how much the value of Sun Microsystems declined in less than one decade (see chart here). At the height of its dominance as a supplier to telecom companies in the 1990s Sun was worth over $200billion. Recently IBM made an offer at just under $8billion. But Sun has rejected the IBM bid, which was more than double its recent market value, and Sun is now worth only about 60% of the bid. An amazing loss of value for a company that never paid a dividend. And the failure can be tied to a single problem.
Forbes magazine is having a field day with the leadership at Sun these days. "Sun May Be Pulling a Yahoo!" the magazine exclamed on Monday when Sun said it was turning down the IBM offer. The similarity is that both companies turned down values at above market price, but both probably won't receive offers from anyone else. The difference, however, is that Yahoo! has a chance to compete with Google, and Microsoft would have suffocated those chances. Sun, on the other hand, won't survive and the only way investors will get any value is if Sun agrees to the buyout.
Reinforcing the thinking that Sun won't make it on its own, Forbes today led with "Sun's Six Biggest Mistakes" which decries recent (last 4 years) tactical failings of the company. But in truth, Sun was destined to fail 8 years ago – as I argued clearly in my book Create Marketplace Disruption (buy a copy from my blog or at Amazon.com.) The company never overcame Lock-in to its initial Success Formula, and when its market shifted in 2000 the company went into a nosedive from which no tactical changes could save it.
Scott McNealy was the patriarch of Sun Microsystems. Son of an auto executive, he had a love for "big iron" as he called the large, robust American cars of the 50s, 60s and 70s. And when he started Sun Microsystems he imbued it with an identity for "big iron." Mr. McNealy wasn't interested in creating a software company, he wanted to sell hardware – like the days when computing was all about big mainframe machines. His might be smaller and cheaper than mainframes, but the identity of Sun was clearly tied to selling boxes that were powerful, and expensive.
Everything about the company's development linked to this identity (see the book for details). The company strategy was tied to being a leader in selling hardware systems. First powerful desktop systems but increasingly powerful network servers. Iron that would replace mainframes and extend computing power to challenge supercomputers. All tactics, from R&D to manufacturing and sales tied to this Identity. And because the products were good, and met a market need in the 80s and 90s, this Success Formula flourished and reinforced the Identity.
A lot of new products came out of Sun Microsystems. They were an early leader in RISC chips to drive faster processing. And faster memory schemes and disk array technology. These reinforced the sale of hardware systems. The company also extended the capabilities of Unix software, but of course you could only buy this enhanced system if you bought one of their computers. Sun even invented Java, a major advancement for internet applications. But then they gave away this software because it didn't reinforce the sale of their hardware. Sun felt that if everyone used Java it would generally grow internet ue, which would grow server demand, which would help them sell more server hardware – so don't even bother trying to build a software sales capability. That did not reinforce the Identity, so it wasn't part of the Success Formula. Everything leadership and the company did was focused on its core – Defending and Extending the sales of Unix Workstations and Servers. It's hedgehog concept was to be the world's best at this, and it was. Sun intended to Defend & Extend that Identity and its Success Formula at all costs.
But then the market shifted. The telecom companies over-invested in infrastructure, and their demand for Sun hardware fell dramatically. Workstations based on PC technology caught up with Sun hardware for many applications, rendering the Sun workstations overpriced. Makers of PC servers developed advancements making their servers faster, and considerably cheaper, meaning Sun servers weren't required or were overpriced for company applications. Within 2 years, the market had shifted away from needing all those Sun boxes, causing Sun sales and market value to collapse.
Sun made one mistake. It never addressed the potential for a market shift that could obsolete its Success Formula. Sun never challenged its Identity. Sun leaders never developed scenarios that envisioned solutions other than an extended Sun leadership position. They only looked at competitors they met originally (such as DEC and SGI) and when they beat those competitors leadership quit obsessing about new comers, causing them to miss the shift to lower price platforms. Although Scott McNealy was an outrageous sort of character, he created lots of disturbance in Sun without creating any Disruption. People felt the heat of his presence, but there was no tolerance for anyone who would shed light on market changes (especially after Ed Zander was installed as COO). Nobody challenged the Success Formula. Nobody in leadership was allowed to consider Sun doing something different – like selling software profitably. And thus, there was no White Space in Sun. No place to with permission to do new things, and no resources to do anything but promote "big iron."
When any company remains tied to its Identity and its Lock-in failure will eventually happen. Markets shift. Then, all the tactical efforts in the world are insufficient. It takes a new Success Formula – maybe even an entirely new identity. Like Virgin becoming an airline rather than a record company. Or Singer a defense contractor rather than a sewing machine company. Or maybe something as simple as GE becoming something besides a light bulb and electric generation company – getting into locomotives and jet engines. The one big mistake made by Sun can be made by anyone. To remain Locked-in too long and let market shifts destroy your value.
by Adam Hartung | Apr 7, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Innovation, Leadership, Lock-in, Science
"GM, Segway unveil Puma urban vehicle" headlines Marketwatch.com. The Puma is an enlarged Segway that can hold 2 people in a sitting position. Both companies are hoping this promotion will create excitement for the not-yet-released product, thus generating a more positive opinion of both companies and establish early demand. Unfortunately, the product isn't anything at all like the iPod and the comparison is way off the mark.
The iPod when released with the iTunes was a disruptive innovation which allowed customers to completely change how they acquired, maintained and managed their access to music. Instead of purchasing entire CDs, people could acquire one song at a time. You no longer needed special media readers, because the tunes could be heard on any MP3 device. And your access was immediate, from the download, without going to a store or waiting for physical delivery. People that had not been music collectors could become collectors far cheaper, and acquire only exactly what they wanted, and listen to the music in their own designed order, or choose random delivery. The source of music changed, the acquisition process changed, the collection management changed, the storage of a collection changed – it changed just about everything about how you acquired and interacted with music. It was not a sustaining innovation, it was disruptive, and it commercialized a movement which had already achieved high interest via Napster. The iPod/iTunes business put Apple into the lead in an industry long dominated by other companies (such as Sony) by bringing in new users and building a loyal following.
Unfortunately, increasing the size of a product that has not yet demonstrated customer efficacy, economic viability or developed a strong following and trying to sell it through an existing distribution system that has long been decried as uneconomic and displeasing to customers is not an iPod experience. And that is what this GM/Segway announcement is trying to do.
Despite all the publicity when it was first announced, the Segway has not developed a strong following. After 7 years of intense marketing, and lots of looks, Segway has sold only 60,000 units globally – a fraction of competitive product such as bicycles, motorized scooters, motorcycles and mass transit. Segway has not "jumped into the lead" in any segment of transportation. It has yet to develop a single dominant application, or a loyal group of followers. The product achieves a smattering of sales, but the vast majority of observers simply say "why?" and comment on the high price. Segway has never come close to achieving the goals of its inventor or its investors.
This product announcement gives us more of the same from Segway. It's the same product, just bigger. We are given precious little information about why someone would own one, other than it supposedly travels 35 miles on $.35 of electricity. But how fast it goes, how long to recharge, how comfortable the ride, whether it can carry anything with you, how it behaves in foul weather, why you should choose it over a Nano from Tata or another small car, or a motorscooter or motorcycle — these are all open items not addressed.
And worse, the product isn't being launched in White Space to answer these questions and build a market. Instead, the announcement says it will be sold through GM dealers. This simply ignores answering why any GM dealer would ever want to sell the thing – given its likely price point, margin, use – why would a dealer want to sell Puma/Segways instead of more expensive, capable and higher margin cars?
Great White Space projects are created by looking into the future and identifying scenarios where this project – its use – can be a BIG winner that will attract large volumes of customers. Second, it addresses competitive lock-ins and creates advantages that don't currently exist and otherwise would not exist. Thirdly, it Disrupts the marketplace as a game changer by bringing in new users that otherwise are out of the market. And fourth it has permission to try anything and everything in the market to create a new Success Formula to which the company can migrate for rapid growth.
This project does none of that. It's use is as unclear as the original Segway, and the scenario in which this would ever be anything other than a novelty for perfect weather inner-city upscale locations is totally unclear. This product captures all the current Lock-ins of the companies involved – trying to Defend & Extend one's technology base and the other's distribution system – rather than build anything new. The product appears simply to be inferior in almost all regards to competitive products, with no description of why it is a game changer to other forms of transportation. And the project is starting with most important decisions pre-announced – rather than permission to try new things. And there is absolutely no statement of how this project will be resourced or funded – by two companies that are both in terrible financial shape.
The iPod and iTunes are brands that turned around Apple. They are role models for how to use Disruptive innovation to resurrect a troubled company. It's really unfortunate to see such wonderful brand names abused by two poorly performing companies without a clue of how to manage innovation. The biggest value of this announcement is it shows just how poorly managed Segway has been – given that it's partnering with a company that is destined to be the biggest bankruptcy ever in history, and known for its inability to understand customer needs and respond effectively.
