by Adam Hartung | Nov 3, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
Circuit City (see chart here) has announced it will close another 155 stores (see article here). Here, right before the big holiday buying season, Circuit City is contracting drastically. The company is almost out of cash, and is running into problems obtaining inventory. And with the likely demise of the company soon, it's unclear how many customers will buy from Circuit City when they can't take back items that break after the retailer is gone.
What makes this story somewhat remarkable is that Circuit City was one of the 11 companies Jim Collins profiled in "Good to Great." Not only was it one of what were considered the best 11 corporate performers in the world – it's turnaround to greatness score was the absolute highest of all the companies profiled, more than twice as high as the next best performer, and more than 3 times higher than the average "Good to Great" company. Jim is considered a management guru, who receives around $100,000 every time he gives a speech to corporate clients. "Good to Great" has been considered a corporate bible by many CEOs and other executives who have taken the stories from Mr. Collins to heart and decided his approach is the best way to great success. So to have Circuit City severely falter, and most likely fail, after only a handful of years since Mr. Collins published his book is an event worth spending some time discussing.
Despite Mr. Collins' great wealth accumulation and speaking success, he is not without detractors. Many academics have questioned the validity of his research. And in "The Halo Effect" professor Rosenzweig of Switzerland's top business school casts Mr. Collins as a fraud. Unfortunately for Mr. Collins, a review of the performance of his 11 "Great" companies demonstrates their performance since publishing the book is – at best – average. When one fails, perhaps it's worth spending some time reconsidering Mr. Collins' recommendations.
What appears true is that companies Mr. Collins likes end up in growth markets. Then, they pursue very targeted strategies which Mr. Collins recommends you not alter much nor even challenge. Mr. Collins ascribes business success in these companies, as he does in his first book about start-ups that get big ("Built to Last"), largely to dogged determination and sacrifice. He proselityzes that success is the result of hard work, dedication, and focus. And, from all appearances, once a company is into the Rapids of Growth, such actions to reinforce the Success Formula are helpful for the early leader to grow. For those who turnaround, much of their success can be ascribed to getting into a growth market and then simply doing what got them there.
But the problem with Mr. Collins' "Great" companies occurs when they lose their growth. In most cases, exactly as it happened with Circuit City, competitors figure out the Success Formula and they copy it. Additionally, lacking the significant Success Formula Lock-ins (behavioral and structural) which Mr. Collins loves and become part of the "Great" companies, new competitors more quickly implement new ways of competing which the "Great"companies ignore. In Circuit City's case, this was obvious in spades as Circuit City ignored on-line competitors which have lower cost, faster inventory turns, wider selection and lower price than traditional brick-and-mortar stores.
As a result, even Collins's "Great" companies end up falling out of the Rapids. Quickly they move into the back half of the life cycle, mired in the Swamp. Without the current of growth, which pushed them in the Rapids toward profitability, they are consumed fighting competitors. But, doing "more, better, faster, cheaper" of what they've always done simply does not make them more profitable. Competitors create market shifts which require changes in the Success Formula to continue thriving. But, with "everyone on the bus" (a favorite phrase of Mr. Collins) no one knows how to do anything new, and there's no place to try anything new. Quickly, results continue faltering and the company is sucked into the Whirlpool of failure – a prediction being made by Marketwatch.com when labeling today's Circuit City article "Circuit City Circling the Drain." Of course, it's hard to argue with Marketwatch's editors when the company value has declined from over 30 dallars per share to 30 cents per share in about 2 years!
Phoenix companies avoid this sort of fall by overcoming their Lock-ins. Something Mr. Collins never discusses. Yes, these Lock-ins help them grow during the Rapids. But all markets eventually shift. The Rapids disappear due to competitive changes. To succeed long-term companies have to Disrupt their Success Formulas by attacking Lock-in BEFORE they find themselves in the Whirlpool. And they implement White Space where they can test and develop a new Success Formula toward which the company can migrate for long-term success. Winning long-term requires more than a single turnaround into a growth market and then slavish willingness to do only one thing. Instead, it requires figuring out likely market changes with extensive scenario planning, being obsessive about competitors in order to identify new competitive changes. And then Disrupting and using White Space to constantly be reborn.
by Adam Hartung | Oct 30, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
The business press, whether print or on-line, is full of stories about lay-offs. Motorola (chart here) to cut another 3,000 jobs in its flailing handset business (article here). American Express (chart here) to cut 7,000 jobs (article here). Over the last few weeks, other announcements included 3,200 job cuts at Goldman Sachs (chart here), 5,000 at Whirlpool (chart here) and 1,000 at Yahoo! (chart here).
Given the regularity with which leaders have implemented layoffs since the 1980s, investors have come to expect these actions. Many see it as the necessary action of tough managers making sure their costs don't unnecessarily balloon. And political officials, as well as investors and employees, have started thinking that layoffs don't necessarily have much negative long-term meaning. People assume these are just short-term actions to save a quarterly P&L by a highly bonused CEO. The jobs will eventually come back.
Guess again.
Most layoffs indicate a serious problem with the company. Long gone are the days when layoffs meant people went home for a major plant retooling. Now, layoffs are a permanent end of the job. For the employer and the employee. Layoffs indicate the company is facing a market problem for which it has no fix. Without a fix, management is laying off people because the revenues are not intended to come back. Thus, the company is sliding into the Swamp – or possibly the Whirlpool – from which it is unlikely to ever again be a good place to work, a good place to supply as a vendor or a good place to invest for higher future cash flow. Layoffs are one of the clearest indicators of a company implementing Defend & Extend Management attempting to protect an outdated Success Formula. Future actions are likely to be asset sales, outsourcing functions, reduced marketing, advertising & R&D, changes in accounting to accelerate write-offs in hopes of boosting future profits — and overall weak performance.
Layoffs are closely connected with growth stalls. Growth stalls happen when year over year there are 2 successive quarters of lower revenues and/or profits, or 2 consecutive declines in revenues and/or profits. And, as I detail in my book, when this happens, 55% of companies will have future growth of -2% or worse. 38% will have no growth, bouncing between -2% and +2%. Only 7% will ever again consistently grow at 2% or more. That's right, only 7%.
When you hear about these layoffs, don't be fooled. These aren't clever managers with a keen eye for how to keep companies growing. Layoffs are the clearest indicator of a company in trouble. It's growth is stalled, and management has no plan to regain that growth. So it is retrenching. And when retrenching, it will consume its cash in poorly designed programs to Defend & Extend its outdated Success Formula leaving nothing for investors, employees or suppliers. The world becomes an ugly place for people working in companies unable to sustain growth. People try to find foxholes, and stay near them, to avoid being the next laid off as conditions continue deteriorating. Just look at what's happened to employment and cash flow at GM, Ford and Chrysler the last 40 years. Ever since Japanese competitors stalled their growth, "there's been no joy in Mudville."
Given how many companies are now pushing layoffs, and how many more are projecting them, this has to be very, very concerning for Americans. Clearly, many financial institutions, manufacturers, IT services and technology companies appear unlikely to survive. Meanwhile, we see wave after wave of new employees being brought on in companies located in China, India, South America and Eastern Europe. For every job lost in Detroit, Tata Motors is adding 2 in India. For every technologist out of work in silicon valley, Lenovo adds 2 in China. For every IT services person laid off at HP's EDS subsidiary, Infosys adds 2 in Bangalore. It's no wonder these companies don't regain growth, they are losing to competitors who are more effective at meeting customer needs. There really is no evidence these companies will start growing again – as long as they use layoffs and other D&E (Defend & Extend) actions to try propping up an old Success Formula.
Sure, times are tough. But why die a long, lingering death? Instead of layoffs, why not put these people to work in White Space projects designed to turn around the organization? Instead of trying to save their way to prosperity – an oxymoron – why not take action? In most of these companies, lack of scenario planning and competitor focus leaves them unprepared to rapidly adjust to these market changes. But worse, Lock-in and an unwillingness to Disrupt means management simply finds it easier to lay off people than even try doing new things. And that is unfortunate, because the historical record tells us that these companies will inevitably find themselves minimized in the market – and eventually gone. Just think about Polaroid, Montgomery Wards, Brach's Candy company, DEC, Wang, Lanier, Allegheny Coal, Bear Sterns and Lehman Brothers.
by Adam Hartung | Oct 28, 2008 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lifecycle, Lock-in
Wal-Mart (see chart here) has not been doing badly the last couple of quarters. Of course, it hasn't done great either. And if we look back the last 8 years – well there's not been much to get excited about. Wal-Mart Locked-in on its low price Success Formula 40 years ago and hasn't swayed since. Today as incomes go down and fear is huge about jobs and investments people are looking for low prices so they are returning to Wal-Mart. But those sales aren't coming easily, because Target, Kohls and other retailers are battling to get recognized for value while simultaneously offering benefits consumers demonstrated they enjoyed before economy went kaput. It's not at all clear that the small uptick in sales at Wal-Mart is anything more than a short-term blip in a very flat environment for Wal-Mart.
It's unclear that there's much growth. This week Wal-Mart admitted it was finding fewer opportunities to open new stores as saturation of its low-price approach appears imminent in the USA (read article here). Instead of opening new stores capital expenditures are going to decline by 1/3, and dollars are being shifted to store remodeling rather than new store opening. This implies a far more defensive tactic set, reacting to inroads made by competitors, rather than an understanding of how to regain the growth Wal-Mart had in the previous decades.
So now Wal-Mart is saying it will turn investments toward emerging markets (read article here). Sure. Wal-Mart wrote off huge investments and exited failed efforts in Germany and France, It's efforts to expand in Canada and the U.K. have been marginal. In Japan it only avoided a huge write-off and failure by making an acquisition. And its China project has gone nowhere, despite much opening hoopla 5 years ago. So why should we expect them to do better with a second attack into China, possibly going into India and Mexico?
The Wal-Mart Success Formula worked in the USA and drove incredible growth, but it is unclear that shoppers in developing countries get much benefit from a strategy largely based on buying goods from low-cost underdeveloped countries and importing them to the USA for mass-market buyers in low-cost penny-pinching store environments. What's the benefit to Wal-Mart's approach in Mexico or India? In India and China customers must pay high duties on imported goods, and low-cost retail exchanges already exist across the country for domestic products. Additionally, lacking a robust infrastructure (meaning a big car and good roadway to carry home mass quantities of stuff bought in large containers) it's unclear that Wal-Mart's approach is even viable. If you have to carry goods home on a bicycle, why would you want to go to a big central store? Isn't buying regularly what you need better? Wal-Mart has made no case that it's Success Formula is at all viable outside the USA, and especially in emerging countries.
Compare the Wal-Mart approach to Google (see chart here). In the last year Google has moved beyond mere search into other high-growth businesses such as mobile telephones. And today Google announced it is going to legally offer books and other copyrighted material to customers in some ways unique – but competing with Amazon's e-book (Kindle) business (read article here). Google keeps entering new high-growth markets with new demands from new customers. And in each market Google enters with new products intended to be better than what's out there today.
Wal-Mart keeps trying to find a way to Defend & Extend its old, tired Success Formula. Wal-Mart is huge, but its growth has slowed. Competitors have entered all around it, and every year they are chipping away at Wal-Mart by offering different solutions to customers. The competitors are getting better and better at matching the old Wal-Mart advantages, while offering their own new advantages. And we can see Wal-Mart is now being defensive in its histiorical markets while naive in trying to export its old Success Formula to markets that don't show any need for it. Wal-Mart is mired in the Swamp, struggling to fight off competitors while its growth is disappearing and its returns are under attack. On the other hand, Google keeps throwing itself back into the Rapids of growth in new businesses that offer new revenues and increased profits. And it enters those markets with new solutions that have the opportunity of changing competition. Google doesn't have to have everything work right for it to find growth through its White Space projects and continue expanding its value for customers, suppliers, employees and investors.
by Adam Hartung | Oct 26, 2008 | Defend & Extend, General, Quotes
(Read the following quote in Forbes, October 5, 1998, written by Peter Drucker) “As we advance deeper into the knowledge economy, the basic assumptions underlying much of what is taught and practiced in the name of management are hopelessly out of date… most of our assumptions about business, technology and organization are at least 50 years old. They have outlived their time… Get the assumptions wrong and everything that follows from them is wrong.”
Last week, former Reserve Board Chairman Alan Greenspan admitted to Congress that his assumptions about financial services and the products being offered, including credit default swaps (CDS), were wrong (read article here). As a result, what he thought would happen in the financial markets – from interest rates to equity prices to currency values – turned out to be wrong. Unfortunately, this helped create the opportunity for runaway leverage and the banking meltdown which has affected world trade since early September. When leaders operate with wrong assumptions, the price paid by everyone can be pretty hefty.
The reality is that pretty much all leaders work with assumptions about business that are very country specific. The impact of global knowledge transfer – of worldwide information at a moment’s notice – of labor arbitrate happening in hours – and the immediacy of financing and financial reactions – is still not well understood by leaders trained in an earlier era. Thus leaders under-recognized the speed with which manufacturing jobs could move around the world – as well as the speed with which IT services could move to lower cost markets. Even though the current Federal Reserve Chairman (Dr. Bernanke) is a student of America’s Great Depression, what he doesn’t understand is that Depression happened in an isolated way to the USA. Today, globalization means that problems with U.S. banks becomes a problem globally. For all his studies of history – things in financial services have fundamentally shifted. His assumptions are, well, often wrong.
In November there will be an economic summit. Some are referring to it as the next “Bretton Woods” – a reference to the meeting in upstate New York which determined how foreign currency exchange rates would be set and how banks would interact between countries (read about the summit here). Yet, there are others who say no changes are needed. But let’s get real. Of course we need to rethink how our country-based banking system works in a world where insurance companies and hedge funds often move faster and have more ability to affect markets than traditional banks. In the 1800s banks in the USA issued their own currency – and then states issued their own currency. Eventually this disappeared to federal currency. So, do we now need a global currency? With the change to the Euro in Eurpope the need for individual country currencies took a step toward unnecessary. Should that trend continue? You see, it’s easy to think about the world using old assumptions – like a U.S. dollar as independent of other countries – but does it make sense in a world where products and services are supplied globally and governments (such as India and China notably) now manipulate their currencies to maintain price advantages?
On Friday evening a “guru” on ABC’s Nightline was talking about the wild swings on the New York Stock Exchange and the NASDAQ. He commented “the only way to get hurt on a roller coaster is to get off. So hold onto your equities and keep buying.” Give me a break. A roller coaster is a closed system. Even though it goes up and down, you know where it will end and the result. WE DON’T KNOW THAT ABOUT EQUITIES TODAY. Many, many companies we’ve known for decades could disappear (GM, Ford, Chrysler are prime examples). Just like Lehman Brothers disappeared, and AIG practically so. If you were an investor in common or preferred equities of Freddie Mac or Fannie Mae, your “roller coaster ride” did not have a happy ending – and you would obviously have been a whole lot smarter to have jumped off. You may get bruised, but that would have been better than the disaster that loomed.
It is critically important to check assumptions. This is not easy. We don’t think about assumptions, they just are part of how we operate. That’s why now, more than ever, it is incredibly important to do scenario planning which will challenge assumptions by opening our eyes to what really might happen. Because you can never assume tomorrow will be like yesterday – not in business. To survive you have to constantly be planning for a future that can be very, very different. Doing more of what you always did will not produce the same results in a shifting world. Planning for future shifts is one of the most important things managers can do.
by Adam Hartung | Oct 15, 2008 | Defend & Extend, In the Swamp, Leadership, Lock-in
Are people risk averse? Or do they like risk? Would you believe those questions don’t matter, when trying to understand risk?
Today we’re being told that the bankers who ran some of the world’s largest investment banks were taking ridiculous risks – and the decisions to take on those risks is now undoing financial services globally. Were these bankers all gunslingers – willing to take crazy risks? Would you believe me if I said they didn’t think they were taking much, if any risk?
Risk is a relative term. What’s "risky" is really a matter of perception. Let’s say I drive to work on a local highway every day. The traffic cruises at 65 miles per hour, but since I’m always late I drive 75. On a particularly late day I drive 80. Because I usually drive 75, the relative risk seems small. But the reality is that at 80 the chances of a minor mishap becoming a disaster are far greater. Once you are comfortable driving 75, the perception of greater risk is only the marginal difference between 75 and 80 – so it seems small. Over time, if I choose to keep driving a bit faster, within short order I’ll be driving 100 miles per hour. This may seem crazy – yet there are many drivers on Germany’s high-speed autobahn highways that drive this fast – and faster!! To those of us who poke along every day at 65 miles per hour these speed demons of the autobahn seem to be taking a crazy risk – but to them, working up to those high speeds gradually over time, the relative risk now seems quite small.
And this is what happens in our business. When a bank takes a deposit, it then can loan money. But should it lend dollar for dollar – deposit compared to loans? While nonbankers might say "don’t lend more than you borrowed" that seems ridiculously conservative to bankers. Bankers say that because most loans are repaid, they only need enough deposits to cover the normal ebb-and-flow of the cash demands on the institution. So they feel comfortable loaning out 2 or 3 dollars for every dollar of deposit. Of course, the more loans the banker makes and the rarer defaults occur, the more likely the banker will start to give loans that are 4 times the amount on deposit. Where does this stop? We know with Lehman Brothers the leverage reached 30 to 1 (read about financial institution leverage and regulatory recommendations here)!!! It didn’t take many defaults for Lehman to suddenly find itself unable to meet its obligations and disappear.
The bankers at Lehman Brothers learned not to fear what they knew. Not only that, but they hired immensely smart mathematicians and physicists to try calculating the amount of risk they were taking on with their leverage and their obligations. Using mathematics far beyond the grasp of all but a fraction of the population, they asked scholars to try calculating the risk in the loan packages they sold, and the credit default swaps. They continuously studied the risk. The more they studied the easier it was to take on more risk. The longer they kept doing what they had always done, and the more knowledgable they became, the less risky they perceived their behavior. Of course, as we now know, Lehman Brothers took on far more risk than the company, its investors and its regulators could afford.
The other side of this coin is how we perceive things we don’t know. Almost none of the buggy manufacturers in the early 1900’s transitioned to making automobiles. To them automobile manufacturing involved engines, and that was too risky. By the time buggy manufacturers felt they had to change, it was too late. When we are brought new opportunities to evaluate we don’t evaluate the real merits of upside and downside. Instead, we first question if the opportunity falls into our realm of expertise. If not, we deem it too risky. Because we don’t know much about it, we choose to think it’s too risky for us. Yet, the risk might be quite low.
Take for example buying Microsoft stock in the early 1990s as PC sales skyrocketed and Microsoft already had a monopoly on operating systems – and was building its monopoly in office software. The risk was quite small, since all Microsoft needed was for PCs (PCs made by anybody – it didn’t matter) to continue selling. That was not a high-risk bet. Yet most investors shied away because they didn’t understand tech stocks – including Warren Buffet who famously bought a mere 100 shares, declaring he didn’t understand the business! (Just think, if Warren Buffet had bought a large chunk of early Microsoft, he’d be as rich as himself plus Bill Gates today – now that’s a mind-boggler.)
When markets shift, relative risk can be deadly. If we continue to perceive things we know as low risk, we will "double down" our bets on customers, market segments, technologies and products that have declining value. If we think that doing what we always did will produce old returns we will do what’s comfortable, even when the market is moving headlong toward new solutions. Look at U.S. manufacturers of televisions (remember Quasar, Magnavox and Philco?). Experts in vacuum tubes and other analog technologies, plus the manufacturing expertise for those components, they were all late seeing the shift to solid-state electronics and all ended up out of business. All that expertise in the old technology simpy wasn’t worth much when the markets shifted – even though the new technology seemed risky while the old technology seemed familiar, and reliable.
When markets shift, the greatest risk is the "do what we know" scenario. Although it’s the easiest to approve, and the most comfortable – especially at times of rapid, dynamic change – it is the one scenario guaranteed to have worsening results. There’s an old myth that the last buggy whip manufacturer will make huge profits. Guess again. As buggy whip demand declines everyone loses money until most are gone. But there isn’t just one remaining player. The few who remain constantly see prices beaten down by the excess capacity of buggy whip designers, manufacturers and parts suppliers ready to jump in and compete on a moment’s notice. Trying to be last survivor just leaves you bloody, beaten up and without resources to even feed yourself.
It’s not worth spending a lot of time trying to evaluate risk. Because rarely (maybe never) in business is there such a thing as "absolute risk" you can measure. Risk is relative. What might appear risky could well be merely a perception driven by what you don’t know. What might appear low risk could be incredibly risky due to market shifts. So the real question is, are you Disrupting yourself so you are investigating all the possibilities – good and bad? And are you keeping White Space alive so you are experimenting, testing new ideas? New products, new technologies, new markets, new distribution systems, new components, new pricing formulas, new business models —- new Success Formulas? The only way to avoid arguments of risk is to get out there and do it – so you can get a good handle on what works, and what doesn’t, in order to make decisions based on opportunity assessment rather than Lock-in.
by Adam Hartung | Oct 10, 2008 | Defend & Extend, General, Leadership, Lifecycle, Openness
We talk a lot about evolving markets. When we use that phrase, evolving, we think of gradual change. In reality, evolutionary change is anything but gradual.
People think of change as happening along the blue line to the left. A little change every year. But what really happens is like the red line. Things go along with not much change for a very long time, then there’s a dramatic change, and then an entirely new "normal" takes hold. This big change is what’s called a "punctuated equilibrium."
What we’ve recently seen in the financial services industry is a punctuated equilibrium. For years the banks went along with only minor change. They kept slowly enhancing the products and services, a little bit each year. Regulations changed, but only slightly, year to year. Then suddenly there’s a big change. Something barely understood by the vast majority of people, credit default swaps tied to subprime mortgage backed securities, became the item that sent the industry careening off its old rails. That’s because the underlying competitive factors have been changing for years, but the industry did not react to those underlying factors. Large players continued as if the industry would behave as it had since 1940. Now, suddently, the fact that everything from asset accumulation to liability management and regulation will change – and change rapidly.
When punctuated equilibrium happens, the old rules no longer apply. The assumptions which underpinned the old economics, and norms for competition, become irrelevant. Competition changes how returns will be created and divvied up. Eventually a new normal comes about – and it is always tied to the environment which spawned the big change. The winners are those who compete best in the new environment – irrespective of their competitive position in the old environment. The one thing which is certain is that following the old assumptions is certain to get you into trouble.
I’ve been surprised to listen to "financial experts" on ABC and CNBC advising investors since this financial services punctuated equilibrium hit. Consistently, the advice has been "don’t sell. Wait. Markets always come back. You only have a paper loss now, if you sell it becomes a real loss. Just wait. In fact, keep buying." And I’m struck as to how tied this advice is to the old equilibrium. Since the 1940s, it’s been a good thing to simply ride out a downturn. But folks, we ain’t ever seen anything like this before!! This isn’t even the Great Depression all over again. This is an entirely different set of environmental changes.
In reality, the best thing to have done upon recognizing this change would be to sell your equities. The marketplace is saying that global competition is changing competition. How money will be obtained, and how it will be doled out, is changing. Old winners are very likely to not be new winners. Competitive challenges to countries, as well as industries and companies, means that fortunes are shifting dramatically. No longer can you consider GM a bellweather for auto stocks – you must consider everyone from Toyota to Tata Motors (today the total equity value of Ford plus GM is 1/10th the value of Toyota). No longer can you assume that real estate values in North America will go up. No longer can you assume that China will buy all the U.S. revolving debt. No longer can you assume that America will be the importer of world goods. How this economic change will shake out – who will be the winners – is unclear. And as a result the Dow Jones Industrial Average has dropped 40% in the last year.
To all those television experts, I would say they missed the obvious. How can it be smart to have held onto equities if the value has dropped 40%? Call it a paper loss versus a real loss – but the reality is that the value is down 40%! To get back to the original value – to get your money back with no gain at all – will take a return of 5% per year (higher than you could have received on a guaranteed investment for the last 8 years) for over 10 years! That’s right, at 5% to get your money back will take 10 years!! Obviously, you would have been smarter to SELL. And every night this week, as the market fell further, these gurus kept saying "hold onto your investments. It’s too late to sell. Just wait." Give me a break, if the market is dropping day after day, how is it smart to watch your value just go down day after day! You should quote Will Rogers and say to these investment gurus "it’s not the return on my money I’m worried about, it’s the return of my money"!!
Or read what my favorite economist, Mr. Rosenberg of Merrill Lynch wrote today "There is no indication…that the deterioration in the fundamentals is abating…all the invormation at hand suggests that the risk of being underinvested at the bottom is lower than the risk of being overexposed to equities….in other words, the risk of geing out of the market right now is still substantially less than the risk of continuing to overweight stocks…what matters now is to protect your investments and preserve your capital." (read article here)
The world is full of conventional wisdom. Conventional wisdom is based on the future being like the past. But when punctuated equilibrium happens, the future isn’t like the past. And conventional wisdom is, well, worthless. What is valuable is searching out the new future, and learning how to compete anew. Right now it’s worth taking the time to focus on future competitors and figure out how you can take advantage of serious change to better your position. You can come out on top if you head for the future – but not if you plan for a return to the past.
by Adam Hartung | Oct 9, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
The news is really bad in the auto business. For the first time since 1993 the number of cars sold in the USA in a month has declined to below one million. Sales are down over 25% from the previous year. And sales are predicted to decline considerably more in 2009. The value of General Motors (chart here) has declined to what it was in 1950 – when the Dow Jones Industrial Average was about 269 (GM is a component of the DJIA). (Read article here.) In the 1960s, when GM was king of the industrial companies, a popular phrase was "As goes GM, so goes America." This was based on the notion that GM was a microcosm of the American industrial economy. Is this still true – does GM portend the future of America?
A lot has changed in the last 40 years. Most importantly, the globe is no longer dominated by an industrial economy. Fewer and fewer people are employed in industrial production. We see it all around us as we realize that there are more people writing computer code than making computers. We’ve shifted to an information economy. Companies that ignored this shift, like GM, without finding opportunities to get into the growth economy are now suffering. GM started down the new road once, in the 1980s, by purchasing EDS and Hughes electronics. But later GM leadership sold those businesses in order to "focus" on the auto business. So now it’s only natural to recognize that the most industrial of the industrial companies are at the greatest risk of failure. No longer is GM a microcosm of any economy – including America. As GM goes so goes GM – but that doesn’t say anything about the future of America.
Some companies have shifted. They find new opportunities for growth. Today, wind energy is getting a big lift due to higher costs for petroleum fuels and increasing restrictions on greenhouse gases from using fossil fuels. Wind farms already exist offshore European countries, producing over 1,100 megawatts of power. Now such farms are being built not only on the great prairies of Texas and the American plains, but off the eastern U.S. coastline (read article here.) While there isn’t much interest for investing in auto manufacturing, there is lots of interest for investing in these wind farms to produce electricity – especially in high-cost electricity locations along the eastern seaboard.
And in the middle of this market we find – General Electric (see chart here). GE is the only U.S. company that makes wind turbines, and is a leader in promoting the new source of power. While many people have fixated on GE Financial and its woes, they have ignored the fact that GE is an American leader in many markets seeing rapid growth globally – such as wind power, water production, health care equipment and municipal infrastructure development. These markets are benefitting from the ecomomic boom in China, India and other developing countries, as well as emerging growth in the USA.
Any country’s economy can continue growing if it develops Phoenix companies that keep their eyes on the future and create White Space projects to keep them moving toward growth. These companies don’t fall into the trap of being "focused" on a single business, and dependent upon growth within that historically defined market. They constantly look for places to grow, regardless of what the company has previously done, and develop opportunities to learn in those new markets so they can create a new Success Formula maintaining growth. As long as America has companies that keep repositioning themselves for growth – such as GE, IBM, Cisco Systems, Apple, Google, Genentech, Johnson & Johnson, Baxter, etc. – America can have a great future.
by Adam Hartung | Oct 8, 2008 | Defend & Extend, General, Leadership, Lifecycle
Today Walgreen’s (see chart here) announced it was dropping its plan to purchase Long’s Drugs (see chart here). (Read article here.) This means a lower offer to buy Long’s from CVS (see chart here) now comes to the forefront. Yet, some of Long’s big shareholders are balking that the CVS bid is too low. And all this amid the most dynamic set of economic circumstances since the 1930s. So, who’s right?
As you might expect, it all depends on your scenario about the future. Walgreen’s has seen it’s equity value fall 50% in the last 2 years. Pretty amazing given that the "core" business is considered highly resistant sales of necessary drug items – after all regardless the economy people get sick and they need medicine. But the reality is that Walgreen’s built its reputation on its Success Formula the last decade of being able to open a new store every 20 hours or so. That’s an easy to understand Success Formula, but it has the obvious downside of identifying the weakness of saturation. To maintain growth, Walgreen’s requires opening more and more stores. But there are markets (like the hometown Chicago area) where stores are getting almost every block! People started wondering if Walgreen’s could keep growing once it had to drive more revenue out of existing stores – rather than just opening new ones.
But now real estate is falling in value. And we all know debt is getting harder and more expensive to obtain. It’s going to be harder and harder to borrow money to buy land and put up buildings. We’re also hearing that pension payments are going to be cut, due to lower stock valuations, and money for health care could be harder to come by. Looking forward, Walgreen’s decided it was smarter to focus on its existing stores than taking on a slug of new debt and a bunch of new stores. Especially given that many of these new stores (at Long’s) would be redundant to existing Walgreen’s in California — and who’s going to buy the land and buildings or leases for those stores if the economy going forward is as bad as being predicted? Sears (see chart here) buyer Ed Lampert was supposed to make a fortune selling all those Sears buildings – and that hasn’t exactly worked out (to put it mildly).
You have to hand it to a leadership team willing to change course. The good news is that for the last several years Walgreen’s hasn’t just opened new stores. The company has experimented with all kinds of new sales initiatives – from printing photos to refilling ink cartridges to selling groceries and even clothing. Unfortunately, many of those efforts took a back seat to new store openings. Walgreen’s didn’t see them as Disruptive growth opportunities, and they weren’t given White Space with permission to do whatever was necessary to succeed, nor the dedicated resources to really develop an alternative Success Formula. So they were just experiments with minimal impact. But now, for Walgreen’s to keep growing, it will have to do some Disrupting and put those projects front and center. The company will have to put some serious energy into learning if it can bring out its own high-end cosmetics line (aborted), or it’s own designer clothing (aborted) or capture decent share in selected office supplies versus Staples (aborted).
It’s hard for a Locked-in organization to change course. The momentum to keep doing what was always done is enormous. For Walgreen’s it must have appeared oh-so-tempting to buy Long’s. "Damn the Torpedos, full speed ahead" is such an easy cry for the company skipper to make. But here it really appears that some good scenario planning has kept the company from running headlong into a deal that could bankrupt the business if things do go southward economically (as it appears).
But to regain its previous success, Walgreen’s now has to change its Success Formula. And that requires more than walking away from a deal. It requires implementing a Disruption and getting serious about White Space to figure out what will make Walgreen’s the super-retailer of 2020. The company made a good move today, and now we’ll have to see if they can follow through.
Meanwhile, if you own Long’s Drug you should sell as fast as possible. The company value has increased 4x in the last 4 years – with a huge pop based on the acquisition discussions. And the company has no plan for how to grow enough to maintain the recent value. If CVS is willing to purchase Long’s, sell to them. What we can be sure of is that the saturation of drug stores has already begun, and any business that has too many assets, and too much debt, is not a good place to be invested. Better to have the cash.
by Adam Hartung | Sep 22, 2008 | Defend & Extend, Disruptions, Ethics, General, In the Whirlpool, Leadership, Lock-in
By now, everyone knows the story. After all the cost to take over Freddie Mac and Fannie Mae, plus the guarantees given to J.P. Morgan Chase for their acquisition of Bear Sterns, and the cost to keep AIG alive – in the range of $300million to $600million – the Treasury secretary now says the U.S. taxpayers need to spend at least (it could be more – even more than 2x this amount) $700billion to purchase the bad loans sitting on the books of banks, investment firms, insurance companies and hedge funds.
So what does the taxpayer get for this? So far, all the taxpayer is told is "it’ll stave off an even worse crisis." I’m reminded of the words attributed to Illinois Senator Everett Dirkson "a billion here and a billion there and pretty soon it adds up to real money." This is a lollapalooza of a bunch of money – and yet no one seems interested in saying what the taxpayer gets. The proposal is pinned on "things will be worse if you don’t", without much talk about how things will ever get better. There’s no talk about how this will create more jobs, create rising incomes, or improve asset values. Just "it can get a lot worse."
So, put yourself in the role of CEO. If someone came into your office saying "I think we made a whopper of a mistake, and you need to agree to pony up something like $1 to $1.3trillion dollars to bail us out." After you get back up, what would you ask? How about, "what’s this for?" To which you hear "Well, it seems we simply made a bunch of bad investments, and now we have to buy them all back." Nothing about how your business will be better for having done it.
Now, it might occur to ask, "if I do this, how do I know it won’t happen again?" And that’s the question you really should be asking today. Have you heard before about this problem, and told your previous actions would stop the problem? If yes, wouldn’t you say "hey, I’m a bit tired of running around this tree and getting these recurrent bad news meetings. Seems like every Monday is something of a ‘here’s the newest crisis’ environment. What’s your plan to adjust to the market requirement?" And if the plan is to do more of the same, but now with more resources, done harder, and working smarter you’d be pretty smart to say "if the previous actions didn’t work, why should these work?"
In the end, this $700billion to $1.6trillion isn’t changing anything. It’s just putting the proverbial "finger in the dyke." Only what started out as a few hundred million dollars (the finger in the first hole) has exploded into over $1trillion and the dyke hole isn’t the size of a finger – it’s the Holland Tunnel! Clearly, what was tried hasn’t worked. Yet, this is asking more of the same. So, in the legislation the person who’s been watching and saying "things will be fine" and spending the hundreds of millions has now said "just to make sure this works, I want not only all this money but no oversight on what I might need to spend additionally – and no controls over what actions I might need to take – in order to finally stop the flooding problem." Uh, right. Since everything you’ve done before didn’t work the obvious right answer is to give you more money than I ever imagined, and on top of that give you unbridled permission to do anything else you want to keep trying more of the same to stop the problem.
When do you say "no"? Confronted week after week with crisis after crisis, when do you say "I don’t think this is working?" It’s so easy to go along. It’s so easy to say "this has been the way we’ve always done it. Things haven’t worked so far, so clearly all we need to do is do more of it. Possibly more than any of us ever dreamed imaginable – but surely if we do enough, do more, eventually it will work."
Now, more than ever, we need White Space. The financial markets have shifted. Competition has shifted. The balance of competitiveness has shifted to those who have access to lower cost resources of everything from oil to labor. Those who focus on industrial production can now see that it is dominated by those who have more people, who are equally trained and who work for less. Whether that is the production of shirts, or software code. Trying to prop up a global financial system based on the "full faith and credit of the U.S. government" is difficult when that government is significantly in debt, has lost its position as #1 in manufacturing output, and no longer controls the financing of everything from dams to auto purchases. Trying to "fix" this situation with solutions designed to work in another era, under a different set of circumstances, will not produce better results.
At the very least, when confronted with this kind of situation it is the time for leaders to say "where is the White Space to develop a new solution? If I have $1.3trillion to buy the problem – either by giving up the money or by printing more – and I forego all other expenditures (like health care, or defense against competitors) to put the money here – I deserve to see some money spent on developing a new solution. One that is built upon the new market characteristics." This is not the S&L crisis again, nor is it the failure of a single big bank. We are seeing the results of a market shift which the industry was not prepared for. And the only way to come out successful is to have White Space to develop a new solution.
So far, no one has asked for permission to develop a new solution – nor has anyone even proposed it. No one has even asked for resources to develop a new financial system. All the money is going to attempt propping up the old system – and the more we dig, the deeper we get.
At the very least, for $700billion, we need White Space. We don’t need hedge fund managers who are salivating to buy up beaten down assets. We don’t need regulators trying to roll back the clock. Nor do we need "do nothing" recommendations with "have faith this will all work out in a capitalistic system." We are in the information age – not the industrial age. We are in a global economy – not a U.S.-led international economy. We are facing new competitors, with different advantages, doing very different things. And we need new solutions. Without those, each Monday will continue to feel like the movie "Groundhog Day" as we relive over and again the problems we don’t address by simply throwing money at it. We have to find a way to move beyond "more of the same."
Mr. Paulson is willing to bet the U.S. Treasury on doing more of the same. He’s ready to spend money Americans don’t have (since there is a negative U.S. government budget and huge deficit.) This means either higher taxes, or turning on the printing press and creating inflation. That’s a bet he’s willing to take. Are you? Or would you like to see some options? Some new solutions? Or even some teams that are working on new solutions? If he’s your V.P., your CFO, do you approve his recommendation, or do you ask for something more – some White Space to develop a solution that does more than stave off future crisis. Do you look to the future, and how to win, or do you try to preserve the past and put all your money on the bet that old solutions will work?
by Adam Hartung | Sep 4, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
WalMart (see chart here) has announced recent earnings, and they were better than Wall Street anticipated (read Marketwatch article here). Same store sales were up 3% compared to last year. As a result, the stock is worth today almost what it was worth 5 years ago (yet still more than 10% shy of all time highs from a decade ago.) Here we are in a terrible economy for retailers, with department stores, specialty stores and luxury stores all seeing double digit revenue declines. Yet WalMart comes in with a good quarterly result. Does this show WalMart is back on track to recapture past greatness?
WalMart has done nothing to make itself a better, more competitive company over the last year. It’s just done exactly what it has always done – but with a bit more price chopping than usual in some areas – and expansion of low-margin grocery sales in others. More of the same. For example, in the 30,000 person town of Minocqua, Wisconsin Wal-Mart opened a new store that was 5 times the previous store size and included a Wal-Mart grocery – offering the first competition to local grocers ever in that town. In other words, Wal-Mart kept being Wal-Mart.
Of course what happened was a recession. Certainly a recession in consumer spending. The decade of declining incomes in real terms met with the credit contraction of 2008, as well as declining home and auto values, reducing available cash for consumers. The immediate reaction was to simply buy less stuff – and become price sensitive. The first means people quit buying new diamonds and going to Aeropastale for sweatshirts, and the latter meant they started looking for where they could save dimes – not just dollars – on everything from sweatshirts to green beans. So where would you expect people to turn? Why to the retailer that has always been focused on saving dimes.
But this doesn’t mean Wal-Mart is the company you should invest in. Low-price is not the exclusive domain of Wal-Mart. I recently blogged about Aldi, a company that is even lower priced than Wal-Mart on groceries and is itself in an even bigger growth boom right now. And it’s doing new things (like its first-ever television advertising) to help itself grow. So Wal-Mart isn’t the only game in town for low-price. Competition to be the low-cost retailer will remain constant as other companies search out ways to be even lower cost than Wal-Mart – with strategies such as Aldi’s to carry a limited product line and use less labor (rather than just use cheap labor.)
More importantly, consumers don’t remain focused on price long-term. Recessions are characterized by job losses, hours worked reductions, bonus retractions and other income bashers. But things do move on. People don’t remain in a "recessionary mindset" forever. They change expenditure patterns and household budgets to get back into more comfortable lifestyles. And jobs, hours and bonuses come back. When that happens, the desire to shop WalMart will remain where it is now "only if I have to." Not a lot of high-schoolers want to show up in the sweatshirt everyone knows came from Wal-Mart, nor do many men want to purchase their work slacks at Wal-Mart. Now people feel they have to – it doesn’t mean they want to – nor that they’ll do it long term.
When short-term market shifts happen even a bad Success Formula can look good for a short while. Like the old phrase "even a stopped clock is right twice a day." Wal-Mart is extremely Locked-in to its one-horse strategy. Wal-Mart has not developed a culture which can adapt to the needs of modern consumers. It has not made its merchandizing modern, nor its store layouts, nor has it figured out how to adapt in-store selections to fit local market differences. Wal-Mart is still the company that controls the temperature in every store via thermostats in Fayetteville, Arkansas. The recent quarterly results are good news for the short-term, but do not reflect the out-of-date nature nor Lock-in of Wal-Mart’s Success Formula. By next year Wal-Mart will again be struggling to compete with more fashionable companies like Target, while fighting an even tougher batte on the price side with emerging competitors like Aldi.
If you bought Wal-Mart 5 years ago, you’ve been sitting on a paper loss (with almost no dividend return) for this whole period. Now’s the time to get out.
