by Adam Hartung | Sep 3, 2008 | Defend & Extend, General, In the Swamp, Innovation, Leadership, Openness
Today Coca-Cola (see chart here) announced it was planning to acquire the largest juice company in China (read Marketwatch article here.) At a cost of $2.4 billion Coke is hoping to expand its footprint in the most populous country on earth. Are you excited? Most people aren’t – and there’s no reason to be.
What’s the innovation in this move by Coca-Cola? What are they doing that’s new? Nothing, of course. This is a simple extension of the same soft-drink business Coca-Cola has been in for decades. More of the same. Yes it’s good that they would want to do more business in the very large and growing Chinese market – but this is more Defend & Extend behavior trying to support existing Lock-ins. At first it may sound obviously good, but what’s not discussed is how much local competition Coke will face. Nor how much competition from European and other competitors. Without innovation, this kind of extend tactic will face all the traditional market competition and is unlikely to produce exciting (above-average) results. Just look at how little difference offshore acquisitions and expansion have made to Wal-Mart or GM – because as D&E plays they allow competitors to keep banging away at the company’s declining Success Formula. Just because a company announces it is entering a new market does not mean they will sell more stuff, nor make more money.
We can see that Coke is struggling to innovate when the same announcement says that the company is planning to spend $1billion in a stock buyback this year. This is an admission that without anything innovative to invest in the company is going to use its cash to prop up the stock price (which will benefit the bonus of the top execs.) Coke cannot regain its great growth glory if it’s spending all its money to do more of the same and buy its own stock. That’s the cycle of doing only what the company knows, which is why the business has been suffering from declining marginal returns for almost 20 years (Coke is down almost 50% from its highs reached in the mid-90s, see long-term chart here). Even the recently published memoirs of the ex-COO at Coke is a study in how to try avoiding failure – rather than seeking success (The Ten Commandments for Business Failure is currently paired with Create Marketplace Disruption on Amazon – a distinct contrast in approach to business management.)
This is the flip side of the discussion in yesterday’s blog about Google’s Chrome release (see video about Chrome’s launch on Marketwatch here). Chrome is significant innovation by Google trying to move beyond its traditional markets. Chrome is not about Defending & Extending Google Lock-ins to traditional markets and products. Chrome is using White Space to implement Disruptions taking Google into new markets with much higher growth, which will allow Google to remain in the Rapids. Coke’s planned acquisition is a yawner because it supports historical Lock-ins and keeps the company in the slow-growth, unexciting, non-innovative mode that has made its returns lackluster for several years. No White Space in the Coke move – just more of the same – which makes life much easier for its competitors, whether traditional or new.
by Adam Hartung | Aug 27, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
The U.S. credit crisis has a lot of people very concerned about the economy. (Read LATimes article on the high stakes of this problem here.) As well it should. It was a credit crisis in the 1930s which created a rash of loan failures lead to bank failures, deflation and the worst economy in American history. While we keep being assured there will not be another Great Depression, there is still reason for serious concern. Three major financial institutions have failed in the last year (Countrywide, Bear Sterns and IndyMac), and one of the world’s leading economists has predicted the worst is yet to come with at least one additional major financial institution collapsing. So, isn’t it worth asking "how did we get into this mess?"
It wasn’t long ago the big controversy was about how much the heads of Freddie Mac and Fannie Mae were getting paid. The argument was whether these institutions were independent banks, or government agencies. After all, they were guaranteeing FHA and similar loans, so they were using government backing as they regulated the mortgage market as well as underwrote its activities. So the question was whether the leaders should be paid like regulators – say a Federal Reserve Board member – or like executives of an independent bank. As the mortgage markets ballooned these institutions were booking more and more paper profits, and the CEO pay had gone up dramatically. Many people were questioning whether this was appropriate.
Now we can see that both institutions were allowing ever riskier loans to be made by mortgage providers. And both are near insolvency. Equity holders have been nearly wiped out as Freddie Mac’s value has dropped from $70/share to under $5 (see chart here) and Fannie Mae has dropped from $80 to $6.50 (see chart here.) Privatizing these formerly government agencies hasn’t worked out too well for investors lately.
Freddie and Fannie didn’t have bad leaders, they just kept trying to make it possible for their primary customers – the banks and mortgage companies – to keep making more and larger loans. They didn’t come out and say "we’re going to take more risk", they just slowly inched their way forward allowing loans to have less down payment, allowing the buildings to have higher valuations as collateral, allowing higher debt-to-income ratios. They didn’t start out in 1995 with the idea they would eventually be making loans for $300,000 to people who never before owned a house, had no down payment, could provide no proof of income and on an asset valuation that was 25% higher than the most recent sale. That loan would never have been approved by any bank in 1995. Or 1996. Or 2001.
But the banks and mortgage companies wanted to grow. They had a well known Success Formula. They could advertise a good rate, implement the loan application process, then sell off the loan in the secondary market with a Fannie Mae or Freddie Mac guarantee. As real estate values took off, they simply needed more leniency on some of these items so they could do more loans faster and cheaper – extend their business (the back half of Defend & Extend Management). They wanted to Defend & Extend what they knew how to do. So Freddie Mac and Fannie Mae went along. And they got the big financial houses involved as well as they packaged up what were becoming increasingly risky loans.
And that’s what happens in D&E management. In order to keep growing, it is tempting to push just a little harder by trying to extend the old Success Formula. Cut a cost corner here. Take a little more risk there. Just do a little bit more of what was previously done. Everyone can see that these actions are taking them downstream. But, so far so good! Nobody has drowned yet. We might be able to see the waterfall ahead, and hear the water crashing down below a little clearer, but so far we haven’t seen any problems. So let’s try to do just a little bit more.
Of course, inevitably, D&E managers go over the waterfall – and take their customers, investors, employees, suppliers and this time the U.S. citizenry along with them. They reach just a little farther than they should have, and then it’s a free-for-all as the business gets sucked into the Whirlpool from which there will be no return.
We saw this before, when the Savings & Loan industry melted down and went away because of the ever increasing risk its leaders took. Equity holders were wiped out, and many lenders were significantly damaged despite the unprecedented government bailout at the time. In the end, we suffered a recession and a big loss of faith in real estate as the Keating 5 were tried and the S&L industry collapsed. All by trying to maintain the Lock-in, then Extend the business just a little more into some new area. And by getting the regulators to go along, the entire country and its economy end up at risk.
D&E managers don’t like risk, and intend to take risk. But because there isn’t any White Space to develop a new Success Formula they keep extending the old one. They claim they aren’t taking risk, but in fact they are. Each risk may be small, but as we’ve seen they quickly add up. These leaders start turning a blind eye to the risk as they remain Locked-in and see no other way to grow. They have to grow, and they have to remain Locked-in, so they take risks that to outsiders might look crazy. (Think about how Enron started guaranteeing its own derivatives so it could keep growing.) But Lock-in allows them to pretend the risk isn’t as great as it is. These extensions keep the Success Formula in place, and make it appear to be producing better results. But these extensions are moving closer and closer to the waterfall, and the inevitable fall into the Whirlpool. Eventually, we all must have White Space to evolve a new Success Formula, or the trip over the waterfall is inevitable.
by Adam Hartung | Aug 26, 2008 | Defend & Extend, Ethics, General, In the Swamp, Leadership, Lock-in
Sometimes management behavior can cause outsiders to think the industry and company leaders fear growth. Take for example a new book about innovation in the movie business Inventing the Movies by Scott Kirsner (see at Amazon here or read a review in Forbes here.) As the author points out, after Edison invented the first Kinetiscope movies – which were small viewer-based single person devices – he saw no reason to move forward with a projection system. Why advance the innovation when multiple audience members appeared to risk the revenue? To Edison, he could assure each and every viewing created a payment with his single-viewer technology, but the audience viewership meant he would lose control and possibly see revenue cannibalized. Fear of cannibalization caused him to avoid new innovations which would grow total demand, and considerably grow the revenues of his fledgling movie business.
But we all know this didn’t happen. Projection systems only caused more people to want to go to the movies. Then when talking movies came about again the industry feared that investing in sound equipment would be a cost not recovered and they delayed and delayed. But talking films again increased the audience. And this cycle played out again with color movies. And lest we not forget the wars that were fought over video tapes of movies, which all industry leaders feared would kill the business. Yet, videos (and now CDs) have only increased the audience, and demand more.
All businesses develop a Success Formula early in their life cycle. That Success Formula ties the Identity of the business to its strategy and tactics. So a tactic as simple as having a single-viewer kinetiscope becomes almost impossible to change because it gets linked to the identity of the business (and often its founder – in this case Edison). Thus it takes a new entrant, often from outside the industry, to parlay the new technology into the market. This new entrant, not afraid of controlling the business through administration of an old Success Formula, is able to bring forward the new technology/solution and build the new audience/demand. And often we see the old industry leader far too late to change – stumbling, fumbling and failing.
Businesses need not follow this course, however. If they are willing to invest in White Space they can test new solutions. They can figure out new Success Formulas. They can evolve, and they can grow. Doing so isn’t really hard, it just takes a willingness to accept the requirement for White Space to take advantage of market shifts. White Space allows you to migrate forward, rather than constantly fall back into Defending & Extending what you’ve always done.
As we all know, each innovation in the movies has grown the industry, not been its doom. And that’s true in all industries. Yet, the largest players are rarely the ones who lead these shifts. Look at how it took Apple to bring about the revolution in digital music, rather than Sony. Lock-in gets in their way. If we want to avoid being pummeled by market shifts that create great growth opportunities for the new competitor we have to be vigilant about implementing and maintaining White Space that can provide our beacon for growth.
Where’s your organization’s White Space?
by Adam Hartung | Aug 25, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership
Most managers want to move up. It is characteristic to have ambition in organizations. To want to do more, to accomplish more, and to receive more compensation. So we look for opportunities to do more, inside our organizations and outside. Usually we move positions because we don’t have upward mobility internally, so we find the opportunity externally. But, not all upward moves are worth the risk.
Look at the revolving door installed by Mr. Lampert at the executive suite of Chicago headquarted Sears (see chart here). (Read more about another round of Sears executive changes here.) Mr. Lampert has convinced some very talented people to take top positions at Sears. He has hired people away from companies as well known as Yum Brands, Motorola, Proctor & Gamble, Now he’s hoping that a new crop of execs will save the company from its perilous slide which has cut equity value more than 50% in the last year. But, rather than becoming business saviors, these new executives will probably be limiting their careers when Sears continues to falter.
It’s the nature of leaders to be optimistic. To think they can accomplish what previous managers couldn’t. And some are better than others. But we should eschew the "hero" complex entirely when looking at a new position. Success will have more to do with circumstances than us as individuals. And when a business is struggling, like Sears, it’s only hope to turn around requires it give up looking in the rear view mirror at old advantages and focus completely on the future. It must be clear about competitor strengths, and ignore the temptation to think of customers as an asset. It must Disrupt the old Lock-ins, and nullify the Status Quo Police. And it must implement White Space where the manager has permission to do whatever it takes to succeed – unbounded by old Lock-ins – as well as the resources committed in advance to accomplish the goals. Without those 4 things, success is not going to happen. No matter how good you are.
Looking at Sears and Mr. Lampert we know a few things. He keeps talking about the old Sears advantages, and trying to find a way to recapture them. He’s trying to plan for the past, not the future. Meanwhile, he isn’t looking for new customers by being a cutting edge competitor, instead he’s trying to hang onto old customers and Defend them from better competitors. Thirdly, he likes to "whack the chicken coop" by making lots of noise and firing people, but he’s not willing to Disrupt old processes, practices and behaviors in order to nullify the Status Quo. And Fourthly, he absolutely doesn’t have any White Space as he keeps trying to fiddle with the old Sears to improve it. Rather than create White Space he shuts it down in cost cutting actions while trying to "fix" a hopelessly out of date Success Formula.
Those who left good jobs to go to Sears for Mr. Lampert have not escalated their careers. And the new batch of managers he’s hired will fare no better. Sears under Mr. Lampert is not following The Phoenix Principle to turn itself around, but rather keeps trying to find some way that it can be cheaper, faster, better and thus Defend & Extend what worked 30 years ago.
If you want to make a career move, do not listen to the Siren’s song about how everything can be different if the right person is in the job. Circumstances make more difference than the person. We work in organizations that have powerful Lock-in to behaviors, structural systems and cost. Unless the primary pieces of successful change are there, no individual will make much difference. Yes, it’s good to want to get ahead. But make sure you don’t take a job where your head will be handed to you.
by Adam Hartung | Aug 21, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
What is success? We often think of it as accomplishing goals. If we set a goal, and achieve it, we succeeded. If however we repetitively don’t achieve goals that leads to failure. So, you would think that managers would do the things that would most likely insure reaching goals year after year, quarter after quarter and month after month. And because markets shift, that would mean doing things differently to deal with market shifts.
But if we look at Chicago-based United Airlines, as an example, we can see that is not how many leaders define success. Their definition of success is all about Defending & Extending an old Success Formula – even when the results of that Success Formula have sunk to dismal lows. Often leaders, and this does appear true at United Airlines, would rather fail, by missing goals over and over, than Disrupt and use White Space to change. As we know, United fell into bankruptcy (not the first time) earlier this decade blaming the events of 9/11/01. But everyone who’s followed United knows the company has never flourished, and has a long litany of missing its goals for revenues, revenue per passenger mile, and especially all measures of profit.
No business can succeed without the support of its customers and employees. Investors will not achieve a satisfactory rate of return when customers and/or employees are unhappy. Yet, let’s look at the actions United is taking to deal with its most recent hard times. It lengthened check-in lines by refusing to develop a streamlined method for gate access – preferring to maintain its status quo while security requirements grew substantially. It started charging to check a bag, even though carry-on bags are the biggest problem for security checks and boardig. It cut food on all domestic coach flights. And now it has cut food for most international flights in coach class (read article here.) With each step, United Airlines might as well get a bullhorn and shout through the terminal "we think you customers are irrelevant to us as an airline. We wish you would shut up and do what we tell you to do and quit complaining. We’d be a great company if it wasn’t for you stupid customers."
United Airlines’ unions have made round after round of concessions the last 25 years. All classes of employee, from pilot to gate agent to flight attendant to ground crew to mechanic have taken pay cuts. They have deferred compensation into pension plans, only to see the deferral wiped out by company losses. They have seen benefits slashed. And they have seen work rules tightened in order to pursue tighter enformcement of behavior intended to cut hours worked, overtime and even base pay. Meanwhile, the executives (and there’s been a lot of executives through the United revolving door) have paid themselves quite richly on both base pay and bonuses – and departing execs have received very rich golden parachutes. With each management decision they got out the old bullhorn and announced "hey, you employees should just shut up and be glad you have a job. We run this place, for better or worse, and you don’t have a say in what we do. You’re the reason we’re not a more successful company, you crummy employees, and its because of you that we as a management team look so incompetent."
Now, the employees have taken to wearing plastic bracelets that say "Glenn’s Gotta Go" referring to a dismissal of the CEO (read article here.) And management is taking the tack that these employees are out of line with this behavior. Management says employees should "suck it up" and keep their grievances quiet. Even though management has not done the employees any favors for over 20 years, they are upset these overworked, much abused and underpaid employees would offer up this quiet form of civil disobedience. But employees are finding themselves more aligned with customers than management these days – and their wrist bands are a show of unity with the customers that management is the group out of step with shifting market requirements.
At the end of the day, management is responsible for results. Current results. United could have hedged fuel costs, like Southwest, and never gotten into its current jam. Management could have acted at any time the last 30 years to work with Unions to make a better airline, rather than maintain long-term contentious negotiations keeping them from the benefits of employee ideas. United Management could have launched Ted with the permission to develop a new Success Formula rather than hamstringing the idea to nothing more than a name change on certain flights. Management could have done many things differently.
But over the years, despite different people in the managerial seats, United Airline leadership has chosen to remain steadfast to its Lock-ins. It has consistently chosen to Defend & Extend a lousy business model that’s never consistently made money. For United Airlines management, success has not been about meeting goals – it has been about extending the status quo. No matter who suffers amongst customers, employees or vendors. Despite what management is saying, these leaders would rather fail than change. Success isn’t nearly as important for them as we would assume.
by Adam Hartung | Aug 19, 2008 | Defend & Extend, General, In the Rapids, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
Last week BusinessWeek reported on how Dell was making a strong play to catch Apple’s iTunes in the digital music marketplace (read article here). On the surface, it sounds like a good set of tactics that might work. But it probably won’t.
Apple (see chart here) is a company filled with Disruption. In fact, Disruption is the lead in the Businessweek story. The reporter, Peter Burrows, discusses how a very disruptive Steve Jobs made it impossible for one of Apple’s engineering execuutives to remain at Apple – subsequently causing a lawsuit and payout by Apple. Typical for Mr. Jobs, he was ready to Disrupt rather than continue on a path he had lost faith in. So he made a hard turn to drop Tim Bucher. It is through this process of Disruption (painful as it is) and using White Space that Apple’s market value has increased by some 13x the last 5 years.
As a disruptive leader, heading a Disruptive organization, Mr. Jobs has Apple constantly creating White Space and doing new things. Apple has gone from the Swamp – practically the Whirlpool – back into the Rapids. It is sustaining its big hit products like iPod and iTunes with new innovations, while using White Space to jump into new markets like mobile telephony and wireless hand held computing. These Disruptions and White Space projects keep Apple working on the process of innovation to grow existing markets and enter new ones.
Dell (see chart here) is a very different company. Dell is still working hard to "leverage" its "core competency" in direct-to-customer sales. This approach has led Dell to attempt augmenting its "core" product lines of PCs and laptops with high definition televisions, and even its own mobile MP3 device. Both are long gone. Dell is still Locked-in to the culture, processes, IT systems, HR practices, decision-support approaches, vertical silos and knowledge sets that are focused on personal computing. Dell keeps trying to find ways to Defend & Extend its "core" in the hopes that late entry into new markets will allow the company to regain past rates of return. And it’s market value is down about 1/3 in the same timeframe.
Dell has added an acquisition (Zing) to its market approach, along with the engineering exec formerly fired by Mr. Jobs. But what Dell has not done is Disrupted itself. It has not admitted it must change its Success Formula to really be successful. And, it has not created White Space with permission to do whatever is neccessary to succeed – rather than operating within the confines of the old Success Formula and old Lock-ins. Without Disruption and Lock-in this project will be hamstrung by old assumptions, culture and structural restrictions which will stand in the way of creating a new Success Formula and market success. So even though the new Dell project sounds pretty good, it is probably won’t work because the project is still in an organization that first and foremost wants to sell more PCs – it wants to sell boxes in very, very high volume to businesses that can buy thousands.
You may ask if this isn’t possibly a replay of Apple versus Microsoft (see chart here)? And the answer is no. In both markets Apple took early leadership. But in the case of the Mac versus the PC Apple Locked-in on its hardware and software platform as a system sale and was unwilling to consider any other option. At that time Apple fixated on Defending & Extending the Mac. Meanwhile, Microsoft focused solely on software – and not only the operating system but the most critical and common applications (word processing, spreadsheet, presentation and database). By changing the competition to a "Windows + Intel" platform Microsoft was able to focus on software innovations which it could then take to market faster than Apple could react.
In the early 1980s, Microsoft was not saddled with a two decade Locked-in legacy like Dell, and Microsoft was not trying to Defend & Extend its DOS operating system when it launched Windows followed fairly quickly with Word, Excel, Powerpoint and Access. Meanwhile in 2008 Dell is a 25 year old company that has historically eschewed R&D and new product development, relying on vendors to do such work as it put all energies into supply chain management and direct-to-customer selling. Now in its effort to compete with Apple, Dell is trying to build its new solution inside this old fortress – which is designed to do something entirely different. Because Dell won’t Disrupt itself, admitting it needs to evolve, and won’t create White Space, it’s Lock-ins will be the hurdles that will stop progress. It’s this legacy – a very successful one producing above-average results for most of the 1980s and 1990s – that will hinder Dell’s success. One it can overcome – but shows no signs of taking the necessary actions.
by Adam Hartung | Aug 6, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle
If you don’t control your destiny, who does? Most Americans are especially proud of their independence, because it gives them the strong sense that their destiny is up to them. While everyone understands the role of luck and timing, those who also understand their strengths can find ways to maximize them. Anericans have the opportunity to make the most out of our circumstances. And that independence is also true for business. In America, home of capitalism if not the birthplace, any business has the ability to direct itself toward greater returns and success. And the larger you are, the greater your resources, the greater your ability to control your destiny and maximize your results.
So how is it that General Motors, the world’s largest auto company, would say that it’s destiny is not in the hands of its leaders? As the Board of Directors at GM reinforced its support in its CEO, I was shocked to read the following quote in today’s Chicago Tribune (read article here):
- "Most of the problems the company is suffering are not of their own making. There’s been radical changes in North American demand," said David Hel, an analyst at Burnham Securities Inc. in Sierra Vista, Ariz., said. "I don’t think making a change at the top is going to solve that."
Excuse me???? What was that? We’re to believe the largest auto company in the world, with all those assets, all that cash flow, all those employees, was without the ability to influence its own competitiveness and results? We’re to believe that no leader would have managed this absolutely dysmally performing company any better the last 5 years? The CEO, who over the last few years has watched the company lose market share, see it’s share price drop to a 54 year low (chart here), sold off many of the most valuable remaining assets (like GMAC) and overseen write-offs that exceed the entire market value of the firm is not responsible?? I do hope your investment firm receives enormously large fees for helping GM with its pension plan investments, or whatever it is you do for them, to make such a blatantly ridiculous comment. Because you just shot your personal credibility all to heck. l’m sure employees and investors could help identify a raft of better leaders than the ones who drove GM into its current dire straits. Mr. Waggoner may be well educated, well speaking, bright, cordial, tall, and good looking – but he’s done one heck of a terrible job as CEO at GM.
I guess following Mr. Hel’s confused thinking the leaders at Toyota, Honda, Nissan and Kia have no responsibility for the success of their companies. It’s all just a random set of variables that leads to success, or failure for an auto company?
Time for a reality check here. Of course the decisions made by leaders at GM were very different than the decisions made by Honda’s leaders. And the outcomes are radially different. What has befallen General Motors is a failure to recognize that markets keep growing, just in different ways. The demand for transportation has never been greater than it is today. Sure it may have shifted, from horses years ago to trains to automobiles to airplanes. And the kinds of autos people want to buy may have shifted around since the Model T was number 1. And the growth in auto sales may now be greater in China and India than the USA. But the demand for transportation is growing, not declining. So the market is growing – just not GM. Because GM quit trying to grow, and tried to Defend & Extend its practices and traditional markets.
GM leadership was willing to consider itself a "mature" company. Thus GM’s management expectations for growth were allowed to subside. Instead of measuring itself against total growth, managers became happy to talk about GM share and growth in selected segments. Thus GM could justify its below-market growth, and claim that it was an acceptably mature company. The leadership was OK with performing poorly because it abdicated its responsibility to growth – despite the impact on shareholders, employees, suppliers and customers. Management, and apparently the Board of Directors, is more happy to fail as GM than to become a better company – albeit one significantly different than the one sucking tail pipe fumes now.
Once any leadership team accepts that slower growth is acceptable, ultimate failure is a fait accompli – it will happen. Growth absolutely will slow. And eventually that will lead to enormous troubles. For any analyst or investor to claim that growth is out of the hands of management is syccophantic. As we know, despite the move to small cars in the 1970s, then big cars, and to higher quality cars, and then to higher mile-per-gallon cars year after year the offshore manufacturers have been growing share at the expense of the U.S. companies (except for the great success Chrysler had prior to its acquisition and innovation killing management changes by Daimler Benz). These offshore competitors did not relegate themselves to excuses about shifting customer tastes between segments as they came out with new models that covered the board – including pickups and SUVs – to keep their share profitably growing.
If you haven’t thrown in the towel on GM – you should definitely do so now. Clearly, the leadership team has given up on figuring out how to be successful. They are hoping to do no more than survive by doing what they’ve always done. And we know that won’t work. They may survive a while, but without growth the competitors will eventually eat up all their customers, resources and eventually them. By admitting they can’t believe a different leadership team could find a better way to compete, and grow, demise is a fait accompli.
by Adam Hartung | Aug 4, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
We all know we’re going to die. But we don’t usually think about it as we live each day. We pretty much run our lives the same until we are exposed to a new threat, like a particularly dangerous intersection or a tainted food, and then we change our behavior to deal with the threat. We know the average longevity for an American adult is around 75, so we fully expect to live that long and we don’t really think beyond that.
The same is true for most businesses. Yet, for about a decade we’ve known that the odds of a healthy public company surviving a mere decade is, at best 50/50. With such a short expected half-life, it should be surprising that pretty much all businesses do their planning as if they will go on forever. We apply optimism to our businesses the same way we do our lives. No CEO or other top executive will say "I imagine my company is in the half unlikely to make it another decade." Individually this makes sense, but collectively it is a disaster. Business leaders keep being surprised by the fragility of their Success Formulas as their businesses fall into the Whirlpool, wiping out shareholders and bondholders as well employee jobs.
Last week Chicago woke up to the painful, overnight demise of Bennigan’s (read story here). One of the oldest casual dining restaurant chains, Chicago was one of Bennigan’s top markets with 10% of its company stores located here. Also, Bennigan’s largest store was very visibly located on Michigan Avenue in the heart of the city. So Chicagoans were very surprised that at midnight on July 29 the owners called up store managers telling them to shutter the stores – the company is liquidating. Apparently the chain could not compete in a market of recession-softened demand, busted real estate values and higher food prices. So overnight, the business disappeared – leaving franchisees of 140 stores wondering what they heck they’re now supposed to do.
Bennigan’s, owned by Metromedia Restaurant Group, is a startling example of the myth of perpetuity. Despite being one of the very first casual dining concepts, increased competition was not hard to spot. Likewise, the dissolving of real estate values has been happening for months – like a slow pour of honey. And that recessions cause downdrafts in eating out has been known ever since restaurants have existed. And that food costs would increase was being predicted almost 3 years ago as fuel prices went up and showed no sign of a major downward reversal. It takes a lot of fuel to make and transport those quasi-prepared meals to restaurants – as well as a lot of energy to heat and cool the locations to customer expectations. None of these trends were hard to spot. But somehow, Benegan’s management did not plan for them.
As management Locks-in on its Success Formula it becomes blind to changes that could be very threatening – possibly business ending. As problems develop, seen in revenue or profit declines, the tendency is to say "we have to do more of this, do it faster, do it better, do it cheaper." When reality may be there is a need to take much more drastic action. But the desire to Defend & Extend becomes paramount among the optimists, who keep hoping for "things to return to better conditions." When, often, the current situation is more likely "the new reality." Or "the new normal." The past conditions are very unlikely to ever return.
Anyone expecting a return to widely available, extremely low cost credit had better think again about all those banks writing down billions of loans, and the near collapse of the mortgage industry as Freddie Mac and Fannie Mae stand on the brink of failure. And as auto leasing companies shut off all leasing products due to fear of lower residual values. Anyone thinking about a return to rapid U.S. job expansion had better take a look at the videos of hundreds of millions of workers in China, India and South America all desperate for a job at any wage. Anyone expecting lower taxes and a government bail-out had better take a look at the record-breaking deficit built up the last 8 years (when the budget was last balanced) and the expected upcoming costs for war (continued or ending), health care, and the aging/retiring population demand on social security.
What happened in the past was then, all that’s important is planning for the future. Without taking a very sobering look at what might happen, it’s easy to be Pollyanna. And that is how leadership teams fall into the half of businesses that don’t survive. It’s not lack of hard work. It’s an unwillingness to realize things change and we have to prepare for those changes. If we get stuck in D&E management, we keep doing what we always did despite declining returns. And eventually, you just can’t keep going any longer.
Failure rarely is as dramatic as it happened at Bennigan’s. Usually the wind up happens through an acquisition and slower shut down (like JPMorgan is about to complete with Bear Sterns), or through a longer process of management bleeding out the company assets (not unlike SBC’s takeover of AT&T). But the end point for Bear-Sterns and Bennigan’s were the same. They are no more. Any management team unwilling to accept the staggeringly pessimistic statistic that it has a 50% chance of failure in a decade is a likely candidate.
Keep that in mind GM, Ford, United Airlines, Delta and Citibank. We don’t like to think these sorts of iconic companies with long histories and past glory can disappear. Yet, past members of the Dow Jones Industrial Average included Woolworth’s, American Can, Johns-Manville, Esmark, Inco, Internationals Harvester and Nickel, Nash Motors, National Distillers and Swift. None of those DJIA companies thought they would ever leave the DJIA – much less disappear. Yet they did. If we run our business as if it can go on forever by doing more of the same we doom it to demise. Whether it’s fast like Bennigan’s, or more slowly.
by Adam Hartung | Aug 1, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Fear is a good motivator. But when the fear goes beyond that necessary for protection, it can become paranoia. While it’s not a word we like to think applies to us, in Defend & Extend organizations paranoia is fairly common. Defending the Success Formula, and it’s Lock-ins, becomes so paramount that anything which even looks like it might affect the Lock-in can cause extreme over-reaction.
Take the reaction Wal-Mart displayed when it started telling employees they needed to fear a Democratic win next fall (read article hear.) Wal-Mart certainly has its share of problems, but they won’t be fixed, or turned into a disaster, by whoever is elected in the next Presidential campaign. Yet, the leaders at Wal-Mart are so fearful of anything that would upset their Lock-ins that they are now telling their employees they had better vote Republican.
Wal-Mart’s credo is low cost. And somewhere along the way, this included paying its employees no more than it has to. The stories abound of Wal-Mart employees so underpaid they have to use food stamps or other government welfare subsidies to survive. And everyone is familiar with the armies of Wal-Mart employees lacking health care coverage. This Lock-in, to everything being low cost – including employees – caused Wal-Mart to develop a pathological fear of unions. A paranoia. And that has led to a fear of Democratic politicians.
Once unions were powerful in America. But you have to go back to the 1950s and 1960s. Then threats of union boycotts or strikes actually caused management to make decisions that were not balanced, but instead designed to avoid union wrath. But even at its height, non-government worker union participation never reached more than 50%. Now, union participation is only 8% – and that is down 50% since the mid-1980s. Unions are not a threat to any business leader today – including Wal-Mart.
Yet, as the article details, even minor union activity has caused dramatic over-reaction within Wal-Mart. When one store achieved union representation for its butchers Wal-Mart got rid of butchers by going to meat cut at the slaughter house. When a store in Canada had its store personnel unionize Wal-Mart closed the store. And now Wal-Mart is so afraid that unions might regain some strength they are trying to affect the votes – one of the truly independent actions all Americans have – of its employees.
A union would not bankrupt Wal-Mart. It might even make the company better! Yes, its cost might rise – but as we’ve seen low cost is not the only way to compete. The cost of a living wage with health care for all full-time Wal-Mart employees would not even cost retail prices to rise 2%. So it’s not like Wal-Mart loses its ability to be low-cost if employees had a decent wage and benefits. Moreover, if Wal-Mart had to pay better it just might have to rethink some parts of its Success Formula. And that just might help Wal-Mart adjust to changing market circumstances and become a far better competitor.
By trying to "stamp out" unions, and certainly deny their existence inside Wal-Mart, management is being paranoid. So driven to defend its Success Formula that it won’t consider options. Most Americans want their cohorts to have the basics covered. And while liking low prices, they are willing to pay for good products and good service fairly. And instead of seeing Wal-Mart as a company that abuses employees, unions could cause people to say "Wal-Mart is a great place to work. They treat people well. Let’s shop there."
D&E breeds paranoia. Protecting the Lock-ins to an extreme. And that’s the sign of a company in trouble. Because inevitably, all companies have to migrate to changing markets if they want to be profitable longer-term. The sooner management identifies paranoia, and kills it, the faster the company can react effectively to market shifts and improve its profitability. But don’t expect that to happen at Wal-Mart.
by Adam Hartung | Jul 24, 2008 | Defend & Extend, In the Rapids, In the Swamp, Leadership, Lock-in, Openness
Another big loss was announced at Ford (chart here) today (read article here). After announcing a $9billion loss, the CEO said he was looking to convert some truck plants to make hybrid cars. And the company is considering bringing some of its high-mileage European cars to the U.S. Let’s see, after announcing a quarterly loss that was 85% of the company’s entire market value, the CEO thinks maybe it’s time to change the product line-up and manufacturing capacity configuration.
How hard would hit have been over the last 8 years to expect the need for higher mileage autos to increase? Instead of looking at what historically made the most money (which were trucks and SUVs), and trying to milk those products for profit forever, can you think of any future scenario which would not have predicted the need to switch customers to different products? Only by focusing on the past – what used to make money – could a leadership team walk so far out on the gangplank.
Compare this with today’s announcement at Google (chart here) to launch a competitive on-line encyclopedia to Wikipedia (read article here). This would appear to be creating a "me to" product in a market already well served. Why should Google bother? Such a viewpoint would be looking backward, rather than at future scenarios.
How many new users will come to the internet over the next 10 years? How many people may want a different approach than used at Wikipedia? What are the odds that it is possible to have a product that is possibly better than Wikipedia? If you look at the future, and you recognize that (a) internet use is unlikely to slow for many, many years (b) products with lots of acceptance, and no competition, are easy targets because some people have to be underserved, and (c) competition always improves products — doesn’t it suddenly seem logical to offer this new product?
Scenarios should point out not only future risks, but future opportunities. Yes, Google is #1 in search and #1 in on-line ad placement. And growth in both those markets looks very good. But your future scenarios should be looking for additional markets as well. In this case, Google sees potential to use its capabilities in both search and ad placement to better the on-line encyclopedia product market. Thus, its a market opportunity which is very likely to do well given this future view.
We can’t wait on market confirmation to make plans. We have to develop scenarios, and take management action based upon them. If we do, we can identify and test markets early enough to be prepared when customers start to shift. If we don’t, we’ll be caught "flat footed" when they shift – and as Ford is demonstrating this can be an expensive, possibly deadly, position to be in.
