by Adam Hartung | Jul 23, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Everyone knows newspaper ad revenues are down dramatically. But this trend didn’t happen overnight. Ad revenues started slumping way back in 2001. At the time most management blamed the recession. Then lack of recovery was blamed on a jobless recession. By 2004 it was clear that advertisers were increasingly looking to targeted advertising like the internet and cable TV, moving away from traditional print. By 2005 movie studios were telling media companies they never intended to use traditional advertising like they previously had, auto companies were shifting large portions of advertising to the web, and real estate companies (not yet into the doldrums they face today) were shifting more and more advertising to the internet instead of full page newspaper ads for which there was no evidence of value.
Simultaneously, by 2000 eBay had become America’s permanent garage sale, making the need to buy an expensive classified ad far less necessary. Not to mention the impact Vehix.com and Cars.com was having on used auto sales. Meanwhile Craigslist.com was demonstrating its ability to find buyers for apartment rentals, autos and all kinds of things. It was clear that classified ads were now facing competition like never before seen – and that competition was going to intensifiy, not lessen.
Newspapers reacted all through the decade by slashing staff and other costs. At Chicago’s Tribune Corporation management could see it had purchases the LA Times at a market top, and by 2004 the company had already made several rounds of cuts at all its properties. Into this declining market Sam Zell decided to buy Tribune Corporation using a little of his money and a lot of debt (OPM – or other people’s money).
Now, after a slew of additional cuts, Zell has told employees "it was unfair to hold him to previous forecasts." (see quote in Chicago Tribune article here). If you can’t hold the Chairman and CEO responsible for over-optimistic decisions leading the company to the brink of disaster – and causing cost slashes which jeapardize the product while leaving no money to invest in the emerging on-line media market – who do you hold responsible?
Every management team has the requirement to do scenario development. All businesses have to be managed to succeed in future markets against future competitors. To meet these challenges, they have to develop scenarios that assess all market forces – both good and bad. It may be OK to hope for the best, but for goodness sake isn’t it up to management to plan for the worst? But Sam Zell allowed himself to listen to outgoing management, the Tribune company sellers, and use historical revenues as the basis of his projections. As he said "his team predicted a 5 percent to 7 percent decline in 2008 revenue." Rather than look at the forces affecting The Chicago Tribune and other newspapers (as noted earlier), he simply took the current results and said "surely things won’t be worse than a 5 – 7 percent decline". WRONG! As they like to say in ads for mutual funds "past results are no indication of future performance." Or, maybe you could at least have the savvy to not believe everything you’re told by the salesman.
Chicago is one of America’s largest and greatest city. Its citizens deserve great news reporting. But the Chicago Sun-Times has been gutted by a previous owner who embezzled billions out of the company leaving it on the brink of failure. And now its largest newspaper, The Chicago Tribune, is getting smaller and containing less news as Mr. Zell shows his "toughness" by laying off thousands of employees and slashing the news and editorial staff. This has led to some of the best editors in the country walking out the revolving door installed in HR due to the declining quality of the product. But, Mr. Zell claims that when he loaded the company up with more debt than it could repay he should not be held responsible.
There was another option available to Tribune Company and Mr. Zell. The internet started to affect how people searched for and acquired information by the mid-1990s. Tribune reacted by doing some things right, such as its investment in Cars.com, CareerBuilder.com and Food Channel which bred FoodNetwork.com. But it never attempted to transition news to the internet. What the company could have done by the time it sold to Mr. Zell was move its investments into building the worlds best on-line environment. Dow Jones, for example, invested in Marketwatch.com which was moving fast to displace The Wall Street Journal. And the foresighted News Corporation moved heavily into not only cable television, but internet acquisitions such as MySpace (and now Marketwatch via its acquistion of Dow Jones).
Mr. Zell should have recognized that Tribune Company was not a big building he could hope to fill with new tenants and milk for cash. Overly optimistic assumptions are the result of rose-colored glasses, which no leader should wear when planning for the future. Tribune Company was largely a group of outdated properties facing far faster growing and more successful new competitors – with a few gems that needed much more investment. He was buying old freestanding Sears stores just when the competition was throwing up shopping malls. He needed to move fast not to leverage this property up and out of cash, but instead to invest into internet opportunities with which he could migrate the news and other information base within Chicago Tribune and LA Times. Mr. Zell and his management team needed to figure out how to deliver reader eyes to web sites, and thereby serve up an enticing audience for the internet ad buyers. Not hope for a planned recovery of print media advertising in the face of the internet tsunami.
Who are the losers because of Mr. Zell’s optimistic forecasts that he now wants to say aren’t his responsibility? Chicagoans to start wtih. We’re wondering in Chicago if Wrigley field will be bought by someone and renamed XYZ park – something Chicagoans dread. We’re now expecting the landmark, and historically important, Tribune Tower to be converted into condos. And we’re getting less and less news every day as the paper gets smaller and smaller – with no good replacement for the information people seek. The same thing is happening in LA, where business leaders are frantic over the value destruction wrought at their local paper under Tribune Company control. And of course there’s all those great researchers, writers and editors who instead of transitioning to new media are simply out of work. And who knows what will happen to the bond holders who trusted Mr. Zell to be far better at utilizing scenario planning to keep Tribune Company a viable and successful company.
by Adam Hartung | Jul 16, 2008 | Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
The headline in today’s Chicago Tribune trumpeted the headquarters move of MillerCoors to Chicago. In exchange for $20million in aid, about 300-400 headquarters jobs will move to Chicago. The article goes on to wax eloquently about how Chicago is a "winner" city because of its great quality of life (read article here). Unfortunately, the article is a whitewash of the economic reality in Chicago and Illinois. Chicago’s mayor and governor are trying to focus on symbols, like acquiring a new company headquarters, rather than look at the results. Because the reality is that Chicago and Illinois have been on a long-term job decline.
The brutal reality can be found by downloading the PDF located here. What you’ll see is that from 1990 through 2007 Illinois, and Chicago as by far its largest job hub, has trailed not only the nation in job creation, but even the rest of the midwest (Indiana, Iowa, Michigan [yes, even auto-dependent Michigan], Missouri and Wisconsin). Chart after chart details how every sector of employment has been significantly trailing the national growth rate – and even far behind the region. Chicago may be a great city to live in, but it’s not a great city to be employed – or look for a job. Especially if your talents are on the leading edge of growth businesses.
What matters in business is results. And competitively, Chicago and Illinois have not met the challenge for almost 2 decades. Year after year Chicago becomes more of a "fly over" for people working on both coasts. Even though the University of Illinois is one of the top 5 engineering schools on the planet, most graduates leave to work on a coast (think Marc Andreeson and Netscape and you’ve got he message). When innovators create a new product as a result of working at Kraft or Motorola, they have to go to a coast to find funding, employees to grow the business and talented service people that can aid their growth. Large companies in Chicago are shrinking as competition steals competitors to the coast, or offshore.
In the midwest it’s common for people to relate their life to a family farm which exists today, or is a mere one generation away. But just like these midwestern urbanites migrated to the largest midwestern city, Chicago, because there were no jobs in the rural hinterlands, we now see midwesterners are forced to migrate coastal in order to maintain employment or find funding for new ventures.
By focusing on something as trivial as a headquarters win the city and state do a disservice to its citizens. This symbol overlooks the need for a much higher growth rate. Housing did not crash in Chicago like it has in LA, but it never went up nearly as much either. With few jobs, there was less demand and the boom never set in like it did elsewhere. People in Chicago cannot hope to see their city flourish if it cannot win the competition for jobs by developing more opportunities. Yes Boeing moved its HQ to Chicago, but we all know the planes are made in Seattle, and that’s where the jobs are. MillerCoors may be in Chicago, but the beer is made in Milwaukee and Denver. Neither "win" comes close to offsetting the losses from the closing of BankOne and operations move to New York, or the closing of Ameritech and operations move to Texas (just 2 recent examples of massive job losses). Or the failure of Lucent and Motorola to maintain their health thus causing tens of thousands of jobs to move to both coasts and India.
Chicago and Illinois leaders still focus too much on maintaining old Lock-ins, trying to Defend & Extend what the city was when it was the manufacturing and transportation center of America 50 years ago. For example, Chicago is no longer the city of Capone and Dillinger. By denying gambling, Chicago’s hold as the conference center of America shifted to Las Vegas while tourists flocked to Merrillville, IN or Milwaukee, WI to enjoy an evening. Yet the paranoia about its past stops Chicago from doing the obvious and legalizing casinos like cities/states have done within 75 miles. Or take for example the refusal to build a domed stadium in Chicago where weather which is less than ideal. While everyone knows a domed stadium would help bring in major events from around the globe, the city refuses to consider one as it relishes in the glory of aged facilities like Soldier and Wrigley Field. The last all-star baseball game in Chicago was delayed 8 hours due to rain, and everyone watched and wondered if the White Sox would play in the snow to win the World Series. Great is their past, and beautiful is the architecture – but Locking-in to that past is now costing citizens tax revenue and jobs! {note to readers – yes I know the Sox play in the renamed Comiskey Park and not Wrigley – but why didn’t the city dome that when it was rebuilt?}
The situation in Chicago is not dire, but neither is it good. Unless the IT jobs, healthcare jobs, biotech jobs and other occupations upon which the planet’s future is based make their way to Chicago, the city will some day be as well known as Dodge City – but possibly about as popular (Dodge City has under 50,000 people and is so far off the beaten path I challenge you to identify its location within 150 miles – hint, it’s in Kansas, not Arizona or California.) To find the future which will keep Chicago vibrant its leaders must focus on scenarios for growth, and realize they must COMPETE with cities that offer many benefits. Then the mayor and his leadership team must Disrupt Lock-ins to tradition, and use White Space to discover a new Success Formula which can regain growth leadership. If the current mayor Daily wants to have a legacy which eclipses his father, he must reset the agenda for growth by focusing on jobs – not merely symbols.
by Adam Hartung | Jul 15, 2008 | Defend & Extend, In the Rapids, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Readers of this blog know my lifecycle references. We start out in the Wellspring of ideas. To be successful we have to find the Rapids of high growth. In the Rapids life is beautiful as we make money and everyone wants to give us more. When growth slows we hit the Flats – where we keep paddling like crazy trying to figure out what happened to the Rapids. But because we’ve slipped from the Rapids to the Flats, pretty quickly we drift into the Swamp where growth is really hard to come by. We end up spending all our energy fighting the ferociously competitive alligators and mosquitos, often forgetting our real objective. In the end something happens the business isn’t planning for, and like pulling the drain on a sink the Swamp becomes a final Whirlpool sucking the organization away.
The most important time for management to make the right decisions is in the Flats. It’s the Flats where leaders have to steer the company back into the Rapids, or else drift into the Swamp. So let’s compare General Motors and Honda.
GM saw it’s growth start slipping almost 30 years ago. Roger Smith tried to steer the company back into the Rapids by creating a stand-alone company called Saturn that would learn to act like a "Japanese" car company. He also bought Hughes Electronics and EDS to diversify GM into very high growth markets (electronics, avionics, aircraft and IT). But Smith was often maligned by analysts and fellow executives who wanted GM to remain a "car company." Eventually GM sold Hughes and EDS to raise money to shore up its declining auto business where it was mired in the Swamp. GM leadership even abandoned the idea of an independent Saturn, and eventually forced the White Space project to start using common components with other GM autos, common functions like procurement, common systems and even common dealers. Now Saturn is just anther GM nameplate.
Today, GM is starting to hear the sucking sound of the Whirlpool. The company is constantly trying to stave off rumors of an impending bankruptcy. Meanwhile, the company equity value today is less than it was 50 years ago – meaning an investor would have nothing to show for a lifetime of ownership except dividends. And today those were halted – a key indicator that GM is heading into the Whirlpool. Cost cuts now are center stage as the company closes capacity and is even whacking salaried employment 20%. Management keeps saying it has enough liquidity to survive 2008 – whoopee! – which is only another 6 months. So it is looking to shut down nameplates (like Hummer), more plants and sell as many remaining assets as possible. It’s hard to see how anything good will happen for GM’s investors, employees, suppliers or customers as the business keeps churning faster toward the Whirlpool of failure. (Read more about current actions being taken at GM here.) GM is claiming it could not predict the auto market changes being created by higher priced oil – even though this "crisis" has been emerging for 3 years and is unerringly similar to the market shift which happened during the oil price shock of the 1970s.
Meanwhile, Honda sales have grown 4.5% this year. Right, while we keep hearing about the total market declining, Honda sales are growing (read article here). Management at GM, and many analysts, like to portray this as luck. Hardly. Honda and GM compete in the same markets. They just took very different management actions.
Honda never tried to develop a plan to do one thing and dominate the market. Market domination was never its goal. Instead, growth in sales and value has remained #1. In it’s quest to grow, Honda did not merely remain an automobile company. Rather than eschewing other businesses as diversions, Honda successfully developed profitable growing businesses in everything from lawn mowers to lawn tractors to electic generators to boat motors to motorcycles to quadrunners to snowmobiles to snowblowers to robots and jet airplanes – and cars. Of course, in cars they make small cars, luxury cars, all-purpose vehicles and even a full size pick-up. They sell products directly from Honda to end users in some markets, they sell through dealers in other markets to distributors who wholesale products to retailers in other markets and even to large mega-retailers like Home Depot in other markets. No single distribution system. And they sell products in almost every country on earth – including being the #1 motorcycle supplier in India with it’s Hero-Honda joint venture. (Unlike GM which has long maintained an overt focus on North America blinding its opportunities elsewhere.)
As markets shift, Honda is preparing for those shifts. It doesn’t let "focus" make it overly dependent on any one market – or any one sub-market within a single market. In motorcycles, for example, it offers everything from a small scooter for the urbanite to dirt bikes for leisure use to cross-over bikes that can be used on trails and roads to small motorcycles for short-riding to large motorcycles for long riding to crotch rockets for testosterone driven young men to huge, oversized Gold Wing bikes for 50 year old highway touring riders. It does the same in autos, where it offers everything from a hybrid to the high-mileage traditional Civic small car to multi-person mini-vans to full size pickups and even luxury cars under the Acura brand. While GM is trying to be big, Honda has mastered the art of growing and making money by constantly bringing out new products in new markets and learning from those experiences so it can migrate its Success Formula.
Far too many management teams think their job is to "focus" and be #1 in some defined market. Of course, all those definitions are arbitrary, and being #1 doesn’t mean anything if you can’t make money. GM has been huge, but it has been unable to generate enough profit to replace its capital for decades. Now Honda, who is #1 in some markets, but not in most, is showing that by being agile and nimble, by avoiding Lock-in to old-fashioned notions of market share, it can be more competitive. As individual markets struggle, from product markets to geographic markets, Honda keeps using its White Space to bring new technologies and products to customers. It evolves its older businesses toward what works, selling big trucks when people want them where they want them and small motorcycles where demand for them is growing. It’s this ability to look to the future rather than the past, keep a sharp eye on competitors and always be at the front of new products, maintain Disruption to get into new markets and keep White Space alive so new Success Formulas develop which allows Honda’s leaders to keep the company steering toward the Rapids rather than finding itself being driven right into the Whirlpool of disaster like GM
by Adam Hartung | Jul 11, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Yesterday I blogged about reading telltales. Catching small bits of information that can help you predict a company’s behavior and longevity. But sometimes we don’t need a telltale – because the signs are as obvious as a gale force wind. That happened yesterday in my email inbox, when I received a letter from the heads of the major airlines telling me to write my legislator’s to implement and enforce greater regulation on oil traders (read about the letter and see a copy of the text here).
I’ve long been a detractor of the leaders at United, American, Delta, US Airways, Northwest, Continental and the other "major" airlines. These companies were founded by former military officers who created airlines in a regulated environment. Subsequent management has never varied far from the original Success Formula, nor the Lock-ins, choosing to believe they will somehow make money if they just do more, better, faster, cheaper. In reality, the only person who created an airline that made money was an attorney, Herb Kelleher, by founding Southwest.
Now their Success Formulas are on the brink of collapse. So they are pointing the finger at someone else. Simply put, these leaders have never been willing to Disrupt their ineffective Success Formulas and use White Space to try doing anything else. They have remained Locked-in to the hub-and-spoke systems that are highly inefficient and thus reliant on low fuel prices. They have never challenged their complex pricing formulas, nor their antagonistic relationships with employees, nor their indifference toward customers. Even when they decided to open alternative businesses (Song, Ted, Eagle) they remained Locked in to their historical strategies and tactics, requiring these services give out frequent flier miles on the programs, use the existing gates, work with existing employee work rules and maintain the historical reservation systems. These leaders never tried to do anything really different. Despite strikes, government interventions and even bankruptcies they have maintained commitment to their Lock-ins and been unwilling to implement White Space.
They of course could have done many things differently. They could have migrated to a point-to-point airline. They could have improved employee relations. They could have allowed subsidiaries to use different technologies (different planes, different reservation systems) and try different practices (like Southwest’s extensive use of fuel hedging which has kept it profitable during this fuel price spike). But that would have required some Disruptions and establishing real White Space with permission to do new things. Which never happened.
What can we now expect? One or more of these airlines will fail. This letter from the CEOs is a signal as strong as a gale force wind that they have no idea how to deal with their company problems. Lacking any viable solution, they want the government to regulate their suppliers (something they’ve tried for years with their employee unions by the way) so costs will be controlled for them. This letter is an admission they expect to fail unless someone else saves them. Of course they aren’t taking responsibility for being in this position – but they are willing to admit failure is just around the corner and likely without help from a higher power.
What will be the impact on us? A major airline failure (say United) will be a national security issue. Several cities will become isolated islands unable to physically connect with the rest of the country. 100 years ago if the railroad bypassed your town you had to move the town – and many did. What will happen to cities that no longer have air service? How about the thousands of people that use these airlines for international travel? How many Americans will be stranded abroad? How many will be unable to reach facilities in remote countries? Without internal transportation system bogged down, we would be a sitting duck for terrorists wishing to create havoc with people stuck in locations they don’t want to be.
As these airlines fail, are we ready to outsource air traffic? Like we’ve outsourced the production of steel and other products to foreign companies? Are we ready for Lufthansa to step in and take over United’s routes (and some assets) between Chicago and New York, LA, San Francisco and the other thousand cities United services? Or Swiss Air? Or Virgin? If we use foreign carriers for domestic travel, what happens to our safety systems on what has historically required domestic companies for national security?
It’s not hard to recognize the kind of Lock-in to outdated solutions this letter signed by a dozen CEOs indicates. It’s not hard to see that failure is a likely outcome. When Lee Iacocca told Congress "Guarantee my loans or all these Chrysler employees will be unemployed" he made it clear that his company would fail without help. These CEOs are saying the same thing. And it’s really unfortunate, because Southwest has never been secretive about any part of its Success Formula, and it makes money to this very day. So for the major airlines, failure is obviously more acceptable than change. And everyone will lose with that kind of thinking dominating the executive suite.
by Adam Hartung | Jul 8, 2008 | Defend & Extend, General, Leadership, Quotes
Ed Bronfman, Jr. is a scion of the family that used its ownership of Seagrams, and U.S. liquor prohibition, to build a fortune in Canada. Eventually he made a very large investment in Warner Music and appointed himself CEO. Unfortunately, his investment has not turned out as well as he would have liked due to market shifts in how people buy music. Here’s his quote (source of quote here):
"We expected our business would remain blissfully unaffected even as the world of interactivity, constant connection and file sharing was exploding. And of course we were wrong. How were we wrong? By standing still or moving at a glacial pace we inadvertently went to war wtih consumers by denying them what they wanted and could otherwise find – and as a result, of course, consumers won."
Lock-in caused Warner Music to be complacent – and ignore customers that switched to competitors. When markets shift, standing still (doing the same thing – or Defending & Extending your old Success Formula) can cause you to become competitively less viable.
Here’s an even better quote from Bill Gates, founder of Microsoft (source of quote here):
"Your most unhappy customers are your greatest source of learning."
Listening to your biggest, and your best, customers is important, but you won’t learn much about the market. They like your Success Formula and share your Lock-ins. It’s the customers who complain that are telling you about changes in the marketplace. They are telling you they will shift if they can find an alternative. And those who outright become disloyal, who leave, are really able to tell you about market shifts and changes in competition that threaten your returns. You might want to take your best customer golfing to keep her happy, but you should invest your resources in understanding the customers that complain, threaten to leave, cut their business or completely leave. They can give you the market information you need to plan for a future with higher returns.
by Adam Hartung | Jul 7, 2008 | Defend & Extend, In the Swamp, Leadership, Lock-in
We are all told to be "glass half full" kinds of folks. We are surrounded by messages that things won’t be all that bad, and when bad they will get better ("the storm is always darkest just before the dawn"). Unfortunately, when market shifts happen it’s the optimistic ones who ignore the signals, don’t fully prepare for a changed market and thereby come under the greatest risk of failure.
Take for example General Motors (see chart to 50 year low valuations here). GM has been around so long it is inconceivable to most Americans – and probably all of GM management – that GM could fail. I mean, this was the world’s largest auto company, and still is one of the largest. By any historical measure, GM should be able to weather a downturn and survive. But when markets shift, history can become irrelevant. All that matters is competing in the shifted, altered future. And, is GM ready?
What’s so different about the future? Well, we all know gasoline is a whole lot more expensive. The result? Demand for driving in the USA is declining. That means autos will last longer so people will need to buy fewer autos less often. Beyond that simple fact, consider how many autos Americans own. (Following facts courtesy of David Rosenberg at Merrill Lynch and his market memo – see article here.) In most of the developed world the average family owns at most 1 car. But in the USA the average family owns 2.2 cars – more than twice the world average. There are 40% more licensed vehicles in the USA than there are licensed drivers!! So if Americans start driving less, and figure out they don’t need to replace all the cars currently licensed, you get an exponential negative affect on U.S. auto demand. And since GM is almost completely reliant on U.S. demand – where it competes with practically everyone else on the globe – what will happen to GM if American miles driven declines 10% – and if the total demand for new cars starts to decline (not increase) at say a meager 5% per year???? Or 15% per year? Now you can see how it is possible that either GM or Ford may not survive the next shakeout in auto manufacturing (read more on Merrill Lynch downgrade of GM here).
We’re seeing a market shift not just in preferences, but in the overall economy that affects the auto industry and every competitor. Who will survive? That’s hard to say. Expect lots of government interference as well as free-market competition to create a very unpleasant marketplace. But in the end, the most likely winning survivor will be a company that is not strictly focused on automobiles. A competitor that is involved in growing markets, like mass transit light rail cars or robotics or another alternative marketplace will be able to meet market needs while maintaining overall company growth. That competitor will be able to continue raising capital and maintain wherewithal much better than a single -market competitor like GM or Ford stuck in declining annual sales volume and negative returns.
After selling asset upon asset (remember the big sale of GMAC 2 years ago?) GM has run out of assets to sell for subsidizing its auto business. Now it needs to quickly raise $15B to $18B to survive this downturn (read more here). Would you give GM management your life savings? Those two companies will be slashing costs with layoffs, plant shutdowns, and brand closings (read latest GM speculation on Marketwatch here.) But they will always be behind the curve, cutting costs fast but not fast enough to make a profit. Always promising a profit at some future time (like now promising profits in 2010 – do you believe it will happen?).
While GM and Ford will increasingly be unable to raise new capital (and what is raised will be at extra-ordinarily high cost), and unable to develop new products, competitors with more diversified businesses will be able to better meet market needs. So we can expect better results from Toyota, Honda and Tata than from GM, Ford, Chrysler (or even most European manufacturers.)
Roger Smith tried to diversify GM in the early 1980s by buying EDS, then Hughes and then investing in an all new White Space company named Saturn. But GM management sold off those assets for profits in order to subsidize it’s Locked-in auto manufacturing – while forcing Saturn into the GM mold (just compare a Pontiac Solstice to a Saturn Sky and you’ll see just how unique Saturn now is) . How will they now raise desperately needed capital to design more fuel-efficient, high quality, attractive autos? Besides the government, with a vested interest in saving jobs to avoid an economic depression, who would invest in GM or Ford rather than Toyota, Honda or someone else with better return on assets?
The Red Cross used to teach first aid, in the days before paramedics were common and smaller towns depended upon volunteers to treat accidents and emergencies as first responders. The Red Cross training motto was "Hope for the best, Plan for the Worst." Being optimistic is a nice mentality. But competing long-term means preparing for market shifts by focusing on the future. Using scenarios that lay out options which may seem highly problematic given current operations or conditions. Competitors that wait for the market Challenges to emerge, to show themselves clearly, are already too late to be effective against those competitors who build plans based upon potential shifts. Leave optimism at home when planning, it breeds contempt for market shifts. Instead, bring along outsiders who are likely to help you see future scenarios that you might otherwise choose to ignore.
GM management has had 30 years to create a different kind of company. One less reliant on U.S. automobile sales – and more reactive to shifting market needs. But optimism allowed management to keep Defending & Extending what it always did. Optimism allowed the company to believe people would forever want the high-margin large light trucks/SUVs they were making. It would have been better to be more pessimistic – and prepared.
by Adam Hartung | Jul 2, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
This week Bill Gates officially retired completely from Microsoft (article here), and we also learned the company will no longer ship Microsoft XP (article here). At first blush these two press items seem unrelated, but in fact they should give any investor, or customer, of Microsoft real pause.
Microsoft has long dominated desktop computing. From operating systems the company branched out to personal applications, and has held top market share with most of its successful products. Microsoft was a wonderful example of a company that found a high growth market (PC sales), figured out a Success Formula to grow with the market and make money, and then Locked-in on the behaviors and processes which helped it make money. During the Rapids of growth, Microsoft was a model of doing the right things. To the point it was sued for becoming a monopoly due to its high market share.
But sales of PC aren’t growing like they used to. Instead of non-portable desktops or bulky and often heavy laptops consumers of all types are switching platforms. Increasingly everything from mobile phones to PDAs or MP3s are replacing the old platforms – especially as internet connectivity is more easily accessible on these alternative devices. New applications are being used that make it possible for people to do what they want to do (like exchange words or numbers) without the overhead of a big application like Word or Excel. Additionally, sales of Macintosh have re-emerged along with much greater use of Linux in many servers and even some PCs hurting sales of Microsoft products (see OS share chart here). I’m not saying that Microsoft-based PCs aren’t widely available and used, but they aren’t the growth platform they once were. The market in which Microsoft has competed has begun shifting – moving from desktops/laptops to other devices and solutions – and Microsoft is still stuck Defending & Extending its old Success Formula rather than developing the new markets like it did the old.
Even though Microsoft has continued to do what it always did – and do it well – its growth has slowed. Not because of being a poorly run company. Rather, because it is so Locked-in to continuing its past. Microsoft has dominated PCs, but we can now look to the future and see that PCs will be replaced by alternatives in many applications. Thus, Microsoft has moved into the Flats and is increasingly finding itself flailing away in the Swamp of low growth. Instead of being an exciting company, like Google, Microsoft is the company swatting at aligators and mosquitos biting away at its historic industry dominance.
The last time Microsoft faced this sort of Challenge was when the internet emerged. Stuck thinking of the PC as a truly "personal" machine Microsoft had never been a leader in networking machines for information exchange (networking was dominated by Appletalk, Banyan and Novell for many years.) But Mr. Gates was able to see the future risks, grab Microsoft’s R&D and product development budgets, then push the company towards future market needs. Mr. Gates was the company oracle who could redirect the apparatus toward a more connected internet world. He personally led the effort to license browser technology from Spyglass and create Internet Explorer – then bundle it into every sale – so Microsoft could maintain its market position.
By reviewing the past we can see that Microsoft as a company, under the operating leadership of Mr. Ballmer, has long been an organization constantly focused on optimizing products and defending product positions. The ability to identify and redirect resources toward a changing future was held by Mr. Gates. Only Mr. Gates could Disrupt Microsoft and set up White Space for new products. Instead of building an ongoing capability to develop future scenarios, focus on competitors, Disrupt itself internally and use White Space to remain evergreen, Microsoft has been a very Locked-in company that Defends & Extends while relying on its founder to occasionally "reset" direction.
So now Mr. Gates is gone. And the company is so Locked-in to its practices that it is completely ignoring everyone, from customers to competitors, as it simply refuses to ship a product the market wants (XP) – in its effort to force people to buy the product it wants to sell (Vista). This is less about upset customers than it demonstrates the kind of Lock-in which allows competitors to grow. How many potential customers will now buy a different platform from RIM and simply not buy a PC? How many will now really look hard at buying a Linux-based machine? By ignoring competitors, Microsoft is giving them opportunities to succeed.
Microsoft has a huge cash hoard. And PC sales are slowed, but not dead. So the company won’t go bankrupt any time soon. But we can expect a continuation of the kind of meaningless thrashing around the Swamp of low growth we’ve seen lately. Purchasing a tiny share of Facebook rather than Disrupting and using White Space to really understand social networking applications. Or ongoing unsuccessful pitches to buy companies in growth markets – like Yahoo! in internet ads – that fail because Microsoft brings nothing more than money and a whole boatload of negative, stifling management practices.
According to old managment theory, we should decide Microsoft is now "mature." And it is supposedly time for this market monster, which has used billions of external capital dollars to create its dominant market position, to begin paying back to investors by raising its dividend. But what we all know is that in computer technology markets shift fast. Companies that pay out their cash hoard quickly lose cash generation as customers shift to new competitors. The payout evaporates and faster than expected employees lose jobs as sales dwindle. Just look at how fast Wang and Lanier disappeared when PCs replaced word processing systems – or DEC disappeared when PCs replaced high-end CAD/CAM machines.
Microsoft without Mr. Gates is exactly will be unable to plan from the future backward. A company short on "vision" and long on execution that is happy enough to use its market position to attempt forcing customers to use products they don’t want (read article here), and thereby create greater opportunity for competitors. It’s easy to scoff at smaller competitors when a company is huge, but the kind of behavior Microsoft is now exhibiting quickly leads to trouble. Investors are already well aware that Microsoft has lost its competitive edge, as the company valuation has stubbornly remained stagnant for years (see 5 year chart here). Meanwhile, the only person able to Disrupt Microsoft and set up White Space to change the Success Formula is now gone.
Without Disruption and White Space, it is far too easy to predict what the future holds for Microsoft, its employees and investors. Microsoft is no "safe haven" for the "widows and orphans" fund. Rather, its better to put your investment dollars somewhere with growth – probably at Microsoft’s Locked-in expense.
by Adam Hartung | Jun 30, 2008 | Defend & Extend, Disruptions, In the Swamp, Leadership, Lock-in
We have a lot of signs that we are in, or on the edge of, a seriously long and painful recession. According to Merrill Lynch today (read report here) the S&P 500 was down 8.7% in June, down 18.3% from the October, 2007 peak. GM is at a 53 year low, and swap spreads price in (for both it and Ford) a 70% probability of bankruptcy in 5 years – 30% in one year. Home prices nationally are down 20%, and there is no visibility when the decline will stop. All the major banks are at multi-year lows due to the crisis in mortgage-backed securities. For the first time ever, the Conference Board survey showed more people expect their incomes to decline than there are people who expect an income increase in the next 6 months. Oil and gasoline prices are at record highs. The dollar is at multi-year lows compared to other currencies and fears of inflation are keeping bonds from increasing in price.
Otherwise, everything’s great!
So, what are your plans? Do more, better, faster and cheaper? Often, the first thought is to cut resources. Cut back and "wait it out." Hope that you can survive the recession, and live to compete again "when things return to normal." But that approach is very likely to be your end. You may not survive the recession. If it lasts longer than anticipated, or is deeper than anticipated, you could well run out of resources and that’s that! But, even if you do survive, recessions do not end by "things returning to normal." Recessions end when the economy changes creating more growth. After all, recessions are about periods of negative growth – about economic stalls – and they end when something comes onto the landscape allowing growth to return.
It is during recessions that new products have their greatest likelihood of success. Examples:
- in the 1974 recession Japanese auto manufacturers made their great launch in the USA as they positioned their smaller cars as a good replacement for quality-short, high cost American made cars. GM, Chrysler and Ford never fully recovered and have lost market share ever since.
- in the 1991 recession many data center budgets were cut. When budgets returned computer usage switched to PCs – leaving mainframe and mid-range manufacturers in decline. This change eventually wiping out DEC and Wang – and caused IBM to convert into a services company.
- in the 2001 recession companies and individuals stopped magazine and newspaper subscriptions. As we moved into the mid-2000s people turned to the web for news and now many traditional publishers are in deep financial trouble.
Many companies retrench competitively during a recession. They try to Defend & Extend their old positions while waiting for the good old days to return. They blame the recession on external events (like oil prices or government actions) and think that the end of the recession will put them back in the same competitive position they were in before. They try to maintain the business while waiting for better days. But that’s not how the world works. While they are maintaining, other competitors are gaining ground!
The economy does not return to growth magically. It returns based upon new, more productive products entering the marketplace. During recessions is when customers are incented to try new technologies and products to see how they perform. They switch to products that may have less capability, but are less costly, and then realize they perform well enough to keep using them. Simultaneously, the greater use of these new products allows them to develop into better products, eclipsing older products and technologies. What might have been a "worse" product at the recession’s outset, but cheaper, becomes better and displaces the former product by recession end. Think about hybrid or fuel cell cars today. Or web conferencing.
Great companies do not try doing more of the same, but cutting costs, during a recession. Weaknesses which were starting to show up become full-blown breakdowns in a recession. Customers hurt by the recession no longer will pay for the high cost of the product or service and start searching for alternatives. They don’t stick on the same product, but become adopters of alternative platforms. When the recession ends, they are converted and never go back to the old technologies and products, allowing old competitors to fall into the whirlpool.
As you enter this recession, what are you doing to Disrupt your Success Formula? How are you attacking Lock-ins? What White Space do you have to develop new solutions that can pull you out of the sales funk? It may feel uncomfortable at a time of struggling sales to do new things – but now is when it is most critical to move beyond Lock-ins. Those products which looked less capable, but offered 80% of the traditional product at half the cost are the ones most valuable in a recession. Those customers who you could ignore during rapid growth due to their limited loyalty are the ones at the front edge of alternatives who can be most insightful about what it takes to succeed in the future. Competitors that were leaders in old technologies can be undercut with new products or services that provide new solutions while saving money – making them vulnerable while you bring new products to market.
During recessions "Creative Destruction" is high. Becoming a better, stronger company does not mean cutting costs and surviving. Coming out of a recession stronger requires developing a focus on the future – one unencumbered by your old Lock-ins and Defend & Extend practices. Then figuring out how to undercut competitors by using new solutions for which they are unable to react. Disrupt your thinking about what works, attack Lock-ins and become committed to testing new solutions. And set up White Space to figure out the technologies, products and services which will allow you to grow again.
Recessions are not pleasant. But Phoenix Principle companies can use them to better position themselves for future growth. And in the process slingshot past long-standing competitors who are less willing to Disrupt and use White Space.
by Adam Hartung | Jun 27, 2008 | Defend & Extend, General, Leadership, Lock-in
We all say we compete to win. But really, many of us just compete to compete. Winning is a lot less important than following "the rules." But in much of life, the rules are designed to favor the current winner. To win, you have to find a way to compete differently.
Athletes have set rules to play by. And when they violate those rules, fouls are called. We like to think real world competition is the same. But there are actually a lot less rules in most worldly competitions – it’s not nearly as cut and dried as a sport. As a result there are lots of opportunities to change how you compete, in effect doing different or new things. And savvy competitors, Phoenix competitors, realize that is the easiest, fastest and best way to win. They don’t fixate on doing things the way everyone else does it. Instead they look for a new way to compete that can unseat the entrenched way of behaving.
Over the last 18 months Americans watched this be applied in the Democratic presidential nomination process. Senator Hillary Clinton entered the competition as the clear front-runner. She had access to all the party elders, all the influencers and all the money raisers. She had all the traditional advantages of not only name recognition and awareness, but having the party apparatus primed to support her. Given this advantage, she was clearly going to be hard to unseat. She had the traditional Democratic party machine ready to work for her in big states like California, Massachusetts and New York. And all the traditional competitors that tried to beat her in the nominating process by competing in the traditional way were eliminated.
But Senator Barack Obama followed a typical Phoenix Principle campaign – and beat Senator Clinton. He eschewed trying to work the traditional tools of competition, and instead developed a different approach. He didn’t try to do "more, better, faster, cheaper" of the leader. He instead used typical Phoenix Principle approach that allowed him to win – even though it upset the classical competitor to no end.
- He focused on the future, not the past. Rather than talking about how great things were in some previous era – such as when Democrats last held the Presidency – he focused on a scenario of the future. His scenarios demonstrated a connection with trends in the USA and globally. Constantly focusing on the future, he pushed voters to think about how to achieve future goals – rather than how to return to traditional ways of competing. He didn’t talk about how to get from today to the future, he talked about designing a future then developing a backward plan to reach that future.
- He focused on his competitors rather than his customers. He did what they could not, or would not, given their primary constituency. While conventional wisdom said to focus on older people because they vote in higher percentages, he realized that voting group was Locked-in to traditional candidates and he focused on the overlooked younger voters. He promoted voter registration and being their advocate. He spent little time with old-line union bosses, because unions represent a far less powerful constituency than in the time of Franklin Roosevelt – or even Jimmy Carter. While the traditional competitors focused on traditional financing tools, such as reaching out to lobbyist groups and PACs, he focused his fundraising on the internet where competitors were less willing to depend. They were used to trading influence for money – and unsure that traditional donors would appreciate them raising large sums nontraditionally thus weakening their need to aid the donors. He focused less on his customers – the traditional Democratic voter – and instead focused on competitors to find their weaknesses and exploit them.
- He was Disruptive. He talked about doing things differently. His primary message was "change." This meant different things to different people, but at no time did he stop promoting "change." He talked endlessly about doing things differently – about Disrupting "Washington", lobbyists, corporate America, health care insurers, oil companies. He never showed fear of Disruption, but instead embraced it as a way to develop a new, better future.
- He used White Space. Conventional wisdom said "fight tooth and nail to win primaries in the big states." Instead, he exploited the caucus system used in many states to win. His compaign used unconventional techniques to exploit weaknesses in the "mega-message" approach of traditional candidates. He never tired of finding new, unique places to tell his message – making tremendous use of the internet including YouTube! and other social networking sites. He did not try to identify with traditional campaign methods, but instead used unconventional as often as possible. And he talked about bringing White Space projects to Washington – by creating dialogue with enemies currently ignored, and opening doors to change communication between fractured American constituencies.
Although Senator Obama’s compaign was a long shot, it exploited The Phoenix Principle and created an enormous upset. A very junior candidate – in both age and political experience – he set out to win by doing what had to be done rather than doing what everyone always did. Rather than being cowered by the huge name recognition, political clout and funding available to Senator Clinton, former Senator Edwards and other candidates he used their Lock-in to his advantage. He could predict what they would do, and as was pointed out several times on television coverage his campaign leaders uneerily projected his competitors’ performance in every single primary more than a year in advance! By understanding his competitors so well, by recognizing their Lock-ins, and then using Phoenix Principle practices he came from far behind to win.
And it can work for you too. Focus on the future, not the past. Focus on competitors, not customers to gain insight and advantage. Be Disruptive. Use White Space to develop new approaches to competition. That’s competing to win.
by Adam Hartung | Jun 25, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
Ever heard the phrase "the last company left making buggy whips made a fortune"? Don’t believe it. Ask the person with such a claim to name the company. Better yet, ask that person to name one company that made high profits by being the "last man standing" in their business – any business.
On Monday United announced it is laying off 12% of its pilots, 950. Of course, pilots are the tip of the iceberg. Every pilot drives many more flight attendants, mechanics, gate agents and other employees so we can expect a multiplier effect across other jobs as this action trickles down. Simultaneously, Continental has announced job cots, Delta is whacking employees using early retirement deals and American has said it is finalizing details for its planned cutbacks (read article discussing these reductions here.)
United had to move fast, because if it doesn’t act quickly enough it’s cash reserves will fall, placing it in default on its debt – and triggering a Chapter 11 filing. In other words, United is skating on the edge of extinction. But an industry guru was quoted in the above article saying "There is an inherent demand out there…. as long as you can stay in the game you’ll be fine."
This is ridiculous. The largest participants in the America’s airline industry have built businesses that cannot be profitable. In the best times, when demand was growing like crazy and fuel was cheap they could barely squeak out a profit. They have never made enough money to recover their capital investment in aircraft. Their hub-and-spoke system is simply too inefficient, ignores problems created by America’s constantly fickle weather and too costly. It was a grand theory, but it was not profitable. Couple that with bad workforce practices and total disdain for customers and you have a business model that was doomed before it began. That it lasted this long is only a testament to tenacity and unwillingness to find alternatives. (Read more about how airlines themselves predict service will decline FURTHER in Chicago Tribune article "You are now free to take a flying leap" here.)
But in reality, the entire industry isn’t unprofitable. Look at Southwest. That carrier did nothing like United or American, flying point to point, no milage programs, no pre-assigned seating, etc., . So Southwest has the highest domestic carrier customer satisfaction ratings and the highest profits. It is possible to make money as an airline, you just have to use a different Success Formula. The winner won’t be the "last man standing" as if some competitor simply outlasts all the others and is left with the spoils of war. Rather, the winner will be the competitor that figures out how to provide the service in a manner that makes customers happy and turns a profit for investors. And increasingly we can see the long-term winner won’t be one of the U.S. "majors."
Take a quick look at Virgin America. After years of the "majors" using legal fights to stop this new airline from opening, it has made its debut. And nothing like Southwest or the incumbents. It flies point to point, and it focuses on profitable routes with lots of business service rather than just being big. Although it prices low, not trying to be a "business class" airline with high fares. And it has a global reach. You can fly Virgin around the world whereas the big U.S. airlines depend on you flying one of their "partners" for some of the trip.
Virgin Airlines started in England during a horrible flying downturn and when British Airways dominated the market. No one gave it a chance because it did nothing like the traditional airlines. And Cinderalla ended up the prettiest girl at the ball. Now its leaders are doing the same as they enter the U.S. market. They Disrupted traditional thinking about how to be an Ameican airline, and developed a unique approach. Simultaneously, leadership has maintained a wary eye on how to make money while mitigating risks – this is no "race to be huge." Of course, its leader is one of the more Disruptive leaders in modern times, Sir Richard Branson, who turned his former music mail order distribution company into a varied empire of multiple profitable business across industries and markets. (Read more about the Virgin America launch in Time Magazine here.)
Of course, U.S. airline deregulation did not create a "free market." You don’t see Air Canada, Lufthansa or Singapore Airlines fly between any U.S. cities. As previously mentioned, the big U.S. airlines have fought from the 1970s to keep out these other competitors. All of them make money, and are known for more reliable service and far higher customer satisfaction. If we see United or American or Delta crumble into Chapter 11, can we expect regulators to continue protecting the local industry from offshore competitors? Would that be in our best interest? Virgin’s launch is an indication that these regulators are as tired of bad service as fliers. How will the remaining "majors" survive when they have to compete with airlines that have built profitable Success Formulas in other markets they can rapidly export to U.S. customes?
Business competition is not a game of "Last Man Standing." There are all kinds of variations competitors can employ to avoid the bloody "fight-to-the-death" battle of foolish Goliaths. As a result, multiple competitors displace the fallen gladiators, but do so more effectively and more profitably. In the end, markets transition to new competition based on new services and products. Don’t expect a protected American or Continental airline to be handed the U.S. market to exploit. Instead, begin preparing for market upheaval as these behemoths falter and fail – and new competitors are allowed to enter, changing how we think about flying. For most customers, it can’t happen fast enough.
