by Adam Hartung | Apr 23, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
There’s a phrase used by stock brokers – "Don’t try to catch a falling javelin." They use this to describe a stock that has fallen recently – often a lot. Clients will ask "XY company stock has dropped Z percent, has it beome a good buy?" Brokers will warn the client that trying to catch that falling stock is not a safe way to invest your money.
This actually makes a lot of sense. Just look at Starbucks (see chart here). A high flyer, and a real Phoenix Principle company for many years, it created tremendous value for investors, employees and suppliers while creating many happy customers. There was lots of Disruption, and White Space galore as the company prepared for slowing sales. But in the last year the old CEO returned – and he’s doing exactly the opposite of what the company needs. As a result value has fallen – like a javelin – and there’s really no guessing how far down it will go.
This afternoon saw a rash of reports that Starbucks’ earnings are going to decline – not just miss expectations but actually decline – for the recent quarter and for the entire 2008 year versus 2007 (read Reuters’ release here). Even worse, same store sales have declined – meaning less is being sold in each store than last year. Starbucks has hit a growth stall, and that bodes very, very poorly for the company.
CEO Schultz is already making a rash of excuses for lousy performance – even blaming lower sales on lower home prices and a generally weak economy (read quotes here.) Even though it is leadership’s job to keep the company growing, especially when slowing sales are as easily predicted as this case. While making excuses, he’s shutting at least 100 stores and pulling products out of remaining ones – like the warm breakfast sandwiches. Let’s see, sales are down – so we’re going to remove products from the shelf. Right, that’s the ticket!
We don’t care if customers go into Starbucks to buy a coffee, latte, sandwich, muffin, coffee mug, coffee pot, CD, DVD, beans, glasses or MP3 download! What customers buy doesn’t matter – it just matters that we keep getting them into the store spending money! And that’s what the last CEO focused on. Creating new ways for Starbucks to make revenues and profits out of the existing footprint – while looking for new footprints in entertainment, grocery and liquor! Yet, when the old CEO returned he couldn’t wait to enforce his old Success Formula on the company – 25 years later – as if the world had never changed and Starbucks was again a 30 unit franchise. The repetitive Defend & Extend practices that worked to grow Starbucks 15 years ago are not what is now needed to keep it growing today. Starbucks was a flying javelin, but under Mr. Schultz it’s falling out of the sky very fast indeed. Investors had better run for safety!
by Adam Hartung | Apr 22, 2008 | Defend & Extend, General, Lock-in, Openness
Educational systems get a lot of attention all over the world. For years Americans thought their educational system was the world standard. America was early in offering an education free to all citizens. And Americans quickly got to the top of world charts with its percentage of high school graduates. But that was all long ago – back in the 1950s.
Since then almost every developed country has exceeded America’s educational system. Today America is known for its graduate schools. There is little doubt that if you want a master’s or Ph.D. you will get a good program at a good price in America. Same is true for professional degrees, like law, medicine or an MBA. But below that? But from kindergarten through high school, we are no longer even competitive with other countries like Japan, Taiwan, Germany and the U.K. (just a short starter list).
Most Americans know this. It is the lead every year once or twice in the major newspapers. So Americans usually step up to vote bonds for more school buildings and equipment. And they pay the highest property taxes on the globe to cover operating costs like teacher salaries. While not the best, America’s is BY FAR the most expensive educational system on the planet. Yet, year after year America’s basic educational system falls farther behind competitively.
Today many of America’s best college admits are home schooled – they don’t go to a public school at all! Long considered an approach only used by religious extremists, home schooling the last 20 years has started to show dramatic results. This week the top high school applicant in Illinois (which includes the huge Chicago area) was a home schooled girl (read article here). She was accepted to Harvard, Yale, Princeton, Stanford, Northwester, etc.,etc. And in the last winter Olympics we learned America’s best shot at medaling was from a home schooled young male.
Again and again we are seeing people who do better on exams, are more emotionally balanced, have better self-images and are better equipped for life are home schooled. Heaven help me for saying this. My past-on father was a lifetime educator, as was his sister, as was my oldest sister and her husband. I’ve lived around educators all my life – and we all believed in public education. But today, students are increasingly miserable and under-educated in the American system. Drug use is high, absenteeism is high, extra-curricular participation is down, students are losing all their liberties to draconian security measures, and yet shootings are surprisingly common.
The problem lies in management. It’s hard to find a more Locked-in administrator than the one in your local school. Years ago we turned over the reigns of our schools to these administrators in the belief that professional management would be better than all the involvement which used to come from parents. And those professionals rapidly Locked-in a system for education, from curriculum to hours of teaching to accreditation for schools and teachers, that has served the administration well – and no one else.
I’ve had many discussions with the leaders at the nationally ranked and 4,000 student high school my sons attend. And the one thing that has always been consistent is they don’t care what I, or any other parent, or anyone else has to say. These administrators have no White Space in these schools to practice alternative educational techniques. And they don’t want any. NO DISRUPTIONS could be printed on a banner in the main hallway, since these managers have no tolerance for anyone doing anything that isn’t a defense or extension of the existing system. Results are immaterial to these administrators – all that matters is remaining Locked-in to past practices.
Talking to many school administrators the last 20 years, my impression is they have more in common with Korean dictator Kim Sung Il than early educational founders Plato, Socrates or Aristotle (those philosophers who were threatened with stoning for being teachers, yet laid the foundation for the inquisitive system of education we most value in graduate schools today). Their schools are dispassionate corridors of non-thinking supplication. Students, teachers and parents are not listened to, only disparaged if they disagree with these administrative stalwarts clearly happy to be Status Quo Police. The road to more money in education is via administration or seniority, and that route is only followed by pledging to never experiment, never do anything new and never actually open the doors to inquisitive thought and open-minded discussion.
It is hard for most parents to think that they could educate their children at home as well as they are taught at school. Yet, fledgling data (often anecdotal, admittedly) is that home schooling and alternative education is proving to be far more productive and valuable than the near-prison like conditions run by the modern wardens of thought we call principles, vice-principles and deans in the vast majority of our public schools. And we should not be surprised, because it is in these alternative and home schools that the educational process is Disruptive – like Socrates asking impossible questions of his students – and White Space is allowed where THINKING is more important than FOLLOWING RULES.
For young parents today, it should not be an automatic action to enroll their children in the local public or parochial (accredited but not public) school. If you want your child to be the next leader, someone needs to bring out the best in that child – and use the best available educational tools in new and possibly unique ways. And that is not going to happen in these Locked-in environments. American children are being set-up to fail when competing with better educated children from foreign countires once they enter universities which are increasingly filled with students from these other lands. It’s time parents get outside their box of traditional behavior and think about how their children can actually become competitive with children globally. There is no more important decision worthy of White Space than the education of our country’s youth.
by Adam Hartung | Apr 21, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Harley-Davidson (see chart here) has had one heck of a 20 years. If you put $100 in Harley stock in 1986, it would be worth $23,000 today. Profits have gone from $4.3million to $1billion in 2007. As boomers got older and richer they gained disposable income, and many spent a lot on Harley motorcycles.
In 2001 through 2005 Harley had to increase production every year. But last week Harley announced it’s revenue was declining 13%, and thus it is laying off 700 of its 9,000 employees and looking to possibly idle a plant (read article here). Of course management says this is just a short-term phenomenon created by the lack of easy credit and impending recession. Investors should just wait and things will work out. With the company value down about 50% since early 2007, leadership claims Harley will return to provide great investor returns. That would be an investment mistake.
While revenue has gone up, so has the average age of a Harley buyer (read background on Harley here). From age 35 in 1987, the typical Harley buyer today is 47 (read info on aging buyers here and here see chart on average age of buyers here). The typical customer earned $38,000 in 1987. By 1997 (almost a decade ago) the average income had risen to $83,000 (read income information here). By dealer statements, the bet is that today the average income is over $100,000. The reality is that Harley’s customers are slowly marching into retirement. These stats bode for a lot of troubles – retirement is not the best age for selling motorcycles. Just how old and wealthy can Harley hope to attract buyers? It’s not like Harley is selling a Rolls Royce.
For 25 years Harley has built its brand reputation for one type of motorcycle. Officianados will point out there are actually 4 kinds of Harley’s – but to most people all Harleys are variations on a simple theme of big V-Twin motorcycles that are – well – loud. For most motorcycle riders, Harleys are also incredibly expensive. Go to the #1 producer of motorcycles, Honda, and you can purchase a bike almost identical to a Harley for $8,000 to $12,000 – but most Harley’s cost north of $20,000 – some as high as $40,000! That sort of branding led to some incredible pricing which has created great profits. But it also priced out of the market more than 85% of all potential customers.
So what are 25-35 year old customers buying? Not Harleys. And as they age, why would Harley expect them to convert? Did boomers grow up and want to buy their dad’s Oldsmobile – or did they choose to purchase Mercedes and BMWs? So it is with younger buyers today. They are buying Hondas, Suzukis, Kawasakis and Yamahas – and they have no plans to ever buy a Harley. Harley’s CEO has felt he had to protect what Harley historically stood for, at the expense of attracting younger – and more – buyers. He chose to "milk" the brand of its value, and now that brand is about to see the udder go dry. Sure, there are a lot of older guys out there with Harley logos tattoed on their bodies – a testament to a great historical brand – but that’s not what’s getting tattooed on young people today. And Harley’s are not what they are riding when they make those first couple of motorcycle purchases.
The odds are not good that Harley will come roaring back with more volume, higher prices and more profits in 2 or 3 years as the recession wanes. They’ve had a great run, but their customers are aging, just like the technology in most of their products. Their product line is limited, their dealers are dedicated to rather out-of-date brand nostalgia, and their technology is frankly quite aged. Yes, Harley has done some things to attract new buyers, like launching its V-Rod with an engine designed by Porsche, but the company never Disrupted itself and the V-Rod has been an after-thought that has not built a following and has not kept up with competitive motorcycles in its class. There’s been no White Space in Harley, instead only efforts to Defend & Extend the old brand and products. That worked well for a long time – but all Success Formulas have a half-life. For Harley, this downturn will most likely be a permanent ratcheting down of volume – meaning negative growth. And for investors that is definitely not good news.
by Adam Hartung | Apr 15, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Hundreds of years ago philosopher Hippocrates created an oath, and for years medical doctors subsribed to it. Dramatically paraphrased, it included the notion "Doctor, first do no harm." The objective was clear – if you go messing around with a bad situation you can make it worse. Make sure you know what you’re doing – and you know how you’re going to make things better.
We should tell modern businesspeople to swear by this same oath. Delta and Northwest airlines have announced their intent to merge and make one huge Delta (read article here). It is widely expected that very shortly United and Continental will attempt the same maneuver to create an even larger United. Now, do you think this means air travel is going to get any better? Will service improve? On-time performance? Less lost baggage? Happier gate agents and flight attendants? Better maintained aircraft?
No one believes that. Even the leading industry gurus claim the only merger benefit is theoretically this will somehow lead to lower cost – and less capacity (at a time when capacity utilization is around 80%) – which is supposed to raise prices. So we should expect basically the same sort of service, with fewer flights, and yet even more attempts to cut wages and maintenance spending to increase profits? The reality is that either (or both) of these mergers will lead to mass confusion as the companies try sorting out conflicting schedules, optimizing broken systems and negotiating new contracts.
This deal is just another effort to Defend & Extend the traditional hub/spoke airline system the major airlines have used – unprofitably – for 30 years. Things won’t get better if these companies merge – for customers, suppliers and investors they will only get worse. There’s no plan here to make a new, more profitable airline. They aren’t suddenly going to become Southwest.
Monday, Blockbuster said it wanted to buy Circuit City (read article here). Why? Blockbuster is getting killed by on-line music downloads, Netflix and On-Demand direct-to-home distribution, and pretty quickly movie downloads. Circuit City was eclipsed by Best Buy in 1990 and has been choking on the leader’s dust, barely making money ever since (despite being heralded as a "great" company in Jim Collins’ book Good to Great). As on-line sales of consumer electronics grows at over 30% per year, making life tough even for leader Best Buy, this merger is supposed to somehow make things better?
The bidder says it’s an opportunity to create a 9,300 unit group of stores – right as we start the worst consumer-led recession in 30 years! As retailers of all types are rapidly closing stores in order to avoid bankruptcy, the plan here is to get a bunch of stores under one name to sell products that are being displaced by on-line and direct-to-home models and consumers are becoming more price conscious. Right. This is nothing more than a move by Blockbuster to try Defending & Extending a retail model that has already proven to be obsolete.
The reality is that Southwest and Virgin have shown airlines that approach the industry differently can make money. Making a bigger company that uses a broken Success Formula only makes for larger losses – not a new airline. Everyone should be wary, because life will only get worse as we consolidate management of most of the system into fewer hands trying to make a broken model work. If you’re an investor, keep buying Southwest and Virgin because these mergers will provide more opportunities for the Disruptive competitors to win.
Likewise, Apple has shown us all that we’ll never go buy CDs in historical quantities. All media is quickly going digital. We don’t buy newspapers, magazines or books like we once did – we go to the internet. And very soon we won’t be buying DVDs either. New competitors are causing Blockbuster and Circuit City to faulter – and trying to make both bigger will only cause them to do worse.
These companies desperately need White Space to build new Success Formulas before they fail – and not just fail investors but customers, suppliers and the communities they serve as well. These merger efforts will not help any of them to be better competitors that offer better products with better service that meet customer needs with lower cost models. And that means they are only going to make things worse. It would be good if businesspeople could overcome their desire to "do something – anything" to save their old Success Formulas and instead only undertake actions based on plans to be better. First do no harm!
by Adam Hartung | Apr 11, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Microsoft (see chart here) is huge and has a lot of cash. So do you care? What made Microsoft an incredible company was how it managed to aid the growth of PC technology, making the machines every day parts of our lives. Microsoft products ranged from operating systems to desktop applications to the prolific Internet Explorer web browser. Along the way Microsoft grew incredibly fast, literally won every marketing war it engaged in, dominated its markets and made huge amounts of money. What a great past.
But what is Microsoft doing now? It’s latest operating system (Vista) took 6 years to develop, got to market almost 3 years late, and is not even adopted by half the current customers. A year after launch, Microsoft has to strong-arm PC manufacturers to load the product rather than the older version (XP). Meanwhile both Linux and Macintosh are stealing operating system share from Microsoft – a very bad sign. Users aren’t clamoring for new versions of office automation software, and growth has stymied. And after dominating the market with IE, Microsoft is now contending with Firefox in the browser market. Quite simply, Microsoft isn’t growing. It is sitting on a huge pile of cash, but can’t figure out how to invest it to generate additional growth. And investors haven’t seen any growth in company equity value the last 5 years!
So, Microsoft has offered to buy Yahoo! But why? Microsoft hasn’t offered any new insight to what it’s ownership of the #2 browser will do for customers or investors. Microsoft has merely said it has the money to spend – like a teenager with last week’s paycheck burning a hole in his pocket. If there’s no plan to launch new products, or otherwise generate growth, why spend the money on a company that is far, far behind the #1 player Google? If Yahoo! can’t maintain or grow share versus Google, what is Microsoft planning to do to change the situation? Merely owning Yahoo! won’t help Microsoft be a better company.
Microsoft slipped into the flats four years ago. Now it’s trying to Defend & Extend its past glory, but to not much success as it is losing little bits of share all over. It has a huge war chest to fight this defensive battle. But wouldn’t investors be better off if Microsoft handed out huge dividends? Why not let investors take the money and buy shares of Cisco, Google, RIMM, Oracle or other higher growth companies? Why should Microsoft management burn this cash? No one is fooled by this action – today’s Chicago Tribune headline ran with "Is Yahoo deal set up for failure?" (read article here) and the last paragraph reads "No matter who ends up with Yahoo, the people involved are not innovators" – quoting Marc Benioff CEO of Salesforce.com. "They are followers. This is not a deal about the future of the Internet. It’s about the problems of not executing in the past against Google."
If companies don’t grow, then why do they exist? Without growth, the company should be milked for maximum cash and the money given to investors who can invest in other high growth opportunities. Microsoft had a great past – but it has not maintained its focus on markets and new opportunities. It missed the networking wave – which largely went to Cisco. It missed the PDA wave (personal digital assistants) which has gone to RIMM and Palm. It missed the digital music wave which has gone to Apple. It missed the internet search and advertising wave – which has already gone to Google.
Microsoft started Defending & Extending its personal computer business, and it lost its growth. Bill Gates demonstrated a knack for developing future scenarios and identifying emerging markets. But he almost missed the web – and it took a herculean effort on his part to get the company refocused and out with IE. Mr. Gates did not build an organization that valued Disruption and invested in White Space seeking new markets early and experimenting with new Success Formulas. He relied on himself. Mr. Balmer is a classic D&E manager – not a Disruptor nor investor in White Space. So now Microsoft leadership is doing things that will just waste our time and investor money.
by Adam Hartung | Apr 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Last night ABC’s Nightline program featured an article on Starbucks (see print version here). This is not the first time Nightline has discussed Starbucks. The program previously chided management about it’s competition with McDonald’s (see video on YouTube here) saying Starbuck’s coffee wasn’t any better than the fast food giant. Nightline’s recent feature was that Starbucks needs to "regain its focus" under the return of early CEO Howard Schulz. Something he was happy to support. Even Marketwatch kicked-in its review of the "retro-strategy" being taken to rejuvenate the company by launching a new coffee blend (read article here).
Wrong. Do we need a lot more Starbucks? At 15,000 units, one could easily argue that it’s sensible to expect less growth. And, as in all markets, competitors are figuring out how to duplicate Starbucks original idea – from other "shops" such as Caribou Coffee to mass chains like McDonald’s and Dunkin’ Donuts. ALL Success Formulas have a half-life. ALL Success Formulas grow tired, and lose their ability to maintain above average growth and profits. And that is happening now to Starbucks. Starbucks did the right things to grow like crazy as an early pioneer in its largest business. But doing more of the same – possibly better, faster or cheaper – is not going to get Starbucks back on the growth path. That’s just Defend & Extend activity which is already demonstrating declining marginal value.
Mr. Schulz was obviously the right guy to get things growing 20 years ago at Starbucks. Out of the Wellspring he took the coffee shop idea into the Rapids. He built systems that helped Starbucks Lock-in on all the things that could help the company grow. Imagine the skill it took to consistently open 6 new units a day!!! He was the right guy in the right place and he helped create an empire.
But that’s not what Starbucks needs today. For at least 3 to 5 years it has been obvious there would be a limit to the growth in Starbucks traditional business. Starbucks has been tailing off the Rapids, and heading into the Flats. And now it is rapidly falling into the Swamp of low growth. It was obvious the demand for shops was going to become saturated, and competitors were bound to get sharper and better. So the last CEO Disrupted Starbucks – saying the company was not just a coffee company. He got into music production, movie production, performer management, liquor production and consumer goods. He also started expanding the stores to offer sandwiches and many other products besides coffee. He actively promoted and funded White Space to find new revenue opportunities. And that is what Starbucks needs more than anything – more sources of revenue.
Starbucks is blessed with a name that does not mean anything. Starbucks doesn’t have to think of itself as a coffee company. Think about Nike – which didn’t have to be a shoe company. Only by moving beyond shoes did Nike become the megapower brand it is today. For Starbucks to now make an about-face and try to find the future in its past is lunacy. That’s trying to catch last night’s dream. The competitive market which supported rapid coffee shop growth is gone, and a new one is in its place. Focusing energy on a slugfest with its competitors will only result in price wars, lower margins, declining growth, store closings, laid off workers and lower returns for shareholders (who already know this and have knocked 50% off the company value in the last year – see chart here.)
The appeal of "back to basics" is so strong. We’ve seen too many executives fall prey to the call. It seems so logical to think that if we "focus" on "core competencies" we will somehow return to previous greatness. But that simply isn’t true. Watch old prizefighting clips, and it is amazing. Rocky Marciano looks like an out of shape thug compared to the athleticism of Joe Forman or Muhamed Ali – who look like they need another year in the weight gym compared to Mike Tyson and today’s belt competitors. Each wave of winners creates yet another round of competitors who are different – and that changes the game. Doing more may have worked for Rocky Balboa – but he had the help of a dozen script writers to make his dream come true. In the real world, we cannot capture the old glory but rather have to find new places and ways to compete as our markets become crowded from those seeking our success.
Starbucks is in for some really big trouble – worse than already seen – if Mr. Schulz stays in place and continues with his plans. For investors, its highly unlikely to be a pleasant ride. Starbucks can succeed if it realizes that its future growth is not about the coffee. It’s about finding ways to change other markets the way it changed the last one. And that means avoiding focus on past successes and instead using White Space to develop a new Success Formula that can grow and prosper – achieving past results but in new ways.
by Adam Hartung | Apr 2, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Top oil industry executives were on Capital Hill yesterday being questioned about their profits (highest ever) and the tax breaks they receive for exploration and production. (Read AP report here under headline "Oil executives defend huge profits".) Let’s not be naive. As officers of their corporations, they have an obligation to maximize the value of their companies – otherwise they could be sued by investors. No matter their personal opinions, they have to defend their profits and their product prices. So reading that they did so should not be unexpected.
It’s not the headline that’s interesting, however. It’s how they reacted to questions about the future. After all, reported profits are the past. What does the industry see in the future, and how is it preparing for it?
Does anyone doubt that crude oil is being consumed faster than it is being produced? We’ve known that since – 1940! The 1970’s "oil price shock" certainly taught all of us that petroleum is a finite resource, and we’re using it up. It’s not whether we will run out of crude – but when. So the interesting question is, when will that happen and what are our biggest "energy" companies doing to prepare for it?
Unfortunately, this isn’t a big topic for these behemoths. Typical of the industry leaders, when the Chairman of BP America was asked what he wanted for America’s future he replied "We need access to all kind of energy supply" with the writer noting "adding that 85% of U.S. coastal waters are off limits to drilling." In other words, more of the same! Drilling more holes, possibly in environmentallyl dangerous locations, does not solve the real problem – world petroleum consumption keeps growing while the pools of oil underground are being used up.
Don’t get me wrong, I grew up in the Oklahoma oil patch. I had lots of relatives that poked holes in the ground, sold oil leases, and worked in oil companies. The industry was very good for my home state, creating jobs and raising the standard of living. But that was then. What we need to address is the future. What are these companies doing to replace these massive revenues as oil gets harder and more costly to find? What are their future scenarios, and how are they proposing to help create a wonderful future? Together, according to the article, the major oil companies spent $3.5b on other options besides oil last year (solar, wind, biodiesel). Their tax breaks – $18billion. Their profits last year $123b!
These companies are incredibly Locked-in. They aren’t energy companies, they are oil companies. Right now, they are making lots. But look at history, and they have sure had their down years (or, rather, decades). These companies are the sort that make good money 5 out of every 20 years. Oil companies have never been a great, consistent, long-term sort of investment. Right now, they are making a lot of money. Shouldn’t they be taking action to make the future better than the past? Wouldn’t it be good for investors, employees and customers if they invested in something besides more oil wells to improve their consistency and growth prospects? Wouldn’t all parties enjoy these companies developing a path to long-term success, even as the oil supplies diminish? As stewards of investor value for the long-term, don’t they need to have a resolution for growth besides merely higher prices? Don’t they need to find ways to actually make more energy and add real growth to their business?
Lock-in is allowing these companies to invest in a marginally declining value proposition. More holes, and more risk. They keep doing what they know how to do, what they’ve always done. What’s needed is White Space where the best minds could really work hard on new alternatives. These companies need to give real Permission to develop a new Success Formula – not just window dressing. The amounts they are investing are small not only compared to profits, but compared to the alternative investments they make in deep water drilling or inhosptible location projects. These oil projects as well cost in the billions of dollars. So the companies aren’t truly resourcing White Space either.
We all know the oil will run out. As investors, we should be looking for leaders that are seeking new ways to compete. New solutions. It will be the new solutions that create long-term above average rates of return. But these leaders didn’t exhibit much interest in anything but Lock-in and more of the same. And that’s too bad for the industry – and all of us customers as well.
by Adam Hartung | Mar 29, 2008 | Defend & Extend, Disruptions, General, In the Whirlpool, Leadership, Lifecycle
Boy oh boy did the Chicago press decide to beat up on Motorola (chart here) this week. With the company’s announcement that Motorola does intend to split into two seperate entities – by spinning off the mobile handset business – the press decided it was time to unload. Headlines: "Pulling wings apart a risk for Motorola" (link here) – "Expert’s advice: Cut red tape and deliver" (link here) – "Motorola breakup ends comeback effort" (link here) – "Motorola must think beyond its batwings" (link here). Reading these articles, you would think the people running Motorola were dullards and miscreants with limited skills and poor business sense. But do you really believe that?
The management at Motorola is filled with very bright, hard working people. Most of them have been quite successful inside Motorola or from outside and recruited in. So the question becomes, if they aren’t stupid, how can this happen? As I’ve blogged before – leadership did a decent job of Disrupting initially, and all of Motorola opened White Space that launched new projects and products. Growth followed. But in mobile handsets leadership allowed the early success of Razr to succumb to old-fashioned notions of maximizing product revenue and profit. Management wasn’t stupid, it just listened to the siren’s song of "maximize profits by seeking market share and using volume to seek lower costs in manufacturing, sales and distribution." Who would argue with that? It made a lot of money really fast. It just left the company vulnerable to competitors – who acted fast and leapfrogged Motorola. And it allowed Defend & Extend practices, well entrenched in Motorola, to re-instill themselves.
So if management wasn’t stupid, what’s next?
First, Motorola does need to split. One business needs to keep doing the right things in DVRs, WiMax, headsets and 2-way radios. It needs to keep the funds from its success to re-invest in more White Space projects and not divert money as well as management attention into cellular handsets. The first business is Motorola – always has been – and justifies its brand image. This business is in the Rapids. This business has found ways to Disrupt its old Lock-ins, sell off busineses (like auto products) that don’t perform, bring in new acquisitions and set up White Space to find new growth markets.
The handset business needs to get out on its own – and either fail or turn around. Literally. Whereas the other part of Motorola got itself from the Swamp back into the Rapids, handsets isn’t just in the Swamp, it’s in the Whirlpool. The business would have gone into bankruptcy already if not supported by the rest of Motorola. These two businesses are in very different parts of the lifecycle, and require very different management solutions. So push it out the door and give it a chance, albeit a small one, to turn around.
The handset business needs to start over. New name, and a new leadership team willing to Disrupt abruptly. The key requirement is to so Disrupt the business that old practices are quickly abandoned – since they are what is causing the company to falter. The people, who know they are in trouble, have to see that old Lock-ins to practices like product reviews and technology stability – practices that are seen as good management – are what has gotten them into trouble and they have to be ignored. Those who have administered the best management practices – the Status Quo Police – have to be removed. Those who reinforced abiding by old practices have to go so that new best practices can be created around faster product launches and more market participation.
New handset leadership needs to very quickly give Permission for these bright people to unleash their skills. Permission has to be granted to rethink the technology, the products, the distributors — all aspects of the business. Handsets can’t win by doing what it did before, better. The business has to transform and that requires Permission to break all the rules – and White Space in which to try new things and see what works. Fast.
Great companies learn to let go early and fast. Quite simply, not all ideas pan out. Some products are huge successes, and some aren’t. Great companies keep Disruptions and White Space alive – launching new products and services. But if expectations aren’t met they cut quickly. They review why things didn’t work out as planned, and move on. Maybe too early, or too late, or wrong technology. But move on. Get over it, quit spending where its not making money. Love your launches, but don’t marry them. Keep nimble. Look at the businesses GE has entered, and exited, over the last 20 years. But Motorola, filled with truly innovative employees, spent too much energy on the "selection" process, launching too few products for the market to evaluate, and tried forcing them into success far too long. Does anyone remember Iridium (the failed effort at a satellite-based mobile phone network)? The faster the current distraction (handsets) is thrown over the wall the faster the rest of Motorola can get back to Disrupting and growing new Success Formulas in new markets.
And those in handsets have to learn to launch new products while existing products are still growing – and to let the customers decide what technologies and products are good rather than internal vetting and management. Whatever you call your company – you can’t move too fast finding a new Success Formula. With the size of ongoing losses, you’re in the Whirlpool fast on the way to extinction. It will take serious outside-the-box launches (like Apple launching itself into the music business with iPod and iTunes) to turn around your business. Only by Disrupting – recognizing the depth of your horrible situation publicly and as a team- then giving yourself Permission to overcome all the old Lock-ins and using White Space to redefine a new company can you hope to turn around.
It’s not about whether management is stupid. That is almost never the case. The issue is about managing, and overcoming, Lock-in. Those who learn to manage Lock-in by using Disruption and White Space keep themselves in the Rapids. It’s really, really easy, however, to follow the siren’s call of maximizing profits by letting Lock-in promote reduced innovation, reduced new product launches, reduced distribution experiments while maximizing sales and profits of existing products and services. Only by ignoring those calls can leadership turn around businesses by refocusing on Disruptions, giving Permission for truly different behavior and using White Space to develop new Success Formulas.
by Adam Hartung | Mar 27, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
We all find ourselves watching the news, or reading a newspaper, then shaking our head and saying "Why’d they do that?" When it all seems so obvious, why do leaders take action that seems counter to their goals?
Take the recent case at Wal-Mart (see chart here). A 52 year old employee gets hit by a truck and brain damaged. Wal-Mart’s insurance pays out $470,000 in health care costs. Yea! Great PR story for how WalMart sticks by employees that sign up for health insurance. But that wasn’t the story printed in the newspaper. When the family, at their own expense, sued the trucking company for lost future wages, pain and suffering and future care needs – winning $417,000 after expenses. But, that still wasn’t the story getting attention. No, what got a lot of attention was when Wal-Mart sued the now invalid and institutionalized former employee to get back its $470,000, won, and admitted it was taking the money away from her! (Read account of story on CNN.com here.)
Let’s just skip over whether Wal-Mart was right or wrong – legally or ethically. More practically, how much does Wal-Mart spend on Advertising and PR every year? Let’s see, $360B revenue at just 1% would be over $3B. So Wal-Mart wants customers to think well of the company and shop there.
As a result of the company’s lawsuit it gets back $470K – that’s .013% of its ad/PR budget. About enough to buy a couple of major market TV ads. Meanwhile, the airwaves (and blogsphere) get flooded with the story and its negative sounding impacts. MSNBC on its Countdown show labels Walmart "the worst person in the world" (see video here.) CNN puts the video onto its hourly loop for everyone to see (see video here). Anderson Cooper makes it a feature discussion on his television show. Even the L.A. Times writes a negative opinion about it in the newspaper (read here.) What would all of that PR cost WalMart to acquire for a positive story? Millions if not tens of millions of dollars. But it could have avoided all that cost for a mere $470,000.
Today WalMart is far from being a beloved company. There are those who like Wal-Mart, but there are those who don’t. For shareholders and employees, converting those that don’t like Wal-Mart into someone who does is beneficial, as it can raise sales, margins, future expectations for performance and even the stock price. As a simple business decision, why would anyone at WalMart decide to go after $470,000 when the risks are so enormous? Why not let this one go? Why do that (make the decision to sue this woman)?
Unfortunately, Locked-in organizations have no choice. When the Lock-in becomes too great, no options really present themselves. There is no room for creative thinking – even if that thinking were intended to help reach the goal. Behavior is no longer goal driven, but instead becomes executing the Locked-in Success Formula no matter what the potential outcomes. Just read this quote from Wal-Mart’s spokesperson (taken from the above referenced CNN article) "Wal-Mart’s plan is bound by very specific rules… We wish it could be more flexible in Mrs. Shank’s case since her circumstances are clearly extraordinary, but this is done out of fairness to all associates who contribute to, and benefit from, the plan." No room for flexibility, no matter the impact or outcome.
If every employee donated $.40 it would recover all the money Wal-Mart apparently saved by suing the damaged woman. But did Wal-Mart ask its employees if they would rather donate $.40 or sue her? Did anyone at Wal-Mart say "you know, this could cost us $10million in damaging PR – maybe it would be more valuable to our employees if we skipped this lawsuit." Obviously not.
When you wonder "Why did they do that?" remember this story of Wal-Mart. Locked-in organizations completely lose sight of their objective when making decisions that serve to Defend & Extend the Lock-in. And once decisions are made, the Status Quo police and all the rest of the organization jump to its defense — rather than think through what was going on. All any executive had to say was "oops, I think we blew this one. Let’s tell that to the press, drop the suit, and give this woman a $20,000 bonus while offering her husband a job in janitorial" and the bad press would have been diffused – possibly leading to a positive spin. But that’s not how Locked-in organizations behave – and that’s Why They Did That.
by Adam Hartung | Mar 23, 2008 | Defend & Extend, General, Innovation, Leadership, Lifecycle, Lock-in
Most management planning processes are designed to perpetuate the past. They are designed to figure out how to do what happened last year, or quarter, only a little bit better. In a high growth environment, no problem. Doing more is a good thing. And if markets were stable, it would be OK in any market. But too few companies compete in high growth markets, and no markets are stable any longer. Simply doing more of the same better, faster or cheaper isn’t enough.
Stuff happens. Just take for example some facts recently published in The Chicago Tribune (read full article here.) VCRs in 1978 were advertised at Sears for $795 ($2,500 in today’s money). A basic 5-cycle washer sold for $320 ($1,000 in today’s money), priced equivalent to a top-of-the-line washer today. Fifty years ago families spent almost 20% of income on food; today that has fallen to about 10%. But insurance premiums have gone up almost 80% in just the last 5 years. Today attendance at many private colleges – like jesuit or other private schools, not merely ivy league – costs more than the average family has as gross income in a year. My favorite — a 2008 Honda Accord produces more horsepower than a 1990 Porsche 911 Carrera.
All right, so we all know this. But we completely forget about it when planning. Yet, they all had really important implications. In 1978 most of us still watched movies in theatres – now many adults haven’t been in a theatre for years (hurting revenues and profits at everything from movie producers to theatre chains) because home entertainment systems and purchases/rented movies are so cheap. Meanwhile "big box" electronic/appliance stores have come on the scene wiping out mom-and-pop TV/appliance stores and probably Sears. In the 1970s laundromats were very popular for new families and people in small homes, but today it is a rare married couple living outside of an apartment that doesn’t have their own washer and dryer, making laundromats practically a concept of the past. I grew up tending to a family vegetable garden, and most families used part of their backyards growing vegetables to save on groceries. Today it’s cheaper to buy corn, green beans, tomatoes, carrots, potatos and broccoli than grow and preserve them at home – good for consumer goods companies and bad for seed vendors like Burpee as well as home canning suppliers like Ball and Kerr. While every working person in the U.S. had health insurance in the 1960s, today more than 40% of working adults have no health insurance. My older sister, like many girls in the 1960s, attended a Christian college paid for by my father who was a school teacher in a rural 5,000 person town and the only breadwinner in our home. Today, that college is long gone as are more than half the private colleges which used to exist in America – or they’ve been converted to satellites of state university programs. And I can well remember when I, working part time as a minimum wage college student, would earn over $2,000 a year and could buy a brand-new American made car (Ford Maverick anyone?) for less than that amount. Now new car sales are stagnant/down, and people are driving cars many more years creating opportunities for auto repair, auto parts and used car sales.
The competitors in all these businesses changed dramatically over just the last 50 years. And in each industry, the early leaders have been displaced. Why, planners kept trying to perpetuate the past rather than focus on the future. Companies failed to keep White Space alive that tracks market changes adapting the Success Formula to meet emerging Challenges.
Today we can look at eggs. I remember when every Easter eggs were on sale, usually at 50 cents/dozen. Not this year. Eggs are up 30% – and now over $2.00. Why? Many factors (read full article here), such as new regulations to improve the health of chickens has increased their personal space by about 10% but has led to taking millions of hens out of production. A new industry council focusing on improving hen welfare has caused most farmers to invest in new technology, siphoning funds for expansion into updating old facilities but without improving production. A national focus on increasing renewable energy has raised corn prices (for ethanol production) to record heights, increasing chicken feed cost 70% (remember when we referred to small amounts as "chicken feed") which accounts for 60% of egg cost. And the current financial crisis is causing lenders to hold back on loans to farmers, making investment dollars for new facilities very scarce and very expensive.
The result, egg prices have doubled in two years. But who planned for that? Practically no one. Is it a big deal? Well yes if you are Denny’s, IHOP or any other restaurant chain that focuses on breakfast. Or how about bakers, who need eggs for cakes, bagels and many breads. Or dairy companies that depend on eggs for a significant portion of their revenues, as demand declines due to price. It may seem trivial, the price of eggs, but it can make a big difference on businesses – and how many of them developed scenarios to prepare for this kind of change? Those that didn’t find their planning, based on Defending & Extending the past, not worth very much as they scramble (excuse the pun) to adjust to changing market conditions.
Good companies build scenarios of the future for planning. Not just "most likely" scenarios, but scenarios that could make a big diffference even if considered unlikely. It’s not what we plan for that hurts our businesses, but rather what we don’t plan for. The things that surprise us. Companies that survive for decades, and make above average returns, are ones that plan for unlikely events – and prepare themselves for conditions that are unlike the past. And they keep White Space alive to rapidly learn from these Challenges providing Success Formula adaptations that can keep the winning company out front and making above average returns. These are Phoenix Principle companies.
