by Adam Hartung | Mar 22, 2008 | Defend & Extend, Disruptions, In the Swamp, In the Whirlpool, Innovation, Leadership, Lifecycle
A couple of weeks ago I blogged that the Chief Innovation Officer for Tribune Company – Lee Abrams – was unlikely to make much difference because he wasn’t given any White Space. He didn’t have permission nor resources to develop a new Success Formula – and as a result he would be allowed only to make minor adjustments around the existing Success Formula edges – a program which is way too little, too late for nosediving Tribune.
Recently Mr. Abrams was interviewed (read interview here), and the reported discussion leads me to be no more optimistic than I was before. While I grant Mr. Abrams with a lot of experience, good ideas and desire, he’s still without White Space and that means organizational Lock-in, and the Status Quo Police, will keep his efforts from yielding much improved results.
I was pleased to read that Mr. Abrams recognizes the difference in requirements between his success in radio and his challenges with Tribune. As he indicated, when he applied innovation to radio "what radio needed was discipline. It was all over the place and we disciplined it." That made a lot of sense for 1970s radio. Top 40 had ignited a huge growth wave, and the radio industry was in the Rapids. In the Rapids, businesses need to develop a Success Formula and become good at executing it so they can keep growing fast. Good business practices in the Rapids are all about Locking-In on the Success Formula and replicating faster than anyone else so you can grow the most and build the greatest resource base.
But after growth stalls it’s a whole different game. Once tipped into the Flats or Swamp successful innovation is about finding your way back into the Rapids. And Mr. Abrams seems to know that. When he took his new job at XM Radio a few years ago he had employees bring in memorabilia from traditional radio stations and he burned them! Similar to how he had a Chicago DJ bring disco records to the ball park and blow them up with explosives to mark the shift away from Disco programming! These actions were symbolic Disruptions – making people see that the past needed to be forgotten in search of a more successful future. Disruption is the first step to opening the mind, and organization, for a better future. Then it takes White Space, given Permission to truly develop a new Success Formula and resources to see the efforts through.
But Mr. Abrams isn’t blowing up any artifacts at Tribune. He sounds much more subdued as he looks to use the six smaller Tribune newspapers as "labs" to test things. He even says he "can’t do anything too radical right away." He’s not talking about necessary Disruptions. He’s talking about attempting some sort of evolutionary change within a horribly Locked-in and resource-starved company more focused on making debt payments than anything else.
Those 6 newspapers aren’t labs. The management in them is intent on making budget this year so they don’t have to cut more heads from the traditional business. Those managers are focused on saving their traditional business traditional ways. Mr. Abrams has no White Space there to develop a new Success Formula. Those papers have no spare resources, manpower or money, to spend on White Space projects. They want immediate cost savings or immediate revenue enhancements with no additional investment – and that means working around the edges for minor improvements that don’t run afoul of existing Success Formula Lock-in! If they see Mr. Zell offer resources to Mr. Abrams those newspaper leaders will be screaming bloody murder to Mr. Zell to give them the resources and they can be much more productive with them than any ideas being offered by Mr. Abrams. They won’t reject Mr. Abrams, but they will contend that they can do more short-term with the resources than he can! It will be tough for Mr. Zell to ignore those newspaper heads – after he’s cut their budgets for practically every line item!
Tribune desperately needs Disruption and White Space. I hope Mr. Zell finds it possible to really support his new Chief Innovation Officer by implementing some Disruptions. Things need to change in the newspapers, TV stations and radio stations FAST. The new leaders need to quickly Disrupt, so people realize change is expected. And White Space, with permission to do new things – radical things – as well as resources committed to their success is required. Give Mr. Abrams the tools to develop a new Success Formula and he might. But right now – he’s trying to hook a hose to the kitchen sink while rearranging the furniture in a house on fire.
by Adam Hartung | Mar 17, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lifecycle, Lock-in
Almost since I began this blog I’ve talked off and on about newspapers. Living in Chicago, I’ve taken more than a few pot shots at the local establishment – Tribune Company, owner of The Chicago Tribune. Don’t get me wrong, I love "the Trib," as we call it in Chicago. For decades a great newspaper. And because I’m over 49, I still like reading papers. Heck, I very frequently put links in these blogs to the Trib’s web site. Good product at a good price. In fact, in today’s economy, probably too good a product for what I have to pay as a discount subscriber and on-line reader.
Even though all of us are used to the daily newspaper – including the travelers that pick up USA Today and those who just get the Sunday paper for "the ads" – it will disappear. Or at least change form so drastically it won’t appear like it used to be. That may be hard to accept – but then again, do you remember listening to 33’s, 45’s (and if that means nothing to you don’t worry, you’re just young) and LP records; Or 8-tracks, or cassettes? And soon, even CD’s will disappear to the growingly popular MP3 player. Nowhere is it given that we deserve a daily printed newspaper, and in today’s world it’s existence is becoming less viable by the month (read CBS Marketwatch on "Death Knell for Newspapers" here.)
You may be surprised to know that newspaper readership peaked in the 1950s. But you shouldn’t. After all, radio, television and cable TV all ate into newspapers’ share as a source of entertainment and news. The internet is just the latest competitive technology – but it is the one which has pushed the industry into the Whirlpool from which it won’t return. Newspapers have used their resources in many valuable ways, but they have little to none left they can use to become the next Google or Marketwatch. Most are overleveraged (read my past missives on the debt ladening of Tribune by Sam Zell), and all are short the cash (or debt capacity) to catch up with those who invested heavily into web growth a decade ago.
Defend & Extend Management never stops believing there is some way to save a dying business. But businesses do become obsolete. Mail order catalogs were once great, but in an internet world? Printed stock prices were valuable until on-line brokers came along. Heck, I remember when we used to have television repairmen – and they even came to our house and picked up the TV then returned it after repairing! Now we throw the thing away – and I don’t know where you’d find a repair person. My parents helped make the Kerr and Ball companies a lot of money by home canning vegetables they grew in the family vegetable garden -but what is the current market for companies making quart jars and home canning lids? Would you believe that we used to have operator manned printing presses in corporations to make copies of business documents? And carbon paper for multiple copies out of typewriters? Obsolescence happens, but D&E managers never see it. They are paid to follow a "never say die" approach to markets.
Only by constantly Disrupting and maintaining White Space can we hope to keep our companies long lived. No manager has a crystal ball for the future. Predicting the demise is very hard to do. It’s smarter to keep looking for growth, and be optimistic in finding it. Constantly looking for the direction to go is far better than trying to defend a business bound to shrink. Now that even the newspaper industry’s own study group is saying the industry won’t come back investors should start thinking about where they are putting their resources. No, it may not be commonplace to take a laptop in for the "morning constitutional" – but we’re bound to lose that broadsheet sooner than most people think.
by Adam Hartung | Mar 16, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
I was in Junior High when I learned about isotopes. By measuring the amount of radium in an object you could measure its age. Thus, knowing the speed at which radium degenerated gave us a "half life" of the isotopes – and with that we could judge the age of things like rocks and bones and other very interesting items.
Businesses don’t have isotopes, but their Success Formulas definitely have a half-life. New ideas develop into new Success Formulas which earn above average rates of return while growing. But, unfortunately, competitors can rapidly copy your Success Formula and the value drops amazingly fast, surprisingly far. And while the Success Formula remains, the returns don’t justify reinvestment and growth slows. Lock-in keeps the business running the old Success Formula even after its value has started declining. Great companies can fall victim to their own good management if they let the Success Formula age.
Target (see chart here) is just in the beginnings of this phase. Make no doubt about it, Target has been very well run. By introducing new ideas to discount retailing, Target took on Wal-Mart very successfully. Target grew, and it made good money growing. It was innovative, and it made innovation in housewares and clothing – at a low price – a new Success Formula within an industry long focused merely on price. Kudos to its great success, and its ability to slow the giant WalMart.
But being innovative and cheap – what’s called "cheap chic" – has been easily copied (read more here on Target and its competitors.) Lots of other very well run retailers, such as J.C. Penney’s and Kohl’s, have brought out their own innovative merchandise. Now Target is running hard-up against these companies, slowing growth and profits. Target has made product innovation it’s own Defend & Extend. Today, doing more handbags, lamps, dresses and shoes that knock off very expensive designers has become their Success Formula to which they have behaviorally, structurally and with their cost model Locked-in. It may sound surprising, but what is hurting Target today is focusing on making more of these innovations – because that is the Success Formula they are trying to Defend by Extending into more products, and their competitors are successfully copying. And there simply isn’t the same profit in that game there was a decade ago.
Some analysts are noting this, and ranking Target’s equity a "sell". I don’t blame them. Target has become internally focused on "execution" of its Success Formula. It doesn’t appear to have any White Space looking for the next retailing wave that will have above average profits. Target is squeezed between the low-cost (and completely Locked-in, do it until they die) WalMart and copycats. Unless Target quickly Disrupts, recognizing its Lock-in, and gets some White Space going the next round of handbags and red TV ads isn’t likely to do much for revenues or profits.
All Success Formulas, even great ones, have a half-life. The length of time they can earn above average returns is not dictated by the company. Rather, returns are dictated by competitors with their abilty to copy and even one-up the original good idea. And of course substitutes (like all those pesky on-line retailers that keep popping up stealing Target sales) come into the market slowing growth and hampering margins. That’s why everyone has to constantly maintain Disruptions and White Space. Otherwise, they keep optimizing their orginal good idea too long – and become too Locked-in – until even their own innovation skills become passe. You’ll never known you stayed too late at the dance until you look around and notice the band breaking set. It’s far better to keep open the White Space looking for the next party so you don’t get stuck – and watch your profits get mopped up.
by Adam Hartung | Mar 12, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Back on October 18, 2006 I blogged about Motorola (see chart here) hiring a new marketing chief, Kenneth "Casey" Keller. I was pleased because in his career he had demonstrated an ability to create White Space and launch new products even in stodgy old H.J. Heinz. Of course then I was an advocate of Motorola.
I guess we shouldn’t be surprised to now learn the new Motorola CEO has let his top marketer go (read article here). Not even 2 years on the job. Motorola’s wrong turn in the mobile phone business surprised me – and a lot of other people. And why would Motorola want a Disruptive White Space kind of marketing leader when the company is backpedaling as fast as it can to old ways?
After opening the company to lots of Disruptions, former CEO Mr. Zander decided to milk the Razr letting new products slow precipitously. While Disruptions and White Space continued in the other Motorola businesses, the mobile phone division drifted quickly back into old habits – Locking-in on technology, Locking-in on distribution, Locking-in on engineering, Locking-in on old product development and launch processes. So the competition caught up, and Motorola’s profits fell out of bed.
Conventional Wisdom got Motorola into trouble. Conventional wisdom says it’s good to extend product life and milk products. Conventional Wisdom says being #1 in market share is good – which Razr clearly was. Conventional Wisdom says it’s lower cost if you Lock-in on a single technology and engineer its use into all applications. Conventional Wisdom says to listen to your distributors, which Motorola did as it cut prices dramatically to drive volume. Conventional Wisdom says to reduce joint projects if you’re #1, which Motorola did by dropping its joint product development program with Apple after launching Rokr (opening the door for iPhone launch.)
Once the profit problems hit Motorola, more Conventional Wisdom. Stop all possible projects to preserve cash. Focus on trying to find a replacement product for the one you milked to death. Redirect resources toward your biggest business, even if it’s losing money and market share. Get everyone on board to doing the same thing, and let go those who dissent. Kill all projects not clearly tied to trying to "save" the old, crippled business. Focus on the problem business, even if there are other emerging business opportunities showing great promise (like set-top boxes, new applications of commercial 2-way radios and installing corporate wireless networks.)
Firing the marketing chief shows Motorola is using conventional wisdome to try fixing its dire situation. More than ever, Motorola needs Disruptions and White Space. Motorola needs to find an outside the box solution. The company needs different kinds of thinkers, and new projects that can return growth to the company — which probably will not be in mobile handsets any time soon. Conventional Wisdom will likely lead Motorola where Conventional Wisdom usually does – down the road of Sears, Marshall Fields, Montgomery Wards, Brach’s Candies and other long-lost once great Chicago companies.
by Adam Hartung | Mar 10, 2008 | Defend & Extend, General, In the Swamp, Leadership
When was the last time you bought something at an ACE hardware store? How large was your purchase?
I grew up in a town of 3,000 people. In the 1960s we had 2 – yes 2 – lumberyards in the town. We also had a hardware store. Now, those are long gone. People drive 20 miles to a larger city, where they can buy from Home Depot and Loews. Obviously, times have changed. But out there exists ACE hardware, a company dedicated to supplying small hardware stores as franchisees. Unfortunately, it is extremely tough to figure out how to create a viable value proposition when your competition buys products at the lowest possible cost, operates a world-class distrubtion system and employees small armies of experts working part time in the plumbing, electrical and other departments.
So what does ACE do? Why, restate earnings!! (read article here) Completely ignoring the competitive situation that is, at best, gloomy, the company restates prior year revenues and earnings for ’04, ’05 and ’06. Of course, in future years the CEO will conveniently find it unnecessary to remind us that earnings for previous years were lowered as he compares current results to the past. And through this financial machination he will attempt to prolong a Success Formula that is so out-of-date it’s surprising the company is still alive!
The very next week CW announces viewership. If you aren’t familiar, CW was formed when two U.S. networks – UPN and WB – decided they needed to merge to become more competitive. Facing an onslaught of new competition niching up the cable TV market, and an avalanche of new competitors on the internet, these two networks could see that future results looked grim. So they merged in order to consolidate viewership for their strongest programs. What happened? Well, before merger the two had 890,000 + 850,000 viewers in the desirable 18-34 demographic. Now? Viewership is a whopping 750,000!!!! (Read about CW here.) Is that what management calls "synergy"? Of course, one of the biggest players in this game is the Tribune Company, which recently went private under the leadership of real estate investor Sam Zell. Apparently the news is getting any better in TV while newspaper readership continues dwindling in Tribune’s major markets like Chicago and Los Angeles.
The point? Leadership has a vested interest in making their business appear good, whether it is or not. CEOs will regularly talk about how they are doing well, and taking good decisions for investors. Why, the CEO at ACE just said that despite having to restate 3 years worth of financials the investigation found "no fraud, no missing money and no missing inventory." Sometimes, management can "spin" better than a presidential candidate when trying to make themselves look good. It’s up to employees, vendors and investors to pay very, very close attention. Financial machinations appear around us everywhere, and spurrious mergers and acquisitions often hide the poorest competitors. In the end, without a strong program of Disruptions and very active White Space businesses are at risk of failure. And the longer they delay recognizing the risks, hiding risks through various machinations, the weaker these businesses become.
by Adam Hartung | Mar 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
If you read material printed on paper (and not just stuff on your computer screen), you’ve had contact with R.R. Donnelley and Sons (see chart here.) This was one of the industrial era’s venerable companies. In the time of Lincoln, books were somewhat rare and very precious. But in the industrial era improvements in printing technology allowed printing to become everyday – commonplance. And the world’s largest printer became R.R. Donnelley. So everything from phonebooks (do you remember phonebooks?) to books to magazines to financial reports and a lot more were printed, and continue to be printed, by R.R. Donnelley.
But, you’ve probably noticed that the world shifted. We don’t read as many newspapers, magazines and books – printed items – as we used to. The web changed things. We now do company research on-line, rather than through paper-based company reports. We want analyst reports on stocks, markets, new products, technology and everything else sent via pdf download rather than a booklet. There is still a place for printed material, but every year we see the shift toward digital distribution continue picking up steam. And that is bad news if you’re business is printing. A reinvention gap is being created between businesses focused on printing, and markets consuming information from analog but increasingly digital sources.
Alas, R.R. Donnelley saw this trend and made big acquisitions in 2005 and 2006 (Astron and Office Tiger, to name a couple) to move the company into business process outsourcing (BPO). These services were, and are, growing very, very fast as companies move all kinds of back office operations from payroll to accounts receivable, HR, payables, document design, etc. into someone else’s hands. GE created and spun off a company with more than $1B revenues (and as much market value captured by GE) named GenPact to compete in this business (Genpact chart here, and info on GE Genpact ownership here). Moving into BPO was a great way for R.R. Donnelley to migrate toward the new information economy.
But, R.R. Donnelley implemented its transition all wrong. Now the company is losing money, and undertaking massive writedowns (see Marketwatch news release here.) Instead of these acquisitions closing R.R. Donnelley’s reinvention gap, the company has fallen into a growth stall – and is farther from the Rapids than before! R.R. Donnelley is stuck in the Swamp – and headed for the Whirlpool if it can’t find some growth markets to patch up its leaky boat.
R.R. Donnelley did not put its BPO acquisitions in White Space and allow them to flourish. Instead, after acquisition R.R. Donnelley leadership tried to apply company practices to these acquisitions. They tried forcing these acquisitions into alignment with old-economy management techniques currently used by R.R. Donnelley. This resulted in acquired management, those that had built revenues and profits in the new markets, quickly deciding to leave – and leaving R.R. Donnelley with floundering ventures no longer as competitive.
Since then, R.R. Donnelley has continued making acquisitions. But not in growth businesses. Most recently management agreed to acquire a company that prints newspaper inserts! Imagine that, traditional printing in the declining newspaper market! R.R. Donnelley’s current CEO is committed to old Lock–ins and efforts to try Defending & Extending the expiring Success Formula. He’s blaming the problems on his predecessor – who led the charge toward innovation, while saying – in the midst of announcing losses and write-downs – "We are pleased with our performance in 2007"! (Read this quote plus more about R.R. Donnelley’s business reported in The Chicago Tribune here.)
Investors should run, not walk, to their computers and place orders for selling positions in R.R. Donnelley. Even though the value has declined by 50%, to levels not seen for 4 years, this company is very unlikely to ever have the glory it had when running printing presses was as profitable as making railroad cars, American automobiles and selling products at Sears.
by Adam Hartung | Mar 6, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you’ve read this blog the last 2 years you know I’m no fan of Mr. Lambert and the company he runs – Sears Holdings (see chart here). I have a vested interest in watching this story, because the day KMart announced it was buying Sears I was quoted on the front page of the business section of The Chicago Tribune saying that I gave the merged company no chance of success.
Since then I’ve been right. Sears and KMart sales have declined, sales per store have declined, Sears and KMart have lost market share as retailers, and the proprietary brands (such as Craftsman, DieHard and Kenmore) have lost share. Dividends for shareholders have been nonexistent and assets have declined in market value. Thousands of employees have lost their jobs, and many vendors have lower revenue and margins. So far, there are no winners as a result of this misguided venture by Mr. Lambert.
Prior to acquisition Sears was a very troubled company. It was no longer a retail leader, and it was using all possible tricks to Defend & Extend its outdated Success Formula – to minimal avail. Then along came Mr. Lambert – himself quite Locked-in to his own outdated, industrial era Success Formula. His plans to "milk" Sears and Kmart of value to feed his hedge fund has not worked out as he would have liked (to put it mildly).
When Mr. Lambert bought Sears there was value that could have been unlocked by Disrupting and using White Space. He should have moved very fast to sell off the large real estate holdings in a red-hot real estate market. Given the disastrous situation at Sears, he should have moved fast to shut down lots of stores not competitive with vastly better operators Wal-Mart, Kohl’s, Target and J.C. Penney’s. The well known brands mentioned above could have been rapidly sold to other retailers, possibly making lucrative deals with one of the major companies. And he could have converted Sears to a much greater on-line retail company, building on the strong skills at subsidiary Lands End (while building on long ago company history in catalog retailing.)
But Mr. Lambert didn’t Disrupt, and he didn’t open White Space to quickly change Sears and Kmart. Now…… his actions are far too little and far, far too late since the likelihood Sears Holdings will ever be worth much is pretty dim. Given the sales declines, and facing a major recession, the value has slipped away and how investors will ever capture it is completely unclear. Especially as Mr. Lambert promises more of the same as he intends to cut expenses further and purchase less inventory for upcoming shopping seasons. Those tactics haven’t been working, and nothing magical is going to make them work soon.
Mr. Lambert is now blaming the horrible condition of Sears on economic conditions – "Despite the perception during the first two years that we were not focused on growing our business, we were planning to do just that in 2007…. we did not foresee the severe economic turbulence ahead." (read article on current Sears conditions, and the source of this quote, here) Give me, investors, vendors and employees a break! This is simply making an excuse for the future while refusing to acknowledge the value destroying decisions previously made! Sears has gone down, not up, ever since this acquisition was made – and that can be blamed fully on Mr. Lambert. It was his job to prepare Sears for the future, not blame the future economy for his failures. If we were back when Sears was first founded, it’s safe to say town leaders would be tar and feathering Mr. Lambert and running him out of town on a rail — but then, of course, Mr. Lambert doesn’t live in Sears’ hometown of Chicago – he’s ensconced in New York where he doesn’t feel the pain his demonstratively lousy business decisions have created.
Postscript – readers should keep in mind that it’s been only about one decade – on mere short 10 year period – since Sears was one of the 30 Dow Jones Industrial Average companies. We should all remember how very fast companies that remain Locked-in to outdated Success Formulas can move from the Flats to the Whirlpool. Sears’ fall has been swift. Don’t ever think the past can protect you into the future – let Sears remind you just how fast failulre can sweep over any business, no matter how large and previously successful!
by Adam Hartung | Mar 4, 2008 | Defend & Extend, Disruptions, General, Innovation, Leadership, Openness
When markets shift it’s better to "get it fast" and make changes than "fight to the death" to protect the past.
The Chicago Tribune recently reported results of music compact disc sales (read article here.) It may not surprise readers to learn that nearly half of all teenagers bought no (not one) CDs last year. I’m 50, and I remember when teenagers were the mass consumers of 45’s and then LPs (remember small records with big center holes and "long playing albums") then later 8-tracks, cassettes and eventually CDs (how’s that for a walk down memory lane folks!). So to learn that the percentage of CD sales to teenages fell to 10% from 15% in 2007 was a bit surprising. When my sisters and I were young, teenagers were the vast majority of the market!
What does this tell us about the future? CD’s have a pretty lousy future. In 10 years I’ll be 60 – and who knows if I’ll be buying any CDs. But we know that these teenagers aren’t going to start. They’ll never buy a CD. If you’re a music company that depends on CD sales (like EMI, Sony, Vivendi/Universal or AOL Time Warner) you had better be pretty worried. Whether these companies will ever Disrupt their Lock-in and get a new approach is far from clear. They have ignored the trend for a long time, and Locked-in businesses are well known to remain Locked-in until they, quite literally, fail (at least in that market).
Do you remember how people bought all those albums or tapes? Does anyone remember Musicland – the retailer that in the 1970’s had 20%+ of music sales? Or that Virgin was begun as a direct mail company selling music through the mail? In 2007 the number of sold CDs fell by 19%! While sales of digital songs grew 45%! Today Apple, the company once known for a niche computer called the Macintosh, is the number 2 retailer of music in the country – without a single music store! Apple displaced Best Buy to take the #2 position (of course, #1 is Wal-Mart, but how long do you think that will remain as trends continue?) Clearly, the company that "gets it" has made a fortune, while the ones locked-in to traditional physical product sales and bricks-and-mortar have fared far more poorly.
Do you remember Wayne Huizenga? He was the megalomaniac who built up a car dealership into a network of dealerships making a fortune. He also bought the Florida Marlins, and they became World Series winners. And he bought Blockbuster Video, converted it to Blockbuster Music. So now you think, "what a dope." Guess again. This guy gets it fast. He sold his car dealerships when folks were willing to pay a lot. And he sold his ball players, capitalizing on the world series to make a big profit before overspending to try a repeat – as most owners have done. And he was fast to shut those Blockbuster music stores and sell the real estate before he got stuck with a bunch of unsellable inventory. He got it fast — which is more than we can say for the traditional companies mentioned above. Markets are constantly shifting. Those businesses (and their leaders) that Get it fast can avoid costly Defend & Extend – and build on early wins (like Apple) to huge success.
by Adam Hartung | Feb 28, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Compare two recent reports on automobiles. Last Friday The Chicago Tribune reported that U.S. auto sales this decade had declined 7% (read article here). Hmm, sounds like better quality cars is dampening revenues – and an excuse for GM, Ford and Chrysler to do poorly. However, just last week the Wall Street Journal reported that the number of passenger automobiles on the roads in China rose — get this now — from 500,000 to 50,000,000 in the last 30 years! Right, a 100X increase in the number of automobiles. I don’t know how many autos are on the roads in India, Chile, Brazil and other high growth countries – but I’m sure the number has gone up quite a bit. Any visitor to these countries can point out the increased congestion.
So, if all the growth is in these other countries, why hasn’t GM focused 50% (or more) of its market research there? Why haven’t most design efforts been focused on autos that meet the demands of these markets? Since all companies want to grow, why isn’t GM (and Ford, etc.) focused on supplying these markets with double digit volume gains? After all, Tata Motors of India is now launching a sub $2,500 auto (read more here) that it expects to sell in the tens of thousands, and simultaneously the company is taking over luxury brands Jaguar and Land Rover from Ford (see article here.)
Businesses get Locked-inside their boxes. GM, Ford and Chrysler have sold cars in Europe – but largely they have always been happy to be U.S. companies selling products in the U.S. Even though the growth has gone elsewhere, outside the U.S., these companies remain "inside the box" – and that box keeps getting relatively smaller as the global markets get larger. Although they may try to "think outside the box", Lock-in keeps them fixated on the U.S. and only marginally involved in other markets.
Companies like Tata "get outside the box – then think." They figure out how to make money in high growth markets, and go to new markets figuring out how to get a toe in. They compete, get bloodied up, compete more, learn and find a way to make money. They don’t get overwhelmed with planning exercises and building market models. They never lose sight of where growth is, and they keep their eyes on growing sales in these Rapids markets with high growth. Meanwhile, their eyes are forever on the horizon looking for the next growth opportunity.
No matter how big a business seems when growing, eventually growth slows. New technologies, new products or new competitors change the landscape, and what was once a very big box starts to shrink. Before long, as the growth goes to other markets, the box starts looking smaller and smaller. Yet, most companies remain fixated on competing inside their box. Like GM, so worried about U.S. market share that they missed the explosion in China, India and elsewhere. And now the competitors that learned how to succeed in the growth markets are keener, and better resourced, to come blow up the small box GM is fixated upon.
Businesses have to get outside the box or they eventually fail. The quicker they learn this lesson, and implement processes to Disrupt their cozy competitive world – while implementing White Space projects to keep them in the quickly shifting Rapids – the more likely they are to survive longer, and make significantly more money for investors while creating exciting jobs for employees and demand for suppliers.
by Adam Hartung | Feb 26, 2008 | Defend & Extend, General, Leadership, Lock-in
$6billion – that’s how much today’s economy paid for ….. nothing. IBM (see chart here) announced today it would add $15billion to its share buyback fund (read Marketwatch article hear). This fund is used to repurchase shares of Big Blue, and top executives said they intended to spend $12billion buying back their own shares this year. The fund, according to IBM’s Chief Executive is "one of they key elements of IBM’s 2010 road map for earnings per share growth."
When a company buys back its shares it does not increase sales, or earnings. It merely buys back its own equity. The number of manufacturing plants, patents, or products does not go up. The number of salespeople, or other employees does not go up. All that happens is the total sales and earnings is now divided by a smaller number of shares. Earnings per share increases – not because the company is doing any better – but rather because the denominator was manipulated to a smaller number.
Note that as the amount being spent to buy shares was announced at $12billion, the amount of value increase was only half that – $6billion. Right off, we should recognize that some investors see this for what it is. Financial machinations that provide no real value. Instead of IBM saying it was opening a White Space fund to spend $15billion on new markets, new technologies, new projects it is spending the money on financial manipulations that have no inherent value. And what is that worth? Well, investors said about half of the amount promised to be spent.
Investors should be worried about this kind of announcement. Firstly, it says management is focused on financial machinations – rather than actually growing sales and earnings. That is not a good thing. Secondly, it implies that management has so few investment opportunities that it is going to spend money on stock buybacks. Again, not a good thing. Investors should prefer that the company would have so many new product investment opportunities that it is having to allocate cash amongst them – rather than give the cash to existing shareholders in an effort to buck up the share price. It’s an indication that the company lacks growth opportunities when it buys shares rather than buying new capital equipment to make new products, or new salespeople to meet customer needs.
The front page of Marketwatch.com excitedly announced the $4.30 jump in IBM’s shareprice as a result of the announced buyback. You would have thought some great new innovation had been launched. Instead, this was much ado about nothing – and a real risk to a company that requires high amounts of Disruption and White Space to maintain growth.
