by Adam Hartung | Jul 10, 2007 | Defend & Extend, In the Swamp, Leadership, Lock-in, Quotes
Do you remember the old Smith, Barney television ad where the professorial actor said “We make money the old fashion way. We EARN it.”?
More executives appear to need reminding of this. In today’s market report from Merrill Lynch (see info here, page 2) we learn that in the first quarter of 2007 the S&P 500 spent an incredible $117BILLION on share buybacks. So much was spent buying back shares that it added from a full point to 1.5 points to EPS for the quarter! In May and June IBM, WalMart and Home Depot announced share buyback plans of $50Billion (and keep in mind, just yesterday Home Depot announced real earnings would be down 18% this year! [see page 1 of same link]). Conoco and Johnson & Johnson are announcing plans to buy back $25Billion of equity between them.
When businesses are growing they spend money on hiring employees, building plants and offices, traveling to see customers and making new products. When they want to Defend & Extend their existing business they take the money out of such productive long-term uses and spend it instead on buying back their own stock. An action which does not create a single job, nor new product, nor help the business create enhanced growth in revenue or profitability. We have to be careful not to confuse financial machinations with real growth.
by Adam Hartung | Jul 8, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
When was the last time you enjoyed an airplane flight? Flying is one time when as a customer the more you consume, the less happy you become. I don’t know anyone flying commercial U.S. airlines that enjoys the experience. It’s amazing, ever since deregulation annual customer surveys point to unhappy customers – and every year satisfaction declines further.
The Locked-in airlines will tell us that customers can’t expect service and low price. And customers keep picking price. That’s not true. Customers really don’t have much choice. Airlines have Locked-in on their Success Formulas, and they pay more attention to their money-losing direct competitors than they listen to customers. When everyone (Southwest accepted) gives lousy service, can’t be on time and loses bags– and they control 90% of the gates across America — it’s not like the customer has much choice. So they blame the customers for being unhappy. Give us a break!
The Chicago Tribune ran front page articles today on just how badly the airlines are performing – looking at plane crowding, delays, lost baggage and customer complaints (see articles here and here). So what are the airlines doing about the situation? Are they creating White Space to try new solutions? Unfortunately, no. Their answer is to do More, Better, Faster and Cheaper operation of an airline system that is cracking all over the place, and producing horrid results. How will we get better service, after 3 decades of decline, by doing more of the same?
The first action the airlines promise is MORE flights. How will that improve the situation when the system is already overcapacity, causing computer breakdowns at the airlines and in the FAA? More flights have never solved the problem.
United reacted by hiring a Walt Disney executive pledging to help the airline be BETTER at customer service. Sorry, but the airlines aren’t amusement parks, and customers are trying to get from A to B on time and with their bags. The solution isn’t about trotting out Mickey Mouse to put a smile on someone’s face when they are 6 hours late, tired of the uncomfortable airport seating, and out of money for the overpriced airport food and lodging. Trying to apply a veneer of happiness on top of a broken Success Formula producing lousy results will only make investors and customers more angry.
The airlines are asking for a change in work rules so they can try to move the airplanes FASTER. When the gates are sold out, and the system is working so close to capacity that even high wind can cause 2 hour back-ups at major airports as ripples flow the system, changing the job description for a baggage handler or gate agent isn’t going to solve the problem.
And, of course, the airlines never tire of talking about ways to cut costs so they can be CHEAPER. They never grow weary of hammering on their employees (often unionized) that they have to take pay cuts – when many no longer even earn a living wage (especially in the major cities where airlines hub.) Haven’t the airlines heard customers? Prices are already low. Lower prices don’t matter when you can’t get where you want to be on time and with your bags!
More, Better, Faster, Cheaper are the 4 words of Defend & Extend managers who have no idea how to do anything other than maintain Lock-in to a broken Success Formula. And in this case vendors (except for the airplane manufacturers), employees, investors and customers are all bearing the brunt of an industry that is more interested in Defending & Extending what doesn’t work than in creating some White Space to develop a new solution.
by Adam Hartung | Jun 24, 2007 | Defend & Extend, In the Rapids, In the Swamp, Leadership, Lock-in
You know I’m no fan of McDonald’s (see chart here.) As detailed in previous blogs, the leadership is horribly Locked-in to its old Success Formula, and is expending lots of company resources to protect that Success Formula in the face of unhappy investors and competitors. Yet, when talking about competitors what do you hear McDonald’s discuss? Wendy’s, Burger King, Carl’s Jr. – other businesses focues upon hamburgers -with an occasional mention of Kentucky Fried Chicken or another traditional fast food outlet.
We all know where the big threat is though. And that’s Starbucks (see chart here). Far from a mere coffee shop, Starbucks has used White Space to unleash itself in several markets. And last week Starbucks showed its willingness to use White Space to expand into the marketplace McDonald’s has owned for decades – fast lunch – by announcing it will be launching premier salads.
McDonald’s started selling salads totally as a defensive move. McDonald’s new customers were staying away because mom or dad simply couldn’t eat a burger and fries, or preferred not to. So McDonald’s offered a second-rate salad product at a hefty price to try and keep the parents from saying "no" when the kids asked if they could have a burger. Salads weren’t intended to bring in new customers to eat salads, they were intended to Defend & Extend the old hamburger-based Success Formula by stopping client exodus.
Starbucks is taking a positive move into salads (see article here). It is an expansion of their Success Formula definition to include a full lunch entree. It is a shot across the bow of McDonald’s, which has conveniently ignored this emerging competitor for several years. And McDonald’s didn’t see it coming, and would now most likely say they don’t think of Starbucks as a competitor. After all, Starbucks doesn’t sell a burger, or fries.
The national airlines (United and American) never dreamed that Southwest would one day be national, have much higher customer satisfaction and be more profitable. Sears never imagined that a low-cost discount chain like Wal-Mart could eclipse its powerhouse status. DEC never imagined that AutoCad could drive it out of business. Lanier and Wang never perceived that Microsoft with a simple application like Word could kill the word processing marketplace. Once businesses devote their energies to Defending and Extending their Success Formula they completely miss the new competitors, and they don’t react until they are so far down the river that they can hear the Whirlpool sucking them under.
by Adam Hartung | Jun 22, 2007 | Defend & Extend, Leadership, Lock-in, Quotes
This week Blackstone, one of the world’s largest private equity firms announced it was likely to soon go public. Ironic that a business based upon taking companies private is now going public… Reflecting upon this, Merrill Lynch today ran the following quote (see page 5 of report here) in it’s daily North America Morning Market Memo by David Rosenberg. His topic is what happens after a business is purchased by a private equity firm:
"All of a sudden managment is focused and will do anything to maintain or increase cash flow. Here’s the usual list: Cut spending, workers, officeds, factories and advertising, and with tech companies now in play cut R&D, their lifeblood. Don’t mistake financial engineering for company building."
Well said Mr. Rosenberg.
by Adam Hartung | Jun 13, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Too often Locked-in companies literally race toward the exit of their business. And such seems to be the case with Ford (see chart here). Back on 3/15/07 I blogged that Ford was Defending and Extending its bad business by selling one of its good businesses, Aston Markin (link here). Now the company is following that same destructive path as it considers selling both Jaguar and Land Rover (see article here.)
From the late 1980s into the 1990s Ford started to develop a new future via acquisition of Aston Martin, Jaguar, Land Rover and Volvo. These were combined into its Premier Auto Group, which could have served as White Space for developing a new Success Formula that would effectively compete with Toyota, Honda, and BMW. But instead of letting this be White Space, with funding and resources to develop a new Success Formula, Ford tried to force its old Success Formula onto this group. Executives at Ford pushed to have these new acquisitions "leverage" Ford by using common parts, common engineering and common approaches. The result was a negative impact on Jaguar and Land Rover, as the old Ford Success Formula drove down the value of these brands. Instead of migrating Ford toward a new Success Formula, leadership tried to integrate these premier brands into the old Success Formula focused upon supply chain optimization and cost reduction.
Instead of becoming a great new company that led the market, Ford leadership turned Premier Auto Group into another Edsel. Something intended to be valuable, but not coming close to meeting anyone’s goals.
Jacque Nasser had an idea of how to transform Ford when he made several of these acquisitions and kept them outside of Ford. But William Ford, Jr. started the process of destroying long-term shareholder value when he rejected learning from these acquisitions and instead put company focus on old fashioned "big iron" – a claim he bragged about in ads for the Mustang. The new CEO appears to be a man after the Chairman’s heart as he tears apart the future opportunities of the company in search of cash to Defend & Extend the low-yielding Ford Success Formula. Too bad for investors and employees.
by Adam Hartung | Jun 11, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
My last email on WalMart prompted a comment from Barney. He asked my opinion of the 5-year, 10-year and 30-year prospects for Wal-Mart. Great question, worthy of a response to all readers.
The longer out the timeline, the more bearish I am. Strategy sees its results long-term rather than short-term, so given more time the impact becomes more evident. Predicting share prices short-term is hard, even for stock traders and mutual fund managers. But WalMart is definitely NOT a long-term buy-and-hold investment.
Five years out I believe Wal-Mart will be in a similar situation to today, but much more defensive about itself. The years of external attack will wear away the veneer and some of the barbs will lead to noticable wounds. The company will not succeed internationally, nor will the company substantially increase any new businesses. The traditional WalMart and Sam’s Club same same stores sales will not keep up with inflation, and new store growth will diminish (as management has said they intend). Management will waiver between investing in trying to maintain share, via ongoing lurches into price wars, and buying company equity stock in order to defend itself from investor attacks. There will be some ups and downs for the stock price, but it will not keep up with the market. Although WalMart will still be America’s largest retailer, it will not be competitively advantaged.
Ten years out WalMart will have taken a dramatic act, or two, to try and further Defend & Extend its Success Formula. It will start using cash to make acquisitions, in an effort to find some "retail synergy". It will buy into some area where it claims it can use its "core competency" in volume and supply chain to better serve customers – like furniture retailing. It will probably try to do something dramatic on the internet, albeit more than a decade late, like purchasing NetFlix, or Amazon, in hopes of re-positioning itself. But there will be no synergy, nor any value creation. Just lots of confusion for investors. And the company value will, again, not keep up with the economy or the market. It will have become a perennial also-ran investment.
Thirty years out, WalMart is today what General Motors was in 1977. People will talk about what once was a great company. WalMart will be trying to use size to defend itself, but finding that impossible as better competitors match WalMart’s skills with additional benefits.
WalMart is horribly Locked-in, with no signs of a meaningful Disruption on the horizon. Senior leadership is taking the opposite actions, buying back stock and otherwise using cash in efforts to Defend & Extend its outdated Success Formula. WalMart is in the Swamp, and it will stay stuck in the still water until something negative happens that pulls it toward the Whirlpool. WalMart will find lots of great retail companies there – in the Whirlpool – Woolworth’s, Montgomery Wards, S.S. Kresge, TG&Y and of course Sears and KMart.
by Adam Hartung | Jun 2, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
WalMart’s valuation has gone nowhere for more than 5 years (see chart here.)The equity today is worth 12% less than it was in 2003, meanwhile the Dow Jones Industrial Average (of which WalMart is a component) is up something like 25% (see chart here). Yesterday WalMart’s executives capitulated that their business has lower growth prospects, and the equity value jumped more than 3%. Say what?
I’ve beaten up WalMart a few times in this blog for being completely Locked In to an old Success Formula that no longer meets market requirements, allowing Target, Kohl’s, JC Penney and other competitors to eat into their growth. Yesterday the company admitted as much saying that it would scale back plans for growth (see article here). Instead of putting money into more stores, management would start buying back shares in order to reduce the size of the equity pool and thus hopefully raise its value. In other words, if the company can’t make more money for investors it will reduce the investors. Instead of growing the numerator (returns) it will decrease the denominator (investment.) This is nothing more than financial machinations intended to hide the inability to meet growth targets.
And investors said "great." With no return for several years on their investment they are happy to see someone buy them out, even if it’s just the company. The move up is not an endorsement of the company’s strategy or its leadership. It’s a sigh of relief that some investors will find it easier to get out.
WalMart is not improving its competitive position, it is further Locking-in that position. Instead of using its ample cash to open White Space and figure out new ways to compete WalMart is going to use its cash to reduce investors that aren’t happy with the current results. This does not signal a new beginning, but rather just another step in the Swamp toward the eventual Whirlpool of decline.
Interestingly, in just the last week the former head of Marketing at WalMart filed court documents (see article here.) Included are considerable allegations of insider dealing creating benefits for executives and family members of executives. Of course, amidst all the executive scandals of the last few years its doubtful if many investors would be surprised to learn that top executives were feathering their own nest using corporate power and position. It merely reinforces that the executives at WalMart are benefitted by doing more of what they’ve done, not trying to do anything new. Most telling, Ms. Roehm (the fired exec) said that "WalMart decided to fire her because executives had become increasingly uncomfortable with her ideas and cultural change adn they were looking for some way to revert back to their old, price-based approach to sales without embarrassing themselves by reversing the high-provile decision they had made to hire her just nine months earlier."
Less is not more. WalMart is horribly Locked-in and unable to meet changing market requirements. It’s growth options are slowing. It is Defending its old Success Formula with firings, lawsuits and financial machinations. All signs of a company heading toward the Whirlpool. It takes time for a ship bigger than the Titanic to sink, but there’s clearly some big gaping holes emerging in the hull of WalMart.
by Adam Hartung | May 12, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
On May 5 the rumor hit the newspapers that Microsoft was considering buying Yahoo (see article here). Both companies insisted this rumor was unfounded. Then, on May 10 it was reported that Microsoft bought a 4% stake in CareerBuilder (see article here), competitor of Monster and Yahoo! HotJobs, for an undisclosed sum. These reports drive home the differing viewpoints between investors, who want White Space to drive value, and management, that wants to Defend & Extend the past.
Microsoft built its empire upon a Success Formula as a near monopoly. Systematically and effectively Microsoft first dominated the market for small computer operating systems with MS-DOS. They leveraged that knowledge and kept the company in the Rapids with the hugely successful Windows operating system. Then they overwhelmed all competitors making their suite of personal automation products (Word, Excel and Powerpoint supported with the Access database and a slew of supporting free products such as Internet Explorer and Outlook) a near monopoly as well. This Success Formula of building a totally dominant position in software products for PCs now dominates all decision-making.
Unfortunately, the market for personal computers no longer has the high growth rate it once did. Customers don’t feel compelled to purchase upgrades, as the recently released Vista has shown. Instead, they are doing more with other tools such as PDAs, mobile phones and even MP3 players. Additionally, the growth in PC usage has turned much more to internet environments such as search and entertainment (such as Google and YouTube) rather than the PC as a personal productivity tool. But Microsoft’s Lock-in to their old Success Formula has kept them out of these new markets.
Investors look at the slower growth and huge cash pool at Microsoft and long for the company to find new White Space. Yahoo! would be large enough and in a market with enough growth to actually represent an opportunity for Microsoft to move from its low-growth Swamp back into the high-growth Rapids. So investors are pushing the company to make moves to create and fund White Space to drive future value enhancement.
But Microsoft is so Locked-in it shows no inclination to take such a move. Dabbling into a segment such as career tools keeps the investment very low. Four percent of CareerBuilder in no way Challenges the Lock-in, and does not offer an opportunity to create a new Success Formula. By making this investment Microsoft tells investors "we have no intention of addressing new Market Challenges. We intend to remain Locked-in and hope Vista will someday give us the kind of growth we used to obtain from such new releases."
Investors will remain disappointed with Microsoft. But management, which is insulated from external investors by the large holdings of Bill Gates and its extremely large market capitalization, can ignore this disappointment. And by overlooking the White Space opportunities in favor of near meaningless small investments management signals investors the company has no intention of doing anything different any time soon.
Which should make the executives at Google extremely happy!
by Adam Hartung | May 3, 2007 | Defend & Extend, General, In the Whirlpool, Lock-in
Sometimes market Challenges wipe out large numbers of businesses. As I posted in my last blog, Amazon’s approach to internet retailing of books wiped out thousands of independent booksellers, as well as most chains (anyone remember Crown Books?) When such a Challenging tsunami appears on the horizon, trying to Defend & Extend your old Success Formula simply makes no difference.
Yesterday the National Association of Recording Merchandisers met in Chicago to try and figure out how they should respond to the Challenge posted by MP3 technology. These are the people that retail CDs. Do you remember going to the "record store." Their top solution is to install machines in their stores allowing consumers to download songs onto a CD (see article here.)
Never mind that any one of us can already accomplish this task at home with an internet connection, and a computer with a CD burner. These in-store kiosks charge $.99/song (just like iTunes), then add on another $3.00 for the case and label. On top of that, the process is intentionally extended out 5 to 15 minutes to force additional time in the store and encourage shopping. So using this in-store process costs more, and takes longer than doing it in the comfort of your home. And, at the end of this you get a CD. When was the last time you saw someone on the street listening to music with a Walkman instead of an iPod or other portable MP3 player? These retailers do hope to give access to downloading songs to an MP3 player in the future, but they intend to put software on the songs so they can’t be duplicated. And the cost will remain at $.99.
Why would any music retailer think this is a good idea? Because he’s trying to find a way to Defend & Extend the Success Formula he built when music sales required a physical product. Once Locked-in, this manager is most likely to deny the depth of the Challenge, or tweak the Success Formula in hopes it will somehow work. As one retailer said "this machine…puts me back in the singles business." Oh yeah, he admitted to starting 38 years ago selling 45s (for those too young to know, those were 6 inch vinyl records with big holes in the middle.) To say he’s hoping the past will return would be an understatement.
The fact is that the percentage of people buying CDs has declined 15 percent since 2002. CD shipments in the first quarter of 2007 were down 20 percent. While digital downloading of songs keeps growing at 24%/year and greater. Trying to overlay the cost and effort of an old approach on a new solution won’t meet the market Challenge, instead it just moves the competitor another step toward the Whirlpool and disaster.
by Adam Hartung | Apr 25, 2007 | Defend & Extend, General, Leadership
I have spoken in this blog about Financial Machinations. These are actions taken by management to manipulate the financial results in order to make the Success Formula look better than it really is. In short, financial accounting provides so much flexibility for how to “book” things that it is possible for any business leader to manipulate revenues, expenses and assets from quarter to quarter without breaking any rules (auditors will approve the changes) or laws. Beyond these accounting manipulations, there also exists manipulation of the company growth rate and earnings per share by simply reporting quarter to quarter numbers without highlighting critical adjustments – such as an acquisition that inflates revenue or a stock buyback that reduces the number of shares.
IBM (see chart here) gives us an example this week. While IBM is a great company with a rich history and actually quite a bit of White Space, this week the company announced it will use classical financial machinations in an effort to protect its Success Formula (see article here). Shareholders benefit when companies pay dividends, or when the share price goes up. IBM announced it was going to borrow money in order to buy back shares. This means that without any change (better or worse) in the company’s ability to address market Challenges the earnings per share can be manipulated by leadership simply by deciding to buy additional shares – using borrowed money (in other words, without affecting operating cash flow).
This is a warning sign. When companies do well, management does not need to manipulate financial results. The only reason to undertake such an action is to protect the existing Success Formula. In IBM’s case the company’s most recent earnings announcement (last week) saw earnings increase in North America only 1%. Even Gartner (the notable analysts that cover technology companies) showed concern over these results stating “There are mixed signals about how much businesses are prepared to lay out for new technology initiatives.” (see article here)
IBM is not alone. In the last year such notable companies as Microsoft, Hewlett Packard and Motorola have all undertaken similar actions to increasing a pond of funds for buying back shares in order to manipulate earnings per share and stock price. In the last year, stock buybacks doubled increases in dividends. And the S&P 500 spent more on share buybacks ($432billion) than the U.S. government spent on Medicare (see Chicago Tribune source article here.)
In these days of financial transparency, augmented by the internet, such manipulations are unnecessary. They indicate companies that are interested in Defending & Extending their Success Formulas. Phoenix Principle companies are focused upon market Challenges and addressing them with White Space to remain evergreen.
