by Adam Hartung | Jun 23, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
As readers of this BLOG, you know that I find McDonald’s a risky company that is horribly Locked-in to its old Success Formula. So, I wasn’t surprised when I recently read about McDonald’s latest plan to grow.
McDonald’s is planning to pump up sales by opening a series of drive-through units in China (see Chicago Tribune article.) Sounds like a decent idea you say? Well, let’s see, only 10% of all food in China is eaten out (and 90% of that comes from full service restaurants.) People in China don’t view their cars as eating places, and they still prefer to sit together and eat. The largest western food chain in China is KFC (remember that the next time someone says Asian bird flu is a detraction to their sales), with about 3x the number of units McDonald’s has.
But McDonald’s is ready to predict great success. Why? Well, firstly 74% of people in the U.S. get their McDonald’s from a drive-through, so surely the Chinese will do the same thing – right? (Lock-in #1, people want drive-throughs). Secondly, they have found a company willing to be their partner, the state-owned gasoline retailer, so that insures success – right? (Lock-in #2, McDonald’s is a franchising company so it loves partners that will roll out units for it.) McDonald’s has to be appealing to the skyrocketing Chinese middle class, who are buying cars like won-ton noodles, right? (Lock-in #3, the McDonald’s brand is appealing to middle-class consumers globally.)
McDonald’s has passed on a number of growth opportunities. Remember the hot growing Chipotle’s chain that McDonald’s shipped out the door? Remember the McCafe concept that was to challenge Starbucks but that can’t get beyond 30 units opened? The fact is that McDonald’s will only attempt growth ventures which fit inside its Lock-in. Will the Chinese venture work? The odds look long given the approach McDonald’s is taking. Only when viewed through the lens of McDonald’s Lock-in does this venture look like something to brag about.
Cut cost, extend product lines and go to new markets – that’s the same strategy Krispy Kreme said would turn around their lagging fortunes. That was before they went bankrupt. There’s nothing insightful about that strategy, and it’s not likely to put the fizz from its soda into McDonald’s stock price either. It’s a Defend & Extend strategy, when what McDonald’s needs is more White Space, the ability to listen to changing market needs, and some really new ideas for growth.
by Adam Hartung | Jun 10, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
DJIA member, and industry leading pharmaceutical company Pfizer has had a rough go of it the last 4 years. While revenues are up from 2001, they were flat in 2005 signaling a growth stall. This had been predicted since 2001, as earnings have been highly erratic over these years. Company value peaked in the late 1990s, and since then investors have lost half their value.
The Challenge at Pfizer is the same malady affecting several other big pharma companies. Their strategy to rely on blockbuster drugs, those that address widespread human conditions (such as male impotence), has left them see-sawing between enormous investments and difficulties getting approvals for sale through the FDA – as well as losses from rushing drugs to market that have later been found not as safe as promised. While there are lots of other opportunities for these companies to grow, many of them keep trying to find the next "blockbuster" and their growth is erratic.
Pfizer’s latest reaction has been to sell their consumer goods business. Even though the business has been growing at a strong 10%/year, and has an 18% operating profit, management has said the business is "non core" and thus they want to sell it. Not many consumers who need Benadryl, Zantac, Rolaids, BenGay and Rogaine think of these products as "non core," but for some reason Pfizer now does.
Management’s real objective is to generate additional cash in an effort to Defend & Extend its poorly producing old Success Formula. Rather than Disrupting their old, and struggling, Success Formula, Pfizer would rather sell a great, growing, profitable business in an effort to make another stand for what the company has always done – even if there is no reason to believe it will be more successful in the future.
Pfizer has $52B in revenue. Their proceeds from the sale will be $14B. That’s before taxes – which could be half the proceeds. But rather than trying to grow this business even faster, they are ready to sell it to Glaxo SmithKline or Johnson & Johnson. Both of these companies are huge as well, but both of them know how to recognize a pearl in the oyster bed. They are ready to grow what Pfizer won’t.
Normally, the investors in selling businesses come out the winner. But in this case, the buyers are the winners. They are getting great brands in a great business with opportunities to increase their growth rates simply because the current owner is too Locked-in to its "blockbuster" addiction to unleash the value in its own assets.
This is too bad for Pfizer’s shareholders. They get a relatively small amount of cash and they give up a potentially high growth business. And all because leadership is focused on its short-term problems, rather than the long-term Challenges to its Success Formula. And thus Pfizer leadership is Defending & Extending a struggling model, hoping to regain past glory, instead of using Disruptions and White Space to create new value.
by Adam Hartung | Jun 5, 2006 | Defend & Extend, Disruptions, In the Swamp, In the Whirlpool, Leadership, Lock-in
I talk a lot about the deadly impact of growth stalls. Whenever companies suffer two consecutive flat or declining quarters, or a year-over-year decline, I call that a growth stall. And the results are deadly, with fewer than 10% of these companies ever achieving sustained growth of 2% again.
I’m often asked if two quarters, or year to year comparisons, aren’t too short. After all, I preach on the importance of White Space and using transformations for long-term good health. Aren’t I supporting the short-term thinking that gets leaders into trouble?
My answer is no. Leaders and managers must be impatient for results. The world moves quickly, and it takes precious little time for a company to falter and fail. Take for example Sun Microsystems. This was a high-growth tech company for 20 years and a big winner in the internet boom of the 1990s. But now the company has seen 4 consecutive years of declining revenue. It’s value has been lackluster that entire time as well. And now it has announced it is planning to cut another 4-5,000 jobs in an effort to find profitability.
Investors and managers can’t wait 4 years for improved results. In fact, they shouldn’t wait at all. If a company can’t grow, it will atrophy and eventually falter. The purpose of Disruptions is to constantly challenge Lock-In to old Success Formulas, and the purpose of White Space is to identify new opportunities that can create long-lived growth. The problem is that too many companies try to milk the Lock-in, and they wait too long before they Disrupt and seek White Space. They confuse short-term optimization of an old Success Formula with the requirement to continuously identify and develop growth opportunities ad infinitum.
When it was doing incredibly well, Sun Microsystem decided the right strategic action was to "identify its core strengths" upon the recommendation of Gary Hamel. Scott McNealy said the company’s future was "selling iron" (his macho-speak for selling computer server hardware.) As a result, Sun never moved into networking gear, like Cisco, or network software like Google. Also, Sun was pushing boxes so hard it missed the Challenge Linux placed on its own Unix software. Sun was a hot player in the center of the action, but by "sticking to its core" it wasn’t prepared when the marketplace determined it had sufficient server capacity and good a good software alternative. It’s market started collapsing. And Sun wasn’t prepared to move to the next market opportunity. The first two declining quarters led to nearly 20 declining quarters.
The best time to Disrupt and fund White Space is when your business is doing well. It is then that you can clearly evaluate new Success Formulas without the crisis of declining revenue making you "bet the company" on limited options – and do so quickly. By the time you see two consecutive bad quarters, or year-over-year revenue declines, the business is already stuck in the Swamp and well on its way into the Whirlpool. It might not look that bad, but it already has almost no hope of ever growing again.
by Adam Hartung | May 31, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Last week a phase ended when the top execs at Enron were found guilty of crimes related to the downfall of Enron. The are likely to spend the rest of their lives in prison for "white collar crimes." Unfortunately, those crimes cost investors, employees and suppliers billions of dollars. No longer is "white collar crime" considered something easily forgotten.
It was a year ago that I blogged about the fall of Bernie Ebbers at Worldcom (see Dieing for Results). At that time I mentioned that executives can easily find themselves committed to Defending & Extending old Success Formulas – leading them to be sure they’ve done nothing wrong despite the havoc they’ve visited upon so many. The downfall of executives Lay and Skilling give an exclamation point to that blog. They maintain their innocence because they continue to believe that their Success Formulas cannot be wrong.
More troubling than Enron last week was the $400million fining of Fannie Mae. An organization created by congress in the 1930s to help supply mortgages for all Americans was found guilty of acting "arrogantly and unethically" by creating an environment "where the ends justified the means." Top management "manipulated financial reports to win ill-gotten bonuses in the hundreds of millions of dollars." (see report and full text in the Chicago Tribune.)
Have business leaders all turned unethical? Since 1990, the number of classes on business ethics has skyrocketed, and the number of articles on the same topic has grown geometrically. It’s doubtful that any of these leaders think of themselves as unethical – especially as they spend millions defending themselves. And they go on television proclaiming their innocence.
Rather, its an issue of personal Lock-In to old ideas of executive Success Formulas. Executives see themselves as working hard to do what will increase the value of their companies, and themselves. They all protest "I’ve broken no laws" as investigators, prosecutors and reporters tell of how their poor decisions cost billions while sometimes personally enriching themselves. It is their Lock-in to the old notions of what an executive can do that makes them convinced they are not responsible for the damage they’ve wrought.
We all have personal Success Formulas and personal Lock-ins. As leaders, these personal views often spill out into the organizations we manage. If we are unable to see Challenges to our personal views, we are unable to Disrupt ourselves and use White Space to develop new Success Formulas. For leaders, especially in large organizations, this can be very expensive Lock-in to the thousands of investors, employees and suppliers who depend on the company’s future ability to succeed.
by Adam Hartung | May 31, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
This week one of America’s great media companies jumped nearly 10% in value. The Tribune Company – owner of the Chicago Tribune, Los Angeles Times, WGN superstation, the Chicago Cubs and other great assets – announced a significant stock buyback. After falling nearly 40% over the last year, the stock made jump up. Does this signal a good time to own this venerable company?
The Tribune Company announced that it was going to borrow a lot of money, and use the proceeds to buy back its stock. It will sell some assets, but not most of them. There is no plan for a significant restructuring. Nor a big change in the business. The company said its value is understated, so it is going to borrow money, crash its debt rating, and use the money to hopefully resurrect its moribund valuation.
Will this address the issues which has caused the 40% devaluation? Let’s see, large display advertising customers, such as auto and movie studios, have moved 20 to 40% of their newspaper advertising to Google and other on-line sources. Classified ad customers are finding good service at much lower rates at CraigsList.com and Autotrader.com. In entrenched markets like Baltimore, where the Tribune operates the Baltimore Sun, the well financed Examiner paper is entering the market stealing advertisers.
The Tribune’s actions are an example of Defend & Extend Management. Management knows that the low valuation makes them a target for corporate raiders. So they load up on debt in order to keep the outsiders from trying a takeover. Meanwhile, the company strategy is to change very little. And that is unfortunate, since the marketplace has significantly shifted since the Tribune became an industry leader. Such Defend & Extend tactics will not create value for investors, and shows a much greater probability of significantly weakening a company already under attack from "new media" Challengers.
What would be good to see would be more White Space at the Tribune. Rather than a disturbance, which may well lead to complacency, a real internal Disturbance demonstrating that the company recognizes serious change is needed. And White Space that is funded, and given permission to develop a new Success Formula for the company. Since we don’t see those things, it’s unlikely the company will sustain its recent valuation improvement.
by Adam Hartung | May 24, 2006 | Defend & Extend, In the Swamp, Leadership, Lock-in
According to an old Greek legend, thunder was the sound of giants falling in battles in the sky. There’s been plenty of thunder in the tech world lately. Dell Computer, not even a decade ago considered one of the most admired American companies, has seen its market value decline by more than 40% since last summer. Over the same period, Intel has fallen by almost the same amount.
Both of these companies have the same problem – they focused on optimizing their strategies too long, and they have missed important market shifts. They let their Lock-in to an old Success Formula keep them from installing White Space to keep them evergreen.
Dell has long said it has the best supply chain in its industry. It prided itself that it could take an order, make the machine, ship it and get the cash before it had to pay its vendors. Companies globally marveled at this optimized machine, and sought insight to copy it. But, now competitors have learned to copy Dell – and Dell has not developed any new markets that will allow it to continue its growth in revenues and profits. Earnings are down, and there’s no obvious plan for a turnaround. The company CEO has said that he plans to invest more in the same old business model, hoping results will turn around.
Meanwhile, "Intel Inside" – the famous tag line, isn’t on as many boxes as it used to be. Long suffering, and much smaller rival AMD has been winning over customers from Intel. Although this is largely in high-end multiprocessor servers (rather than desktop or laptop PCs), and AMD still only has about 20% of this market, people are legitimately concerned that Intel may really suffer, as once predicted by its famous CEO Andy Grove when he said that "Only the Paranoid Survive." Even stalwart Dell, long a 100% Intel user, has switched to AMD of late.
Both companies point to just how easy it is for even very successful companies to succomb to Lock-in on their old Success Formula. How easy it is to overlook market Challenges as they focus internally on optimization. And, how they can begin Defending & Extending the old Success Formula rather than seeking Disruptions to it and maintaining aggressive use of White Space to spur innovation and maintain growth.
Just like Wal-Mart, any company can become too focused on its Success Formula – even those in high-tech. History has shown that when this happens, the future risk is incredible. Remember Compaq, DEC, Wang, Unisys – and even what happened to IBM in the 1980s? Dell and Intel must react to their market Challenges quickly, because if they stall the losses this far are just a start to what could be an even more painful decline.
by Adam Hartung | May 16, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you want your business to be a success, attracting employees and investors alike, there’s a simple solution. You need to both grow and earn an above average rate of return. It’s the ability to both grow and make money that is attractive. But for too many executives they see these as a trade-off. And they give up growth in the pursuit of profits.
Do you remember the advertising jingle "Nobody Doesn’t Like Sara Lee"? Well lately, a lot of people have taken to not liking Sara Lee. The company has lost about half its value since the late 1990s, and it is currently valued about where it was in the mid-1990s. Since installing a new CEO and turnaround team about a year ago the company’s investors have not be encouraged.
The new leadership has chosen to implement an aggressive asset sales campaign. Rather than Disrupt the failing business by attacking Lock-in and creating White Space to innovate new solutions, they chose to try and sell their problems to someone else. They also began closing plants as they blamed poor results on industry overcapacity. The result has been disappointing prices for these assets, as others refuse to pay high for troubled brands and businesses. The executives chose to stick with their old Success Formula, despite the poor results, claiming the payoff would be in the future.
The asset sales have continued, but the results have still not materialized. Earnings have dropped 78%, and analysts such as Morningstar are saying that Sara Lee is struggling to capture any benefits from its restructuring. Nonetheless, the new management team is convinced it can follow classic industry practices, such as changing its ad campaign on Jimmy Dean Sausage, in its jouney to find improved results. The executive team is adamant that they must stick to their original plan.
So revenues are down, employment is down, valuation is down – and earnings are down. All in the quest for a quick improvement in profits. And there is no growth, as Sara Lee is making itself significantly smaller. Profits vs. Growth is destroying Sara Lee. What they will have to do is realize that what’s needed is a Disruption, an attack on the industry Lock-ins that are driving this failing program, and implementing White Space where they can find a new solution – if they want people to once again like Sara Lee.
by Adam Hartung | Apr 28, 2006 | Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
Believe it or not, in 1985 Apple sold more personal computers than all the Microsoft-based machines combined. Hard to imagine that 20 years later. By the mid-1990s almost everyone in TechLand considered Apple a non-player. Apple had become a small, niche company with limited customers using their machines for only particular applications – usually graphic intensive. Microsoft had "checked" Apple by the mid-90’s, and the vast majority of investors had considered the game over.
However, today Microsoft revealed a serious stumble. They have announced (see article) that costs are up, and profits are not going to meet expectations. Not this year nor next year. Microsoft investors have gotten nothing (other than a one-time $3 dividend) for holding their investment for the last several years. The company’s stock price reached current levels way back in 1998. Microsoft has stalled, while Apple is in the throes of a great renaissance. Apple’s value is up 2x to 3x over the same timeframe.
Not many companies do what Apple did – coming back from the brink of failure. But those that do rely upon the techniques Apple used. An internal Disruption used to face up to market Challenges, followed by installing White Space which is used to identify and develop new opportunities.
Lots of companies do what Microsoft is doing. During the heyday, high growth environment for PCs, from the 1980s through the 1990s, Microsoft developed a Success Formula. As it grew, Microsoft Locked-in that Success Formula with its culture, its structure and its costs. Microsoft optimized itself around the market conditions (the environment) that helped it succeed and grow while its first market was in rapid expansion.
Now, the markets are changing. This is creating new Challenges. Apple is using Disruptions and White Space to react to these Challenges and create enhanced value (for employees, suppliers, customers and investors). Microsoft is busy trying to Defend & Extend its past Success Formula. It’s trying to use its old skills to take on emerging new Challengers Google and Yahoo!. Microsoft is stalled, and if it doesn’t follow Apple’s lead, Microsoft could end up in with even more serious problems.
Any company can stall. All it takes is Lock-in to an old Success Formula. Then, a market shift can open the door for new competitors. The answer is to Disrupt yourself and use White Space to find a new Success Formula that meets new market requirements. Not "more, better, faster" of the old Success Formula – that leads to rising costs, poorer returns and the unlikely hope that the past will repeat itself.
by Adam Hartung | Apr 16, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
If asked to name the world’s top operationally excellent company, one name you would have to consider is Wal-Mart. From humble beginnings, a relentless focus on operations led this company to become the world’s largest. For two decades Wal-Mart has been THE model of supply chain management, inventory reduction, procurement excellence and using technology in support of its operational goals. Wal-Mart has out-retailed every retailer, and become a huge success.
Wal-Mart’s profits have risen consistently for many years. The company’s stock, however, has not done as well. Between 1997 and 2000, the stock went from $10/share to $70/share. Since then, however, WMT has had a series of lower highs every year. Since early 2005, WMT has been a laggard of both the DJIA and the S&P 500. The problem has been a declining price-earnings multiple, as investors wonder how Wal-Mart will continue growing. Yes, profits are up, but how will the world’s biggest company grow?
How has Wal-Mart responded? By increasing its focus on operational excellence! The latest efforts are intended to cut inventory even further. Reducing the numbers of items carried, and risking out-of-stock items in the store. Wal-Mart is willing to have customers not find goods they want in order to even further improve it’s already world-class, record-setting efficiency while seeking to lower costs.
Wal-Mart is continuing to Defend & Extend the Success Formula that made it famous. Yes, that Success Formula made Wal-Mart an incredible success. But now Wal-Mart has to learn how to do new things in order to grow. Focus, focus, focus Wal-Mart has already proven it can do. But, since the company is unwilling to Disrupt itself, it keeps hoping that "more, better, faster" of what first made it famous will somehow bring it out of a 5-year slump. Instead, Wal-Mart needs internal Disruption, and White Space, to overcome the Challenges which have slowed its growth (and investor enthusiasm.) All 1-Trick ponies are eventually eclipsed by alternatives that change the competitive playing field.
No one thinks Wal-Mart is in a slide to ruin. After all, they are ….. Wal-Mart! But, then again, no one predicted that we’d see the wholesale decline in Woolworths, then Sears … and there was AT&T, and Polaroid …. and Xerox once looked like it could copy its success forever ….
by Adam Hartung | Apr 5, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Lifecycle, Lock-in
Newspaper stocks are getting the snot kicked out of themselves the past year. Investment analysts, industry analysts – why at this week’s industry trade show even the industry executives – are all saying that newspapers are losing readers, losing advertisers and losing their margins. Newspaper values are at unheard of lows.
So why is one of America’s billionaires starting a new newspaper in Baltimore? Philip Anshutz, of oil and telecom wealth, has been buying small newspapers in San Francisco and Washington – and now he’s starting one from scratch in Baltimore. Is he nuts?
Think about the competitive situation for a moment. The Baltimore Sun is really the only newspaper in town. It’s owned by the Tribune Company way back in Chicago. The paper has been under pressure to improve margins, so it has been cutting costs and people. It hasn’t changed its business model in decades, so it’s struggling to maintain what it used to provide. In other words, The Baltimore Sun is Locked-in to a declining Success Formula – which it is trying to Defend and Extend. With not-so-good results.
The Baltimore Sun is a target. It’s Lock-in means that this upstart new paper can see exactly how the only competitor is behaving – and can predict their behavior pretty darn well. With only one competitor to deal with, the upstart can take a focused attack. And, since the new Baltimore Examiner is just starting its life cycle it is in White Space to develop all new solutions for editorial, copy desk, graphics and advertising production, as well as printing and distribution. This new paper is able to start with very low overhead, use part-time reporters, go offshore for its editing and page layout work, and find some low-cost new printer. Whatever weaknesses exist at the Sun, they’ve made them obvious and the Examiner is in great shape to exploit them.
Newspapers are not a growing business. But that doesn’t mean the local scribner is going to be allowed an eloquent and profitable decline. When the leading competitor becomes so Locked-in, they become a target. And that provides an opportunity for a new competitor to benefit – even when the market isn’t growing 15%/year.
As a local monopoly, the Sun has no where to go but down. If they keep trying to Defend and Extend, well that’s exactly where they will end up. They are in the Swamp, and the Examiner is trying to push them into the Whirlpool. If the Sun doesn’t re-invent itself, it’s already depressed profits will evaporate. It’s a painful lesson to deal with – and it’s going to be tougher to re-invent now that a new competitor is on the scene.
