by Adam Hartung | Mar 20, 2006 | Defend & Extend, Innovation, Leadership, Lock-in, Openness
Success Formulas are nested. We have personal Success Formulas, which interact with Work Team Success Formulas, which connect with Functional and B.U. Success Formulas, which tie to Industry Success Formulas those are impacted by Success Formulas within the larger economy. Whew! That’s a lot of Success Formulas. But, in fact, achieving superior results mean these Success Formulas all line up. When they are misaligned, resources are spent ineffectively and results suffer.
We frequently focus on the Success Formulas at the top of the pyramid. But, big Challenges occur when changes happen deep. At the deepest are changes in the economy – which we tend to ignore – and yet they create the biggest Challenges.
Just a decade ago the emergence of all the linked PCs across the world wide web created a change in the economy. It challenged Success Formulas throughout the pyramid to align with the new capabilities. We all had to learn how to move faster, and more effectively to keep pace competitively. And it opened the door for international trade on a previous unheard of scale, as we discovered we could use the web to manage work anywhere, from Indiana to India (as detailed in the book The World is Flat).
Now, there’s a new Challenge emerging. And we need to find White Space to identify new solutions.
Any business watcher knows that complaints are high about the cost of health care. Estimates are that $1,500 of every car’s cost is worker health care. And the auto companies are fighting with their unions to cut this cost. The same has happened with health care cost in the airlines, steel, and most other industries. For those of us working in America, we’ve all seen our employers raise our contribution to the insurance premiums, while watching the dreaded co-pays go up and the services offered go down. According to a 2004 Harris poll, a majority of Americans actually favor price controls!
U.S. employers are learning that in a new, no-barriers world they have to compete with companies that effectively have no health care cost. In most other countries, the cost of health care is handled dramatically differently – with the result that employers do not pay for their worker’s plans. As a result, a manufacturer in the U.S. finds the marginal cost of health care actually causes him to lose sales against a global competitor – such as China. And the same with a U.S. services vendor competing with Indian companies.
What’s happening is that we no longer can look just to how we manage the American economy when we compete. We’re now on a world stage. We have to compete with countries which standardize health care, recover much of the cost through various taxing systems, and leave the employer largely out of the equation. The Challenge to American employers – and thus to all of us who work – is very real.
The issue is no longer becoming "what’s the right answer." Instead, we have to realize that Americans are Locked-in to a system that is globally unique. It is affecting our competitiveness – on a company-by-company basis. This system of employer funded private insurers worked well when constructed as part of our Success Formula post Depression. But now it’s hurting our competitiveness. The world has changed.
So far, we’ve been pretty unwilling to recognize this Challenge. We’ve remained Locked-in. Governmental programs to change have been met with attacks from not only insurers, but by most Americans. What’s needed is White Space for us to test some new approaches. Americans are unlikely to change just because they see merits (and deficits) to programs in Canada or the U.K. Instead, we have to develop our own solution. And that will require us giving ourselves permission, and dedicated resources, to experiment with different solutions.
We compete now globally. Thus the requirement becomes aligning our industries, companies and ourselves with changes in the economy. EVen where such alignment can be wrenching. Where will this White Space occur? Probably not in government, that’s not our way. But rather through some form of private approach where we can experiment and learn. The sooner we create this White Space, fund it and put talented people in it the better. And the businesses that pioneer these solutions have the opportunity to generate enormous value, and wealth for investors.
by Adam Hartung | Jan 29, 2006 | Defend & Extend, General, Lock-in
I’ve been delayed posting because I’m traveling around India. What a wonderful country that is regularly creating new Challenges for old businesses.
Auto traffic in India is always difficult, primarily due to very poor quality, and insufficient, roadways. But on a recent journey traffic was particularly snarled. Finally we reached the cause – there was a trio of cows standing in the road looking as placid as imaginable while autos found their way around the cows.
I commented to the driver that this seemed a problem worth solving. India is no longer a slow-moving agrarian state, but rather today it has become a fast-paced technology-led country with new demands. Especially in the cities. While the past need not be forgotten, surely small changes could be made to more effectively move toward the future. Why would they continue to allow cows to wander onto the roadway? Why not put up roadside fencing? Why not have people along the road keep the cows off – or at least lead them off when they wandered on? He looked at me like I was from Mars. "Why would we do those things?" he asked me.
Finally, I understood the often used phrase "Sacred Cows." We say it in business meaning something that is unchallengable. All executives say "around here, we have no sacred cows." But in fact they do. They see them, but they do not recognize them. Just like the driver who was very willing to accept cows on the roadway, business leaders can see the things that impact their business, but they don’t recognize them as something which is changable. Just like the driver looked for ways around the cows, rather address the notion of cows blocking the roadway altogether, business leaders look for ways around the Challenges as they focus on the immediate problem. They accept these things (their sacred cows) as given, and they look for ways to maneuver around them without impacting them. They ignore the Challenges and overlook the Lock-in as they march forward focusing on the problems being created by the Lock-in and the Challenges to it.
Once you are Locked-In you have created your sacred cows. You then institutionalize them with your processes. Activities are based on the notion that these things will never change. And then, we don’t see the Lock-in anymore. We are blind to the notion that these Lock-ins can, in fact, be a cause of our problems in a changing environment. From inside, the sacred cows become invisible as something that can be changed. And to outsiders that is the obvious sign of Lock-in.
Every business has its sacred cows. It is unavoidable as the business defines its market, customers and competencies. But long-term success requires you bring along people who can point out these sacred cows, and identify the Challenges which will lead you to suffer by maintaining the sacred cows and processes which support them. Just as India must fix its roadways, including the impact of wandering sacred cows, if it wishes to maintain its growth rate, businesses must identify their Lock-ins and develop ways to address them to maintain growth.
by Adam Hartung | Jan 15, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
The Chicago Tribune ran a great overview of the situation facing McDonald’s leadership today. In a nutshell, an upstart hedge fund manager (William Ackman of Pershing Square Capital LP) is pushing McDonald’s to restructure itself by spinning off restaurant operations, selling real estate and otherwise changing the company. He is supported by a large REIT (Vornado Realty Trust) which would like to participate in the real estate restructuring. McDonald’s management is fighting off these efforts.
The really interesting question is, how did McDonald’s get itself into this mess? Quite simply, Lock-in to the past has kept McDonald’s from seeing its real Challenge. McDonald’s business today is remarkably like it was in the 1960s. The company still franchises and operates a hamburger chain. While there has been an amazing amount of change in the last 40 years, little of it has affected McDonald’s as they have continued Defending and Extending their early success. Now McDonald’s is mired in the Swamp, unable to control its own destiny due to the attacks from outsiders.
McDonald’s has had lots of opportunities. It has bought other restaurant concepts (such as Chipotles), yet it never really supported their growth as it kept focused on hamburgers. It built expertise in franchising as well as food and restaurant supplies distribution strengths. But it never moved into those businesses beyond supporting its core business. And as nutritional habits have changed among its baby boomer customer generation has aged, while an entirely new generations of customers has come along, McDonald’s steadfastly ignored the Challenges and kept trying to grow its old Success Formula.
You can’t blame the hedge fund operators and REITs for taking aim at McDonald’s. Any time a company becomes a slave to its Lock-in it becomes an easy target. Management is too easy to predict, and their unwillingness to address Challenges with their resources makes those resources a juicy desire for outsiders. Sometimes competitors take advantage, and sometimes its unexpected outsiders – like in this case.
We all have a natural tendency to support the incumbent. They’ve worked hard to get their positions, and we want them to succeed. But when the incumbents can’t address Challenges and overcome Lock-in the interests of shareholders, suppliers, employees and customers are best served by those who would force a change in behavior.
by Adam Hartung | Jan 8, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Harley Davidson is a great, well known brand. But as one of my old professors used to say "a good product, and a good company, doesn’t necessarily make for a good stock."
Despite it’s brand image, for the last 2 decades things have been changing at Harley. Half of revenues now come from brand merchandise (like jackets) rather than motorcycles. The average age of its customers has kept rising, until now its over 50. Its new product introduction has been between anemic and nonexistent.
No one has done a better job of hiding an inherently no-growth story better than Harley Davidson. It has raised prices, faked shortages and found more ways to Defend and Extend its brand as it has done almost nothing to bring in a new generation of customers. Its big effort to move forward was the launch of the V-Rod 3 years ago with an engine, no joke, made by Porsche. Unfortunately, Harley’s dealers bad-mouthed the machine and wouldn’t sell it as they continued to stay Locked in to the old business (and the old-fashioned "hogs"). And Harley knuckled under, downplaying the new bike to appease these dealers. And a new generation of customers, to whom the new bike appealed, continued going to Honda and Yamaha.
Harley has had a P/E multiple of 25. Recently it has fallen to 14. Some folks think this might make Harley a value. I’d say that given the Lock-in, and the complete capitulation to Defend & Extend management at Harley, they have been merrily floating along the Flats not realizing how close they were to the Swamp. Fourteen might be a very high P/E once the market realizes how few 50 year olds are left looking for a $25,000 motorcycle based on 30 year old technology.
by Adam Hartung | Dec 12, 2005 | Defend & Extend, Disruptions, Leadership, Lock-in
Can you tell the difference between a disturbance and a Disruption? I’ve found in my speeches that most people can’t.
There’s actually a big difference. A disturbance will cause you to pause and think about how to get your Success Formula to react quickly. But a Disruption causes you to stop and think about the viability of your Success Formula. It creates a pattern interrupt that it causes you to think about your Lock-ins and consider entirely new Success Formulas. A disturbance is often externally generated, a whack to your head so to speak, while a Disruption comes from within the organization because it attacks your Lock-in.
I’m going to reach out of business for this example. When Katrina hit the Gulf Coast I urged the government to stop business as usual, and create White Space for rebuilding the area into a better, more powerful economic environment. Katrina created a severe Challenge to the area. The problems left behind were so large that business as usual could not deal with them. But would the area actually change, or be left to cope via its old means and resources?
The President went on television in front of bright lights (powered by portable generators) to say that yes, New Orleans needed to be rebuilt. And he promised lots of money. But there were no specific agenda items that would change the old ways we had of dealing with catastrophes, nor solutions to the patchwork of local, parish, state and national approaches that often conflict. At the time of the speech we all wished for a quick rebuilding, but it was clear that would not happen – and it hasn’t. It couldn’t if we didn’t change our way of operating – change our Success Formula.
This happened similarly when we responded to the attacks of September 11, 2001. We gave families of the dead money, but otherwise we lost our opportunity to change how we prepare, how we manage first-responders, and how we operate our airlines. Those things are all still the same – and unlikely to change – because we did not Disrupt our way of doing things and create White Space to develop new solutions.
We didn’t Disrupt the way we deal with catastrophes. We didn’t change the way we’d always operated. To mimic a recent clever TV ad, all that was really offered was "throwing money at the problem." And that, in fact, hasn’t happened because the way we distribute money is so broken the process can’t allocate funds quickly enough to help. The money is promised, but not distributed and it looks increasingly like it won’t be due to chronic government deficits and urgent needs from elsewhere (such as Iraq, Medicaid, etc.)
Katrina was a Challenge. It demonstrated our inability to prepare for and respond to catastrophes. It begged for a Disruption to our Lock-in to old government approaches so we could develop new solutions. But, rather than undertake a Disruption we instead mired ourselves in disturbances as lawmakers and spending officials haggle through the problems of our dysfunctional process. The Challenge pointed out the flawed approach, but we have not done anything about it.
Some have said to me that these government examples are unfair – because government can’t be Disrupted. And that is simply untrue. After December 7, 1941 we Disrupted government allowing businesses to react quickly in the production of Liberty Ships, airplanes and all manner of military apparatus to move us expeditiously into WWII. We opened the floodgates to new ideas for fast action – and we produced more equipment (and solutions) faster than anyone, including our enemies, believed possible.
Challenges expose weaknesses. But we too often focus on the problems created by the Challenges rather than the Challenge itself. We quickly reach for Disturbances that make a lot of noise, but don’t really change our Success Formula. When that happens, you can predict the future quite well – for behavior will remain unchanged. Only by Disrupting – implementing pattern interrupts that cause us to question the status quo – and bringing in committed White Space can we meet the Challenge head-on and create Success.
by Adam Hartung | Nov 27, 2005 | Defend & Extend, In the Swamp, Leadership, Lifecycle
Every time we hear about a company hitting a stall we want to be optimistic. We want to believe they will turn around their situation and recover their growth. Unfortunately, once a business hits a growth stall (regardless of the cause), it has a less than 7% chance of ever sustaining growth greater than 2%/year.
Merck hit a growth stall about a year ago when one of its products was pulled from the market. Several other products were challenged. The immediate result was a dramatic decline in market capitalization. The company lost about 1/3 of its value in a day – and over about 6 months the company lost half its value. We would love to believe the company will recover its historic growth, so value shoppers begin buying up the stock. But the fact is that Merck has a greater than 70% chance of NEVER recovering that lost market capitalization.
We would love to blame the regulators, personal injury lawyers and even product customers for creating this stumble for Merck. But, regardless of cause, what we do know is that for Merck to recover will require a significant change in its Success Formula. The marketplace has shifted, competition has changed (affecting the profits of all pharmaceutical companies) and Merck must change if it is going to try and regain its lost growth.
But the company is not trying to reinvent its Success Formula. Instead, it is trying to Defend and Extend its old Success Formula with marginal changes and cost cutting. Although the company appointed a new CEO last May, it has not really Disrupted its Lock-in (in response to these market Challenges). It has not created White Space to develop a new Success Formula. It keeps trying to capture the lost growth by doing more, better, faster, cheaper.
Those who have heard me speak over the last year know that I have been a constant pessimist regarding Merck. While it’s stock occasionally gains a point or two, there is no upward trajectory. Why do I remain pessimistic? Because, like 70% of companies that stall, Merck keep trying to "fix" its problems with tweaks. Until the leadership Disrupts and uses White Space to reinvent, it will not address its market-based problems effectively.
I’d love to be optimistic – but there just aren’t any signs that would be prudent.
by Adam Hartung | Nov 20, 2005 | Defend & Extend, In the Swamp, Leadership, Lock-in
We all know how Apple rejuvenated itself with the iPod. From a declining, niche player in personal computers the company took off after launching the iPod. Taking advantage of commercially available MP3 technology, Apple stepped in after Napster was sued into oblivian to help customers accomplish their goals of building individual music libraries.
Why didn’t Sony take this tack? Sony not only had all the hardware (after all, they were leaders in radios, personal CD players and the marketplace for personal entertainment), but they actually owned a recording company — they had the content. Sony could have been first to build on the market Napster pioneered to reap the results.
But Sony chose to Lock-in on CDs. It missed the MP3 wave. And it still is. After leading the industry wave to wipe out Napster, Sony is now leading the industry to block piracy with copy protection software. Instead of folowing its customers and developing the marketplace, Sony keeps trying to blame its customes for its woes. Sony keeps fighting the last war, and in the process it is alienating its customers and its most important suppliers – the recording artists.
When markets shift, those who succeed move quickly to the new competitive ground. You can moan and groan and try to use lawyers in an effort to protect and old business, but that never works. Customers will find the suppliers who figure out how to give them what they want. Sony needs to wake up and align with its customers, instead of trying to find ways to protect its out-of-date (and failing) Success Formula.
by Adam Hartung | Nov 2, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Vornado has acquired a 1.2% stake in McDonald’s (check out full Bloomberg News article.) Does anyone remember this scenario? It was just November, 2004 when Vornado bought 4.8% of Sears leading to Sears acquisition by Kmart. Simply put, the Sears real estate was worth more than the stores (KMart’s rebirth as Sears Holdings hasn’t changed that situation, either). Vornado has learned how to spot these opportunities – including acting as a principal in buying Toys R Us in March to capture the value of that struggling retailer’s real estate.
While everyone knows that McDonald’s franchises most restaurant operations, did you know the company owns about 37% of the land under those stores, and 59% of the buildings? Once again, to sharp real estate people the land and buildings look more attractive than the hamburger operations which use them.
McDonald’s reaction? In an email McDonald’s spokesperson Anna Rozenich said that McDonald’s plans to stick to its current business strategy. Over the last 5 years McDonald’s has struggled with flattening demand for its products, selling off most non-hamburger operations, closing stores and restructuring. Now an external party has emerged to question the validity of the business model. But despite all these Challenges McD has refused to Disrupt its old Success Formula and develop new value for its shareholders, employees, vendors and customers.
This is the operating definition of Lock-in.
by Adam Hartung | Oct 27, 2005 | Defend & Extend, In the Swamp, Leadership, Lock-in
…. Apparently a lot. Have you seen what’s been happening to the share prices of companies like New York Times, Gannett, Knight Ridder and Dow Jones? Down, down, down, down – from 25% to 35% in the last year. Why should such great companies be struggling?
I always thought of these companies as news companies. But they think of themselves as newspaper companies. Seem subtle. Until you realize that newspaper readership is down across the board, as is advertising for newspapers. As we all know (and this blog demonstrates) most of us get most of our news from the web now. Instantaneous, customized, searchable news. We don’t wait for a paper to arrive and take time to browse it.
It would seem obvious that the best newspapers, who have the best news bureaus, would be leaders in taking news to the web. And leaders in attracting readers to those sites. But, alas, they spent most of their energy in early web days Defending & Extending their hard-copy business. They feared the web and the uncertain revenue model. They waited, and waited. Now, people don’t go to those sites first, or second, or often at all when they want news (for more detail see Chicago Tribune story.) And, most importantly, younger readers completely ignore these venerable names for finding their news, prefering web sites more customized to their interests.
These companies got themselves into trouble because they didn’t see themselves as News companies. They ignored the challenges the web brought in the 1990’s. They Defended & Extended their old Success Formulas. They reassured themselves their business would return. They failed to Disrupt their Lock-in to newsprint (what a simple, and obvious Lock-in), and they never created White Space teams with the PERMISSION to actually develop leadership in on-line news delivery (as well as a profit model for the emerging new market). Now they have a HUGE Re-invention Gap as they struggle to find a way to catch up with their customers, who are leaving them in the proverbial dust. And once again we see their employees (layoffs), vendors (cost cutting), customers (forced to find new ways to advertise effectively) and investors (losing billions of dollars in equity value) suffer.
Be careful how you refer to your business. Deadly Lock-in might start with something as simple as calling your business News versus Newspaper.
by Adam Hartung | Oct 26, 2005 | Defend & Extend, General, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
Imagine you bought stock in a small restaurant concept in 1993 (12 years ago) with a handful of restaurants. Today, that chain has expanded to 450 locations, profits have grown five-fold since turning profitable in 2004 and sales are up 33 percent in the first six months of this year after doubling between 2002 and 2004. Would you want to sell that stock?
I wouldn’t either. But that’s what McDonald’s is doing, by selling off ownership in Chipotles. Chipotles is growing faster, and more profitably than McDonald’s. But McD is saying they can’t afford to invest in Chipotle, they need to sell their ownership to have others pay for continuing to grow this skyrocketing opportunity. Why? Because McD wants to focus on their 37,000 stagnant hamburger restaurants.
The urge to Defend & Extend the hamburger business is greater than the urge to grow at McDonald’s. McDonald’s shareholders and franchisees would all benefit from McD getting behind expanding Chipotles. The growth and profit opportunities in the new business are multiples of the hamburger business. Yet, even though the data is clear, the Lock-in to perpetuating its outdated Success Formula keeps McDonald’s from taking advantage of its own opportunity. Instead of migrating McDonald’s Success Formula toward this overwhelmingly successful White Space project, they are sending it out the door.
McDonald’s is horribly Locked-in. Leadership doesn’t understand how to Disrupt that Lock-in in order to move the company from the Swamp back into the Rapids. They only difference between McD and GM is that McD hasn’t moved far enough into the Swamp. But time will tell.
For employees and investors, now’s the time to run, not walk, toward Chipotle. It’s always better to be in the Rapids of Growth than stuck in the Swamp of mediocre performance.
