"CraigsList is for hookers." That's what the General Manager at the Los Angeles Times told me in 2005. In a meeting to discuss the newspaper's future profitability I pointed out that 1/3 of his newspaper's revenues came from Classified ads, and I had asked him if he was concerned about CraigsList.com. As you can tell, he was not.
At the same time, I asked him if he was concerned about on-line ads and the Google placement engine undermining his display ad business. He assured me that the internet was all for bloggers and no reputable news reader would pay much attention to on-line news. So no, he wasn't worried about internet competition to the newspaper sucking away this advertiser base. He just needed to keep old customers focused on the value of newspaper ads. In less than 6 months GM removed 70% of its newspaper ads – shifting all the money to on-line advertising – leading the auto pack on-line. And movie companies moved nearly 75% of their newspaper ad budget to on-line, while more than half of real-estate ads went on-line. Those happen to be the top 3 sources of display ad revenue for newspapers.
Today Tribune Corporation is in bankruptcy, and classified ads have dropped to a trickle for all major newspapers. Meanwhile, things are going pretty well at CraigsList and Google:
As can be seen, revenues per employee are phenomenal at CraigsList, and extremely good at Google. Much better than at the Tribune Company newspapers such as the Los Angeles Times and Chicago Tribune – despite them shedding a high percentage of employees over the last 7 years!
According to Gavin O'Malley, at OnlineMediaDaily of MediaPost.com in "CraigsList Revenues Soar: But Problems Loom" revenues at CraigsList may exceed $4M/employee/year! Margins he asserts are in the range of 75-80%! And revenues, while still small at about $125M, are growing at 25%/year (for what everyone thinks of as "free.") Albeit, this is a small business. But what if Tribune Company had paid attention back 5 years ago and invested hard in creating the world's best CraigsList – rather than ignoring it? What would the possible revenues be today? And margins? And impact on Tribune Company growth in revenues and profits?
Most companies do only a surface analysis of competition. They are so busy listening to, and reacting to, big customers it's all they can do to keep operations going and make the marginal changes to keep big customers happy. As a result, maybe they look at 2 or 3 of their most similar competitors (like other newspapers in the local market for our example.) And that will be cursory, examining total revenues, perhaps margins (if public and data is available) and a quick glimpse at impact on existing customers and any new products recently launched. But overall, very little attention is paid to competition.
And practically none is paid to "fringe" competitors. Those with different business models. Polaroid ignored digital camera manufacturers (despite licensing them technology) until Polaroid went bankrupt. Digital Equipment(DEC) ignored AutoCad – calling their CAD/CAM products "toys." Wang and Lanier said no big company would use a PC, rather than an integrated centralized system, for corporate word processing so they discounted Apple and Microsoft. Motorola largely ignored Apple in mobile phones, even after doing a joint venture with them to create and launch the RoKR. Failure lists are strewn with companies that simply ignored "fringe" competitors – saying they didn't understand the industry, the customers and how "the business works."
Large or small size is not important when studying competition, it's the ability to change how customers buy that is important. As we've seen in the case of companies like Google, Apple, eBay and Amazon we can see that fringe competitors can grow extremely fast. They can alter the competitive landscape quicker than almost any traditional corporate planning group will give them credit. Just ask the folks at Sears or Home Depot about he impact of Amazon and other on-line retailers (do you think either of those traditional retailers have anywhere near $1M revenue/employee like Amazon?) Or ask Merrill Lynch about the impact of Schwab, eTrade and ScotTrade.
The second step in The Phoenix Principle is to obsess about competition. When you're "the big gun" in the industry it can be incredibly easy to ignore fringe competitors. But do so at your risk. When profits are something like $2M to $3M per employee (as in the case of CraigsList) there is a lot of resource to invest in growth. And strong indications that the business is able to very profitably grow! Ignoring "fringe" competition – especially because you are focused on existing large customers who are Locked-In to your Success Formula – leaves you remarkably vulnerable to rapid market shifts and a really fast demise.
Apple's most recent earnings surprised almost everyone, to the topside. At SeekingAlpha.com "Apple Soars: Is this a Great Country or What" the author points out that all analysts are now calling for Apple's equity value to continue increasing. Most expect prices to achieve $330 – $350/share. Right now Apple is worth about $235B. At $330/share it is worth $300B. Microsoft is worth $273B. That means within the next few months the expectation among investors is that Apple's value will eclipse Microsoft's.
Why? Because Apple has much faster growing revenue sources than Microsoft. Despite a plethora of products, Microsoft still depends for sales and profits on PC operating system and office automation products. And that market simply isn't growing. Even Microsoft optimists are depending upon a "PC replacement cycle" to drive more sales rather than any real growth in demand.
While Microsoft has spent the last decade Defending & Extending (D&E Management) its PC business, its value has been flat. Meanwhile, Apple has developed other revenue sources:
In 2000 Apple relied on Mac sales. But now, it has 2 businesses that are as large as the computer business. While defending the Mac business has maintained its sales, using White Space to launch other businesses has more than tripled Apple's revenue. Today the iPod/iTunes business is as large as the Mac business, and the iPhone business is as large as well. Both are growing. And with estimates that already a million iPads have been sold – with some estimates of reaching 6 million units in 2010 – who knows how big the publishing business could become for Apple.
As SeekingAlpha.com points out in "Everybody Loves Apple but Who's Left to Buy It" there are ample reasons to forecast substantial revenue and profit growth for Apple – causing it to lure many more investors to own the stock. Not only hardware sales are going up, but in both the music and smartphone business Apple has the envious draw of pulling follow-on download sales – songs, videos, and apps. Thus, each device pulls a series of ongoing revenue bites.
Readers should also note how fast this has happened. What has happened to your business in the last decade? In the last 3 years? As we can see, Apple created a $20B/year business since 2007 just in the iPhone. Another $16B/year business in iPod/iTunes during the last decade. That's over $36B/year of revenue from new sources, all organic (no acquisitions) in under 10 years. And that's the power of White Space. Instead of planning how to defend an understood and predictable market (like Microsoft) Apple studied new market needs, then launched a product and gave the team Permission to do what it took to succeed – unencumbered by the history of the Mac, or Apple or any of the Lock-ins that were part of the old Success Formula. This White Space teams then spawned revenue streams that are envied by everyone.
My recent Forbes column (Microsoft's Dismal Future) portended this week's earnings announcement and the changing fortunes of these two companies. Lacking White Space, Microsoft is an uninteresting company with limited growth forecasts and negligible value growth. By using White Space Apple is growing much faster, and will soon have a higher value than "the world's largest software company."
Effective use of scenario planning, competitor analysis, disruptions and White Space can launch growth in any company. You don't need a "hot economy" to generate growth. And Apple has been demonstrating this quarter after quarter for nearly a decade – with several more good quarters coming.
Is news dying, or are newspapers dying? That's a critical question. Most of us know the demand for news is not dying – and if you needed reinforcement a recent McKinsey & Company study verified that the demand for news has increased (McKinsey Quarterly "A Glimmer of Hope for Newspapers"). And a lot of the increase comes from people under 35 who are escalating their news demands. Of course, most of this increase is coming from the web and mobile media.
Too often, however, we don't see our business growing. Instead, Lock-in to old definitions make us think our business is shrinking when it is actually doing the opposite! And that's the Re-invention Gap. Manufacturers of small printing presses said demand was declining in the 1970s, when in fact demand for copies was exploding. Only the explosion was from xerography instead of presses. So A.B. Dick and Multigraphics, small offset press manufacturers, went out of business when demand for the output of their product was exploding! The market shifted, but it kept growing, and they missed the shift.
Today we see this behavior in most news publishers. Those who print newspapers and magazines are talking about how horrible business is. Only the demand for news is growing more quickly than ever. It's just not demand for print, which arrives too late for many customers. And because print is too slow a distribution method for these customers, advertisers are abandoning print as well. But only if you're Locked-in to printing do you say the market is horrible. Because with demand for news growing, if you reposition yourself to serve the growing part of the market you should say business is great!
Tribune Corporation, owner of The Chicago Tribune newspaper is still in bankruptcy. And its future relies entirely on how well it will serve the needs of on-line news readers. According to Crain's Chicago Business, in "Former Sports Editor Bill Adee Steers Chicago Tribune's On-line Strategy" print advertising revenues fell by 9% versus last year in the most recent quarter. And according to a quoted investment banker, nobody would have much interest in the value of a print newspaper. That business is destined to keep declining.
But simultaneously the volume of on-line ads tripled! And that's what a business has to do to cross its Re-invention Gap. It has to move from the old business into the new business – from the declining elements of its business into the growth elements.
What most businesses do wrong is try to apply their old business model to the new business. The old Success Formula has Lock-ins to metrics, schedules, processes, frequent decisions, decision-makers, strategic plans, etc. which the leadership tries to apply to the new business. For example, most newspapers are used to selling ads for several thousand dollars, based upon the number of subscribers. These are pretty large price points. But on-line, ads are sold per page view or per click. Now we're talking pennies sometimes. And to make money, you have to get a lot of views. Likewise, newspapers work on a 24 hour cycle of news accumulation and publishing, whereas the internet is 24×7 with the opportunity to change headlines and what's reported continuously. If a newspaper tries to apply the old Success Formulas related to sales, pricing and editorial process they fail.
And that's why crossing the re-invention gap requires a big Disruption. You have to get the organization to understand that while you are managing the old business, it is destined to eventually go under. So you have to be prepared to Disrupt the Lock-ins, to discover a new way to do the business. And that can only happen if there is a White Space team dedicated to building a business the way the new marketplace will pay for it. Totally separated from the old business. And exactly the opposite of what Tribune is doing by placing the team in the middle of the old newsroom!
At Tribune, one of the big problems is not only the ad pricing model and news scheduling, but the fact that the leadership is still trying to drive content like they did at the newspaper. Over a decade ago Tribune took a direction of accumulating less news on its own, and as a result it republished lots of content. But now on the internet republishing (or content aggregation as it is called on-line) is far less valuable because readers can go to the source. There are thousands and thousands of aggregators – making competition intense and profits negligible. Why page view a Chicago Tribune web page that's feeding info from the New York Times or Marketwatch or MSNBC when you can go directly to the New York Times or Marketwatch or MSNBC and get it yourself – possibly with other interesting sidebars? Succeeding in the new market requires developing an entirely new Success Formula – which Tribune Company has not done. It's still trying to find that magical "leverage" which will allow it to preserve its "history" (its old Success Formula) while tiptoeing into the new marketplace.
I don't know any newspaper or magazine publisher that has really attacked its Lock-ins, really Disrupted, or set up a true White Space team to explore how to make money in the growing new news market. News Corp. had the chance when it bought MySpace.com, but failed as it destroyed the MySpace business by "helping" its leadership. This market requires understanding how to get the news and report it cheaply and very fast, to computer and mobile device users. That is necessary to obtain the traffic which would be valuable to advertisers. And simultaneously the new team must package ad sales so as to maximize revenues from page views. Most are far too reliant on single ad sales, and not effectively linking the right ads to the right pages to generate more click-throughs as well as views.
Re-invention Gaps emerge because we let Lock-in blind us to growth opportunities.We define the business around the Lock-ins (such as printing a newspaper) rather than defining it around what the market wants (news.) Then when revenues stumble, starting a growth stall, the energy goes into preserving the old Success Formula (and its Lock-ins) first with cost cuts, and later with efforts to "synergize" or "leverage" the old Success Formula into the new market. And this never works. The growing part of the market is entirely different, and requires developing an entirely new Success Formula. That's why even in growing markets businesses fail, unless they commit to Dis
rupting the Lock-in and using White Space to move back into the growth Rapids.
Hi, two readings recently have really surprised me.
Firstly, Dawn Beaupariant from the public relations firm Waggener Edstrom contacted me regarding my Forbes column. I learned this firm is the PR agency for Microsoft. They took exception to my Forbes column ("Microsoft's Dismal Future"). But not because any facts were inaccurate.
Rather, it was their point of view that because OS 7 is now the largest selling OS of all time that demonstrated it was a successful product. Of course, when the television standard was changed in the USA to digital and everyone had to transition set-top boxes those also became big sellers. But it wasn't because everybody wanted the new product. More, it was the impact of a monopolist. We all know Microsoft has had a near monopoly in PC operating systems (even though every year it is losing share to Linux), so the fact that they can force people to use a new one on new machines, or upgrade, is less than an enthusiastic market endorsement of the product. For every "reviewer" who likes OS 7, there are 100 users saying "this gives me bells and whistles I don't need or want, and complicates my life. Can I simply keep my old product, or do my work on my smartphone?"
The Forbes column didn't debate whether Microsoft was likely to remain dominant in PC operating systems – that is a foregone conclusion. The issue is that markets are shifting away from PCs to mobile devices. And Microsoft has lost 2/3 its market share in mobile operating systems. And it is not developing a strong product. If people keep shifting from PCs to Blackberry's, iPhones and Androids – and PC sales start declining – in 10 years Microsoft could dominate PC OS sales (and Office applications) but it may not matter. Too bad the PR firm didn't get that.
Secondly, the PR firm claimed that Microsoft could put forward new products readily, leading to capturing dominant share in new markets. Their one claim that Microsoft had accomplished this was xBox. The PR person conveniently ignored the smartphone market, the Zune-style handheld market, the market for mobile applications (where Apple sold 2billion apps in its first 18 months), the search market (where Microsoft lags Google and would be nowhere without picking up Yahoo!'s declining business) and a host of other markets where Microsoft simply let the horse out of the barn.
To make matters worse, as Microsoft has invested to Defend the PC operating system and office products business, xBox is losing market share (exactly the point I made in the article – using the smartphone example instead)! According to IndustryGamers.com "PS3 'Steadily Increasing' Market Share Across the Globe" (Feb, 2010). Bad pick Dawn!
The PS3 is dominant in Japan and Korea, and as of June 2008, has begun
to outsell the Xbox 360 in Europe. It is also steadily increasing its
market share in all other regions across the globe, including in the
North American market
Most commenters have reflected my viewpoint, saying that they see Microsoft so horribly Locked-in to its old business that it is almost GM-like in its approach to new products and markets. Not a good sign. Those who defend Microsoft simply take the point of view that Microsoft is huge, has high share in PCs, and is very profitable in OS and Office Product sales. Wow, just like people defended GM was in the 1970s comparing to offshore competitors! These defenders completely miss the point that the marketplace is now rapidly shifting to new solutions, and the companies driving that shift with the most product are Apple, Google and Research in Motion (RIM)! Microsoft may look like Goliath, but it would be foolish to ignore the slings of new technology being brought to the battle by these David's with their smartphones, Chrome O/S, mail products, etc.
I was struck this week at the backward thinking offered on the Harvard Business Review blog posting "Is This Innovation Too Disruptive for My Firm." The author justifies companies sticking to their defensive positions, just as Microsoft is doing, simply because most companies fail at moving away from their "core." He seems very content to offer that since most companies can't really move into new markets well, so they might as well not try. Exactly what they are supposed to do as revenues dwindle in their "core" markets he never resolves! I guess he'd rather management simply not try to grow, and go down valiantly with the sinking ship.
Quite concerning is that he takes up the mantle of "core capability." He points out that most of the failures happen when companies move away from their "core" and therefore he recommends that all innovation remain close to the "core." His big argument is that this is lower risk. Well, Xerox remained close to core with laser printers – and how'd that work out for long-term value growth? Apple remained close to its Macintosh core and was almost bankrupt in 2000 before jumping into music and smartphones. Polaraoid stayed close to its core of instant film photography, and Kodak stayed close to its similar core. Now one is erased from the marketplace and the other is a no-growth inconsequential competitor.
Analogies are risky, but here goes. For the HBR author, his arguement isn't a lot different than "Over the last 200 years we've noticed that ships which sail out past the horizon often never return. Therefore, we recommend you never sail beyond the horizon. Clearly, this is risky and returns are uncertain – so don't do it. Ever. Very likely, there is nothing out there you will ever capture of value." Sort of sounds like those who wouldn't back Columbus – good thing he finally convinced Queen Isabella to give him 3 ships.
In 2008 and 2009 we've seen many great companies driven to bad returns. Layoffs abound. Growth has disappeared. Listen to HBR, and behave like Microsoft, and you'll never grow again. In 2010 we need a different approach – a different solution. Companies must realize that focusing on "core" capabilities, customers and markets has rapidly diminishing returns these days. You cannot succeed by focusing on Defending your business – even if it is a near-monopoly like PC operating systems! Why not? Because markets rapidly shift to new solutions that obsolete your products and even when you have high share, and high margins, sales can disappear really fast (like Xerox machine sales or amateur film sales – and probably laptop sales). If you aren't putting a big chunk of resources into GROWING in new marketplaces, by using White Space teams to drive that learning and growth, you will eventually become an historical artifact.
"Microsoft's Dismal Future" is the title of my most recent column on Forbes.com. In it I compare Microsoft with such formerly great, but now struggling, companies as Xerox and Kodak. Looking at all the Lock-in at Microsoft, Balmer's complete unwillingness to Disrupt traditional Lock-ins, and the total lack of White Space for new market projects – Microsoft is a very likely candidate to follow Silicon Graphics. Sun Microsystems, DEC and a host of other formerly great technology companies into the history books. And it could well happen in less than a decade. Don't forget, in 2000 Sun was worth $200billion – and now the company no longer exists!
If I gave you $1,000 and told you keeping it required you invest it all in Microsoft or Apple, which would you pick? For followers of this blog, there can be only one answer – it has to be Apple. While Microsoft has a great past, it has not been using White Space to exploit technology developments in new markets. All go-to-market projects have been around Defending & Extending the traditional PC market. With products like Vista, OS 7 and now Office 10. But reality is that all of us are using PCs a lot less these days. Increasingly we use smart mobile devices to get out work done – eschewing even the laptop – much less the desktop machine. Increasingly we are happy with PDF files and HTML text – not needing elaborate Excel Spreadsheets, or Word documents or flashy Powerpoint files.
Meanwhile Apple is a major participant in the new markets being developed! It's iPhone is a leader in smartphones, where its mere 5% market share has allowed the company to sell 2 billion downloaded applications in the first 18 months! And although digital music is becoming the norm as CDs disappear, iTunes maintains a very healthy 70% market share of digital music downloads. And Apple is moving forward into digital publishing with the iPad launch, as well as hundreds of new applications for low-cost but highly functional tablets (a market Microsoft pioneered but exited.)
Many people invest by looking in the rear view mirror. But Microsoft increasingly looks like a "has been" story. Looking out the windshield, it's hard to place Microsoft on the future horizon. Give the Forbes article a read and let me know what you think!
Apple now has a market cap of $210B. Microsoft has a market cap of about $260B. To traditionalists, this must seem contradictory. Apple has fought its way into new markets, and has domination in none (except maybe the narrowly defined individual music download business). Microsoft has near monopolistic market presence in personal computer operating systems and office software. According to modern business theory from business schools, and the output of books such as Business Strategy by Michael Porter, the monopolist company has entry barriers protecting its return – and thus the ability to almost print unlimited profit. Yet this has not happened.
At SeekingAlpha.com "Apple versus Microsoft: The Value Gap is Closing" the case is made that the value difference is all due to growth. Apple's business for music devices and content is growing – quickly. Its business for mobile devices and mobile device applications is also growing very fast. Those offer substantial positive cash flow today, as well as dramatic cash flow growth in the future. So much so that many analysts wonder what Apple will do with all that money. And that doesn't even count the iPad sales which have exceeded expectations – before even available to ship. And businesses are starting to build applications for the iPad, as explained in the BusinessWeek article "Businesses want Apple's iPad, too."
On the other hand, the demand for PCs is sluggish – at best. People increasingly leave their laptop at home for extended time while the use their mobile device instead. But Microsoft is stuck in a loop of upgrade development and launch. But because of the market shift, these investments are yielding less and less return. Complexity cost is going up, and profits are going down, and growth is dropping precipitously. Products in music, mobile phones and advertising have all lost significant share to Apple, Google and others as attention has remained on the "core" business. So even though current cash flow is strong, value has gone absolutely nowhere for several years, and there's precious reason to think it will go up.
When you lose growth, even if you prop up profits with draconian cost cutting and inventory sales, you lose value. Just look at Sears/KMart. Investors were really excited when Mr. Lampert used his takeover of KMart to acquire Sears. Predictions flew that he would get Sears growing again, while simultaneously monetizing the huge real estate portfolio. But as detailed in Chicago Tribune "Sears and KMart Still Standing, but Market Share Dwindles," value has declined. Mr. Lampert has proven very good at whacking cost. But when it comes to growing revenue – something that will drive ongoing growth in cash flow for a decade or more, he's shown nothing. You can't cost cut your way to long term success.
Blockbuster Video is in big trouble. Most analysts think the company is going to file bankruptcy – unlikely to survive – with a mere $.30 stock price today. Most of us remember when the weekly (or more frequent) trip to Blockbuster was part of every day life. Like too many companies, Blockbuster was in the Rapids of growth when people wanted VHS tapes, then DVDs, to rent – and CDs to purchase. We happily paid up several dollars for rentals and purchases. Blockbuster grew quickly, and developed a powerful Success Formula that aided its growth.
As it is failing, I was startled by a Forbes.com article "What Blockbuster Video Can Teach Us About Economics." The author contends that this failure is a good thing, because it will release poorly used resources to new application. Like most economists, his idea has good theory. But I doubt the employees (who lose pay and benefits), shareholders, debt holders, bankers, landlords and suppliers – as well as the remaining customers, appreciate his point of view. Theory won't help them deal with lost cash flow and expensive transition costs.
As the market shifted to mail order and on-line downloads, Blockbuster could have changed its Success Formula. But instead the company remained Locked-in to doing what it has always done. It will fail not because some force of nature willed its demise. Rather, management made the bad decision to try Defending & Extending an out of date business model – rather than exploring market shifts, studying the competition intensely then using Disruptions and White Space to attack both Netflix and the on-line players. Blockbuster's demise was not a given. Rather, it was a result of following out of date management practices that now have serious costs to the businesses and people who are part of the Blockbuster eco-system. I struggle to see how that is a good thing.
Fortunately, ManagementExcellence.com has a great article about ideas for attacking a threatened Success Formula in order to avoid becoming a Blockbuster entitled "Leadership Caffeine: 7 Odd Ideas to Help You Get Unstuck." The author specifically takes aim at the comfort of Lock-in, and describes how managers can start to make Disruption part of everyday life:
Fight the tyranny of Recurring Meetings
Rotate Leadership
Break the back of bad-habit brainstorming
Do something completely off-task with your group
Introduce your team to thought leaders and innovators
Play games
Change up your routine
Described in detail in the article, these are simple things anybody can do that begin to reveal how deeply we Lock-in, and expose the power of how we could behave differently. If Blockbuster management had applied these ideas, the company would have been a lot more likely to return positively to society – rather than become another bankruptcy statistic.
Let's see, would you rather spend $4million to reach 100 million people once – say via a Super Bowl ad – or spend almost nothing to reach 400million people every day? Seems obvious economics. Yet, how good is your Facebook presence? Because that is the route to all those people who are on-line daily.
Most of today's business leaders grew up in the world of one-way advertising. They watched TV, listened to the radio, read magazines and newspapers. They were taught that to get a message into potential buyer heads, unfiltered by journalists, you had to advertise. And for a long time, that was pretty true. So they Locked-in on advertising and traditional PR as the route to name awareness and brand image. But that was before the market shift which is dampening enthusiasm for traditional media while social media (broadly – including YouTube) is exploding.
Now your customers, and potential customers, are most likely using Twitter, Facebook, Linked-In and other social media every day. And when they search on your products, they get Google responses from social media. If you aren't putting some effort into the media, your image and message could be far removed from your goal!
I remember talking to the CEO of Rolex in 1997. Rolex did not have a web site. His point of view was that as a luxury good, the internet was "below" his company's standards for communicating. If there was to be a web site, he thought Tourneau – the world's largest retailer of luxury watches – would build it. In 10 minutes I demonstrated to him how a simple search on "Rolex" turned up gobs of used dealers, unauthorized dealers, unauthorized repair shops, and outright fakes! Several near the top of the list! He was shocked. His brand was rapidly being marginalized via a channel he had never even considered. His worst fears about how the brand would be stolen, manipulated and value minimized were happening – and he was blithely ignorant. Of course, Rolex got involved quickly to protect its brand.
So when was the last time you reviewed your brand, or image, or message across social media channels? Are you possibly, blithely letting someone else manipulate your image?
At MediaPost.com in "Ensuring A Successful Corporate Facebook Presence" the authors outline a 4 step approach for doing a good job. My biggest fear is that Lock-in to old approaches to sales and marketing mean too few companies are paying even a shred of interest in social media. Over and over I hear marketers of large, established companies saying that social media access is blocked at work – and nothing is being done to leverage the channel! In some instances, I've heard of Chief Marketing Officers making a "command decision" to avoid social media, because they can't "control" it.
Secondly, the competition that is going to ruin your day just might do it via social media! An existing company may have an image, advertising and effective PR. So how would a Disruptive new competitor go after you? Why, using the very low cost channel of social media. We've all heard about disgruntled customers that have used songs, videos and other clever tools to spread extremely negative information like wildfire through a customer base. Yet, by ignoring the channel – by ignoring the opportunity to develop a strong and effective presence that ties to customers – we encourage competitors to use this channel to our detriment.
Don't let Lock-in cause you to ignore this powerful, and shockingly low cost, communication tool. Realize that social media is here to stay, and incorporate it into your future scenarios. Additionally, social media is where your competition – especially fringe competitors – are likely to target you. Why not study them, learn from them, and use the tool to grow instead of being a target? And when it's time to implement, Disrupt your old decision-making and spending patterns so you allocate some resources to build out your social media campaign. Then put together a White Space team with Permission to really go for success using the resources you've now dedicated to the project.
Applying the Phoenix Principle can result in a rapid improvement in social media marketing – and it just might save you a huge amount of spending on your traditional marketing communications plans. While bringing in new customers and markets!
One of the worst impacts of Defend & Extend Management is the placement of a bullseye on your business. Take for example Microsoft. When everyone knows what software Microsoft is going to release, they start targeting it for hacking and otherwise spoiling. Likewise, competitors can predict Microsoft's moves and launch products that compete alternatively – such as Firefox and recently Chrome have done in Browsers. And has cloud computing using mobile devices. As leaders take actions to Defend & Extend the Success Formula the business becomes predictable, and much easier to attack.
And that's now a big problem for WalMart.Advertising Age is now discussing this problem at the world's largest retailer in "Stuck-in-middle Walmart Starts to Lose Share." As WalMart kept promoting, over and over and over, its message of "low price" (how many "rollback" ads did you see on television with images of falling price signs?) a single position was drummed home.
But while WalMart did this, smaller and more nimble competitors like Dollar General have actually been able to undercut WalMart on price – sucking away customers. Additionally, changes to improve margins in WalMart stores, and some redesigned stores, have caused prices to go up at WalMart making the company no longer the price leader! In several categories Target has beaten WalMart in professional pricing surveys! What happens when WalMart, with its concrete floors, limited merchandise and lowly paid employees is no longer the price leader?
Unfortunately, not everybody wants low price – especially all the time. And smart competitors like Target have been figuring out how to beat WalMart on specific items, while also offering a better shopping experience. While WalMart keeps trying to cut prices on the backs of vendors, thus not being the favorite customer of most, Target and others have been smarter about making deals which offered more win/win opportunities. They took specific aim at weaknesses in WalMart's strategy, and are now ruining WalMart's day by beating WalMart selectively while simultaneously offering more! WalMart made it possible by signaling its strategy and tactics so clearly. A result of Defend & Extend management.
WalMart would like to move away from being strictly low price. As the article details, the company has implemented a "project impact" intended to upgrade stores and make them more merchandise and experience competitive. However, this has raised prices and confused shoppers. If WalMart isn't "low price" what is it? Again, when management is all about Defend & Extend then customers aren't able to understand behavior that is different from doing more of what was always done.
WalMart's move to upgrade stores is laudable. But the company cannot implement a change through the traditional store operations. Phoenix Principle companies know that good new ideas cannot survive as part of the existing D&E business. Confused customers, unhappy and confused management and conflicts with historical metrics (like pricing and margin metrics) simply makes the new idea "out of step" with the Success Formula. And as Lock-ins (like "we are low price") are violated discomfort leads to resentment and a desire to get back to old ways of doing business. People start asking for a "return to the core of what made us great." For these reasons, "project impact" is not succeeding and has no real chance of succeeding.
WalMart is in trouble. It's growth has slowed as competitors are figuring out other ways to compete. Ways WalMart cannot follow. Competitors are picking apart the WalMart strategy, and siphoning off revenue and profit. Walmart is stuck in the Swamp, with no idea how to regain growth because the old approach has rapidly diminishing returns and the new approach is not viable in the organization.
To succeed, WalMart needs to apply The Phoenix Principle to "project impact." It must first develop its future scenario, and start spreading that message throughout WalMart and analysts. Otherwise, confusion will remain dominant. Secondly, WalMart must be honest with employees, customers, vendors and analysts about changing competition and how WalMart must change to remain competitive. It must talk less about WalMart and more about competitors and market shifts. Thirdly, WalMart has to be willing to Disrupt itself. Instead of all the incessant "rah rah" about the great "WalMart way" of doing things top management has to start saying that it is going to attack some lock-ins. It is going to force some changes. Then, "project impact" needs to be implemented in White Space. It needs to report outside the existing WalMart operations, have its own buyers, merchandisers, employees (maybe even allowing a union!). It needs permission to violate old Lock-ins in order to develop a new Success Formula, and the resources committed to really do the implementation – including testing and changing.
WalMart is Locked-in and its Defend & Extend Management approach is not good news for investors, vendors or employees. We can see that competitors, from on-line to the traditional Target, are taking shots at the bullseye Walmart has so proudly worn. Market shifts are happening. But WalMart is not establishing White Space to develop a new solution, and as a result the leadership is confusing everybody about "What is WalMart"? The company doesn't need to go back to its old ways – instead it really needs to apply The Phoenix Principle. But so far, D&E Management seems to be leading.
Sustaining growth is really hard. Consulting firm Bain & Company just published the statistic that only 12% of companies were able to grow revenues and profits more than 5.5% from 1998 to 2008 (read more in the Harvard Business Review downloadable book excerpt Profit from the Core.) Given that all companies want to grow, it seems remarkable so many stall.
But while most managers blame lack of growth on the economy, truth is we can learn a lot from those who DID sustain growth. What doesn't work, and what does, can be found by starting with a great OpEd column about Microsoft published in The New York Times "Microsoft's Creative Destruction." Former Microsoft Vice President Dick Brass provides insight to why Microsoft has become a market laggard in new products – despite enormous revenues, profits and new product development spending. Calling Microsoft "a clumsy, uncompetitive innovator," he says products are "lampooned" and the company is "failing." Harsh words.
He points out that profits are almost entirely from legacy products Windows and Office. "Microsoft has lost share in Web browsers, high-end laptops and smartphones. Despite billions in investment, its Xbox line is still at best an equal contender in the game console business." He explains how internal managers set up false hurdles, often claiming quality was the primary issue, for ClearType and a tablet PC. He claims the internal executives "sabotaged" new projects and he blames inability to meet market needs on "internecine warfare."
But all of that could be said about Apple as well. It once was just like Microsoft. In the 1990s Apple stopped everything but new Macs from making it to market. Remember that the first PDA (personal digital assistant) was Apole's Newton? Killing that product became a priority for several Apple executives, and caused the ouster of then CEO John Scully
So the Microsoft described behaviors can happen anyplace. When organizations begin to focus on Defending & Extending their "core" business it leads to hurdles and growth stalls. "Operational improvements" leads to "focusing" on doing what the business always did, perhaps just a touch better (like a next generation operating system [Vista], or a new variation on Office [2007].) The culture, decision-making processes and operating cost model all are geared to doing more of the same. Without intending any downside, in fact in pursuit of improved competitiveness in the "core" products, the business begins erecting hurdles to doing anything new, or different.
This problem isn't limited to Microsoft Although we can clearly see the impact and feel pessimistic about Microsoft's future. It has afflicted many companies, and is why they cannot adjust to market shifts. Even if loaded with executives and enormous budgets for R&D, technology or marketing. Don't forget how Apple looked even worse than Microsoft in 2000.
And that's why so few companies maintain growth. The desire to do more, better, faster, cheaper of what we've always done is overwhelming. Defending & Extending the existing business always looks marginally better, and marginally less risky, than doing something new, or different. In trying to maintain growth by getting better at what you've always done – you kill it.
Why? Because Defend & Extend management does not take account of market shifts. New products, new competitors, new technologies, new business models, new customer approaches — the list is endless of variations which competitors bring to the marketplace. And these variations change the market. Trying to stay on the same course becomes suicide when customers begin moving on.
And that's where Apple has excelled. When Steve Jobs took over he quit trying to Defend & Extend the Mac platform. To the contrary, he reduced the number of Mac models. Instead of planning based on old market share and sales, he pushed a rigorous scenario planning exercise to create a robust view of future markets – and what needs customers would like solved. He then led Apple to study competitors, both in-kind and on the fringe, to identify new markets being developed and new solutions being tested. He then Disrupted Apple – by cutting the Mac platforms and investing heavily in other market opportunities like music (iPod and iTunes). And he encouraged product managers to rush new products to market in order to obtain market feedback, using White Space teams to rapidly learn what would sell. And he repeated this again and again, agreeing to a joint development project with Motorola before entering into mobile phone testing and launch (iPhone.)
Microsoft's proclivity toward D&E management is putting its future at grave risk. All signs are it will become another fateful, negative statistic. But it doesn't have to be that way. Microsoft can learn a lesson from its resurrected competitor and follow The Phoenix Principle. It can escape from xBox, and other new product, second-tier status if it will get a lot more robust about scenario planning, quit acting like the only game in town and start obsessing about competition. Disrupt its culture and decision making, and start using White Space to rapidly get new products in the market and learn how to match them with market needs to succeed!
