by Adam Hartung | Nov 12, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
What to do with GM and Ford? It sort of sounds like "what do we do about our miscreant son ______?" The reality is that both companies are on the brink of failure – and no one believes they can survive without some sort of government bailout. The national news is now active in the debate about whether to bailout or not – and how to bailout – from Nancy Pelosi in the U.S. House of Representatives to MSNBC pundits Keith Oberman and Chris Mathews to CNBC stock maven Jim Cramer. But plenty of people are angry. They were first angered by the bank bailout – and now this potential auto industry bailout makes them angrier. Cries of "socialism" are not hard to find.
Not many Americans want GM and Ford to disappear. The loss of millions of jobs, havoc on the unemployment, insurance and pension systems and the disappearance of thousands of dealerships along with the subsequent short-term shortage of product would be a tornado of problems making the banking crisis look like a west Texas dust devil. But simultaneously, almost everyone is angry about bailing out the companies. So where should this anger be directed, and can it be used constructively?
We must hold management accountable for the terrible state of these companies. Even if you want to blame the union leaders, no labor contracts could have been created without acceptance by company management. Under every bad decision rock will be the fingerprints of someone in management at the company. It is management's responsibility to look out for the fiduciary well being of debtors and investors – as well as the long-term interests of customers who want service and replacement product, and employees who want to keep working, and suppliers who want to support the business. All of these groups have suffered badly due to bad management decisions.
So, are these managers all a bunch of dopes? That would be a radically over-simplified conclusion. These managers are well educated, many from the top schools. They are experienced. They have more vested in the success of their companies than almost anyone. Most have sacrificed pay, bonuses and benefits over the last several years, just like their employees (or even moreso) as part of helping their companies make it year to year.
What we have to realize is that these managers are Locked-in to the Success Formulas their companies created in the 1940s-1960s. During those heydays, investing in auto manufacturing was a great way to grow wealth. Working in an auto company made you amongst the highest paid workers on the globe. Times were good, GM and Ford were on top, and the companies created behavioral norms and structural decision-making systems that helped them do more of what was making money. The companies Locked-in on those behaviors and processes, and they are still trying to run these companies according to those outdated Lock-ins. Even though the marketplace has shifted dramatically over the last 50 years, amazingly little has changed within the Lock-ins at these companies. They have steadfastly Defended & Extended their Success Formulas – even ignoring the learning opportunities from acquisitions in aerospace and computers.
There are auto companies not on the brink of extinction. Toyota, Honda and Kia may not be raking in the money this year, but no one thinks they are going broke. They disrupted the auto market, and have never looked back. As the market Disruptors, they have taken advantage of their Locked-in competitors in everything from labor agreements to manufacturing processes to design methods and even sales/marketing approaches. GM and Ford have been sitting targets, easy to prey upon, because they were so unwilling to Disrupt and use White Space to evolve. Quite to the contrary, the Locked-in leaders at GM and Ford have sold asset after asset – from Hughes Aircraft to EDS to GMAC at GM, for example – in their effort to protect the auto industry Lock-in within their companies yielding poorer and poorer return on assets year after year after year.
Now that the leaders of these companies (and this goes for the financial industry players looking for TARP bailouts) are asking for bailout, someone must step up to forcing change in the management. Not because they are bad people, or ignorant, but because they are Locked-in to approaches assured of not improving results. It makes no sense to put money into Locked-in management teams that have proven they can't make an adequate rate of return. While some are saying "the smartest people about the auto industry are in the auto industry" (or banking), what they really mean is "the people who are Locked-in to how this industry has historically operated, and ignored market shifts to the point they took their companies to the edge of bankruptcy, are asking now for government support to maintain their Lock-in." And that would be a foolish way to invest anyone's money – private or taxpayher. Benjamin Franklin is credited with once saying "lunacy is doing what you always did but expecting a different result." It would be lunacy to bail out these companies and leave the existing management in place – to do more of what was done that led them to failure.
If managing was easy managers would be paid less than workers. To earn more – like the remarkable pay of CEOs – managers are supposed to keep their companies making high rates of return. If they don't, why are these managers there? Once they fail, why should management teams be given money to do more of what they've already done, but to unsuccessful results? Recent examples of AIG managers who are going on lavish business trips so shortly after their company was saved from bankruptcy by the governement is a clear indicator of how ready these managers are to return to the same behaviors and decision-making processes that almost destroyed their companies. They are planning on more of the same, with possibly a little trimming around the edges. Not the kind of change needed for these companies to regain competitiveness. Have you heard any of these management teams take responsibility for their company failures, or recommend they be replaced? Or are they asking for money to keep themselves employed?
There's a lot of competition for managerial positions. There are a lot of leaders and managers who have been pushed out of organizations due to downsizings, or even age. There are thousands of managers receiving new management degrees every year. If these bailouts are to be effective, then we should assuage the anger of those supplying the bailout funds with a change in the management of these companies. If we don't want government employees running them, according to stagnant rules incapable of keeping up with rapid market shifts, then we need a new batch of leaders and managers who are willing to Disrupt how these companies operate – internally – and start up a batch of White Space projects to create new Success Formulas that are competitive and able to produce positive returns in today's marketplace. If we don't change the leadership, we shouldn't expect much payback for the investment.
by Adam Hartung | Nov 11, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Starbucks (see chart here)announced earnings – well sort of (read article here). Accounting rules are the only thing determining whether Starbucks had earnings or losses. Let's say the company broke even – because we don't know for sure given the financial machinations. Starbucks was on a growth tear for a decade, and became a brand synonymous with upward mobility. Company value is now down 75% in just 2 years. Revenues are down, and projected to continue declining into 2010. Earnings have evaporated and company leaders say the only way to create them in the future is continued draconian cost cutting. Company management would like to lay blame for these horrid results on the crappy economy. But is that why Starbucks has taken this fall?
Management has to take responsibility for these results – and it's the leadership in place now. Starbucks was a model of growth. While the company was expanding its shops the previous CEO looked into the future and developed a series of new businesses to augment the original business:
- He started adding food – both cold and hot – to increase sales within the stores
- He pushed Starbucks into food service (United Airlines, among others)
- He pushed Starbucks into grocery stores with prepacked beans
- He pushed Starbucks into liquor stores
- He began promoting CD sales and exploring MP3 distribution
- He produced music – including the #1 CD in 2005 (Ray Charles Greatest Hits)
- He began producing movies (Akeelah and the Bee)
- He opened an agency for artists (signing Paul McCartney of Beetle's fame)
These actions all opened White Space for expanding Starbucks when, inevitably, either stores reached saturation or the growing lust for coffee and tea declined. But he was replaced by Howard Schulz, considered the founding CEO by most. Schulz demonstrated true "hedgehog" behavior (to coin a term used by Jim Collins in "Good to Great") by rapidly exiting of most of these businesses. Mr. Schulz felt Starbucks should concentrate on its "roots" – on coffee. His approach to improving Starbucks was to "focus" on what used to work. And to cut costs until profits met his goal.
But now we can see the disastrous results of his strategy. Stores are closing, and revenues in open stores are going down causing total revenues to decline. And revenues are falling faster than costs, evaporating profits. Where Starbucks was once a model employer, he is cutting benefits to employees and shows little (if any) interest in the famous barrista experimentation that led to innovations like "Frappucino" which helped add billions to total revenue. In just a very few months Starbucks has gone from a company willing to Disrupt its Success Formula and use White Space to grow – into a company exclusively trying to Defend & Extend a strategy from 15 years ago.
But in the last 15 years, the marketplace has shifted dramatically. Quality coffee, including specialties like espresso and latte not formerly common in America, have become commonplace as competitors from Caribou Coffee to Panera Bread, Dunkin Donuts and McDonalds have entered the business. Prices for good coffee have declined, and customers now have other places they can mingle, network or sit and read besides Starbucks. And increasingly you can obtain a good coffee right where you eat breakfast, lunch or dinner. The need to pay a "Starbucks premium" has evaporated – like Starbucks' profits. The new CEO, by following the Jim Collins approach, has ignored the dramatic market shifts which make Starbucks coffee shops a far less profitable business than they were just 5 years ago. He's more likely to end up like Circuit City than the growth company Starbucks used to be.
As mentioned before in this blog, research for "Create Marketplace Disruption" disclosed that only 7% of the time do companies that hit a growth stall ever grow again at 2% or higher. Why such dismal performance? Because the growth stall shows management has missed important market shifts! Focusing internally on profit improvement – especially with cost cutting or "back to basics" actions – only allows competitors to keep improving their position while the former leader retrenches. While the competitors are charging forward, the hedgehog company is burrowing into the dirt, allowing himself to get run over.
Markets never run in reverse. Once someone develops a winning Success Formula competitors emerge. They copy the leader down to the detail, and even come up with their own advantages (including lower price.) Some develop a better solution. And when market shift happens, the leader finds profits decline. To maintain revenue and profit growth requires leaders use White Space to explore new businesses that can evolve and enhance the Success Formula. That was the road Starbucks was on. Until Mr. Schultz took over the reigns. And now, his "Collins-esque" approach to business is driving Starbucks right into the ground(s).
by Adam Hartung | Nov 10, 2008 | Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in
What a day this Monday is turning out to be. Circuit City files for Chapter 11 (read Reuters article here, and Marketwatch article here). Sirius radio looks like it will follow soon (read article here). And Deutsche Bank analysts are predicting GM will end up wiping out shareholders through either bankruptcy or a government bailout that will eliminate the equity (read article here). GM was trying to find a solution by merging with Chrysler, but that deal's now dead leaving Ford at risk of failure, and Chrysler in need of a partner if it is to survive (read Financial Times article here). Who's pulling the rug out from all these stalwarts of American capitalism?
Let's not forget that Circuit City was the statistically best performing company in Jim Collins' wildly popular book "Good to Great". How could a company that was considered a model for all leaders to follow decline so far, so fast? Is it worth considering that the management approach the author recommends possibly might not be as effective as promised? Mr. Collins' recommends companies figure out their approach to the market, then get everyone committed to that approach. After that, his recommendation is to leave ego at the door, and execute, execute, execute against the approach and its metrics. Those who work hard, and sacrifice, he predicts will win. So, should we conclude that Circuit City changed after he wrote his book? Did management become vainglorious? Did leaders, managers and employees lose commitment to the market approach? Did everyone quit working hard, quit sacrificing? Is that the problem in all these companies? Egotistical management lacking committed and hard working employees willing to sacrifice?
My research into hundreds of companies for "Create Marketplace Disruption" concluded just the opposite. In most instances of troubled companies, management was extremely dedicated and hard working. Examples of sacrifice were everywhere, as employees dropped bonuses and accepted pay and benefit cuts. Vendors took longer terms and lower prices while carrying inventory for their troubled customers. Customers remained loyal often right up to the point of failure. In reality, there was just as much commitment and sacrifice, hard work and effort in those that failed as those that succeeded. As Mr. Rosenzweig concludes in "The Halo Effect" these characteristics do not explain performance of winners as distinctive from losers. So, what is it?
Following best practices can oftentimes be as harmful as anything else. Companies that get into trouble consistently demonstrated commitment to Defend & Extend management, even after market shifts rendered D&E management unable to improve results. Continuing to optimize, to do more while trying to be faster and better and cutting costs in efforts to be cheaper simply did not turn the corner on performance. For example, just today a leading marketing web site is recommending that companies need to implement only tactics that are designed to optimize the existing brand and its performance while eschewing innovation (read article here). Innovation is costly and risky, they presume, so investing in wht you know is the only way to go. That same journal pointed out that all the American auto companies were focusing on cost cuts in an effort to save themselves (read article here) - when we all know the biggest problem these companies face are autos which aren't competitive with foreign products which have equal or higher quality at better pricing and often considerable advantages in fuel economy, longevity, cost of ownership and performance.
When management focuses internally, bad things happen. Focusing on how to operate better presumes there will be no market changes which alter competitiveness. The reality is that most companies falter because they miss market shifts – and the shifts cause competitors to become relatively more attractive. If management keeps trying to do what it used to do better, it misses market changes and keeps falling farther and farther behind. Simple product enhancements (product variations or simple derivatives), early cost cuts, and other short-term actions give a false sense of betterment leading to complacency – as competitors keep gaining share due to better relative market position.
The retail marketplace started shifting powerfully in the late 1990s as internet retailers changed the costs and processes for customers. Circuit City ignored these market trends far too long. The auto industry has been shifting ever since offshore competitors started gaining share in the 1980s. But the "Big 3", their employees and their vendors ignored these trends for too long. Even as offshore competitors opened facilities in America, the changed competitive marketplace was ignored as GM, Ford and Chrysler tried doing more of what they'd always done. In the end, who pulls the rug on these companies? It's the competition.
Competitors who link their Success Formula to changing markets use scenario planning to keep abreast of necessary changes and obsess about all competitors to learn what they can do to remain in front with customers. These winning competitors don't Defend & Extend some plan management creates, but instead use Disruptions to keep themselves adaptable to changing markets, and use White Space to constantly test new solutions which can keep them advantaged. The losers are the ones who keep trying to do more, better, faster, cheaper with their old Success Formula, and fall behind competitors who ignore the siren's call of optimization, focus, productivity and sacrifice in favor of adaptability and leading market trends.
by Adam Hartung | Nov 3, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
Circuit City (see chart here) has announced it will close another 155 stores (see article here). Here, right before the big holiday buying season, Circuit City is contracting drastically. The company is almost out of cash, and is running into problems obtaining inventory. And with the likely demise of the company soon, it's unclear how many customers will buy from Circuit City when they can't take back items that break after the retailer is gone.
What makes this story somewhat remarkable is that Circuit City was one of the 11 companies Jim Collins profiled in "Good to Great." Not only was it one of what were considered the best 11 corporate performers in the world – it's turnaround to greatness score was the absolute highest of all the companies profiled, more than twice as high as the next best performer, and more than 3 times higher than the average "Good to Great" company. Jim is considered a management guru, who receives around $100,000 every time he gives a speech to corporate clients. "Good to Great" has been considered a corporate bible by many CEOs and other executives who have taken the stories from Mr. Collins to heart and decided his approach is the best way to great success. So to have Circuit City severely falter, and most likely fail, after only a handful of years since Mr. Collins published his book is an event worth spending some time discussing.
Despite Mr. Collins' great wealth accumulation and speaking success, he is not without detractors. Many academics have questioned the validity of his research. And in "The Halo Effect" professor Rosenzweig of Switzerland's top business school casts Mr. Collins as a fraud. Unfortunately for Mr. Collins, a review of the performance of his 11 "Great" companies demonstrates their performance since publishing the book is – at best – average. When one fails, perhaps it's worth spending some time reconsidering Mr. Collins' recommendations.
What appears true is that companies Mr. Collins likes end up in growth markets. Then, they pursue very targeted strategies which Mr. Collins recommends you not alter much nor even challenge. Mr. Collins ascribes business success in these companies, as he does in his first book about start-ups that get big ("Built to Last"), largely to dogged determination and sacrifice. He proselityzes that success is the result of hard work, dedication, and focus. And, from all appearances, once a company is into the Rapids of Growth, such actions to reinforce the Success Formula are helpful for the early leader to grow. For those who turnaround, much of their success can be ascribed to getting into a growth market and then simply doing what got them there.
But the problem with Mr. Collins' "Great" companies occurs when they lose their growth. In most cases, exactly as it happened with Circuit City, competitors figure out the Success Formula and they copy it. Additionally, lacking the significant Success Formula Lock-ins (behavioral and structural) which Mr. Collins loves and become part of the "Great" companies, new competitors more quickly implement new ways of competing which the "Great"companies ignore. In Circuit City's case, this was obvious in spades as Circuit City ignored on-line competitors which have lower cost, faster inventory turns, wider selection and lower price than traditional brick-and-mortar stores.
As a result, even Collins's "Great" companies end up falling out of the Rapids. Quickly they move into the back half of the life cycle, mired in the Swamp. Without the current of growth, which pushed them in the Rapids toward profitability, they are consumed fighting competitors. But, doing "more, better, faster, cheaper" of what they've always done simply does not make them more profitable. Competitors create market shifts which require changes in the Success Formula to continue thriving. But, with "everyone on the bus" (a favorite phrase of Mr. Collins) no one knows how to do anything new, and there's no place to try anything new. Quickly, results continue faltering and the company is sucked into the Whirlpool of failure – a prediction being made by Marketwatch.com when labeling today's Circuit City article "Circuit City Circling the Drain." Of course, it's hard to argue with Marketwatch's editors when the company value has declined from over 30 dallars per share to 30 cents per share in about 2 years!
Phoenix companies avoid this sort of fall by overcoming their Lock-ins. Something Mr. Collins never discusses. Yes, these Lock-ins help them grow during the Rapids. But all markets eventually shift. The Rapids disappear due to competitive changes. To succeed long-term companies have to Disrupt their Success Formulas by attacking Lock-in BEFORE they find themselves in the Whirlpool. And they implement White Space where they can test and develop a new Success Formula toward which the company can migrate for long-term success. Winning long-term requires more than a single turnaround into a growth market and then slavish willingness to do only one thing. Instead, it requires figuring out likely market changes with extensive scenario planning, being obsessive about competitors in order to identify new competitive changes. And then Disrupting and using White Space to constantly be reborn.
by Adam Hartung | Oct 30, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
The business press, whether print or on-line, is full of stories about lay-offs. Motorola (chart here) to cut another 3,000 jobs in its flailing handset business (article here). American Express (chart here) to cut 7,000 jobs (article here). Over the last few weeks, other announcements included 3,200 job cuts at Goldman Sachs (chart here), 5,000 at Whirlpool (chart here) and 1,000 at Yahoo! (chart here).
Given the regularity with which leaders have implemented layoffs since the 1980s, investors have come to expect these actions. Many see it as the necessary action of tough managers making sure their costs don't unnecessarily balloon. And political officials, as well as investors and employees, have started thinking that layoffs don't necessarily have much negative long-term meaning. People assume these are just short-term actions to save a quarterly P&L by a highly bonused CEO. The jobs will eventually come back.
Guess again.
Most layoffs indicate a serious problem with the company. Long gone are the days when layoffs meant people went home for a major plant retooling. Now, layoffs are a permanent end of the job. For the employer and the employee. Layoffs indicate the company is facing a market problem for which it has no fix. Without a fix, management is laying off people because the revenues are not intended to come back. Thus, the company is sliding into the Swamp – or possibly the Whirlpool – from which it is unlikely to ever again be a good place to work, a good place to supply as a vendor or a good place to invest for higher future cash flow. Layoffs are one of the clearest indicators of a company implementing Defend & Extend Management attempting to protect an outdated Success Formula. Future actions are likely to be asset sales, outsourcing functions, reduced marketing, advertising & R&D, changes in accounting to accelerate write-offs in hopes of boosting future profits — and overall weak performance.
Layoffs are closely connected with growth stalls. Growth stalls happen when year over year there are 2 successive quarters of lower revenues and/or profits, or 2 consecutive declines in revenues and/or profits. And, as I detail in my book, when this happens, 55% of companies will have future growth of -2% or worse. 38% will have no growth, bouncing between -2% and +2%. Only 7% will ever again consistently grow at 2% or more. That's right, only 7%.
When you hear about these layoffs, don't be fooled. These aren't clever managers with a keen eye for how to keep companies growing. Layoffs are the clearest indicator of a company in trouble. It's growth is stalled, and management has no plan to regain that growth. So it is retrenching. And when retrenching, it will consume its cash in poorly designed programs to Defend & Extend its outdated Success Formula leaving nothing for investors, employees or suppliers. The world becomes an ugly place for people working in companies unable to sustain growth. People try to find foxholes, and stay near them, to avoid being the next laid off as conditions continue deteriorating. Just look at what's happened to employment and cash flow at GM, Ford and Chrysler the last 40 years. Ever since Japanese competitors stalled their growth, "there's been no joy in Mudville."
Given how many companies are now pushing layoffs, and how many more are projecting them, this has to be very, very concerning for Americans. Clearly, many financial institutions, manufacturers, IT services and technology companies appear unlikely to survive. Meanwhile, we see wave after wave of new employees being brought on in companies located in China, India, South America and Eastern Europe. For every job lost in Detroit, Tata Motors is adding 2 in India. For every technologist out of work in silicon valley, Lenovo adds 2 in China. For every IT services person laid off at HP's EDS subsidiary, Infosys adds 2 in Bangalore. It's no wonder these companies don't regain growth, they are losing to competitors who are more effective at meeting customer needs. There really is no evidence these companies will start growing again – as long as they use layoffs and other D&E (Defend & Extend) actions to try propping up an old Success Formula.
Sure, times are tough. But why die a long, lingering death? Instead of layoffs, why not put these people to work in White Space projects designed to turn around the organization? Instead of trying to save their way to prosperity – an oxymoron – why not take action? In most of these companies, lack of scenario planning and competitor focus leaves them unprepared to rapidly adjust to these market changes. But worse, Lock-in and an unwillingness to Disrupt means management simply finds it easier to lay off people than even try doing new things. And that is unfortunate, because the historical record tells us that these companies will inevitably find themselves minimized in the market – and eventually gone. Just think about Polaroid, Montgomery Wards, Brach's Candy company, DEC, Wang, Lanier, Allegheny Coal, Bear Sterns and Lehman Brothers.
by Adam Hartung | Oct 28, 2008 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lifecycle, Lock-in
Wal-Mart (see chart here) has not been doing badly the last couple of quarters. Of course, it hasn't done great either. And if we look back the last 8 years – well there's not been much to get excited about. Wal-Mart Locked-in on its low price Success Formula 40 years ago and hasn't swayed since. Today as incomes go down and fear is huge about jobs and investments people are looking for low prices so they are returning to Wal-Mart. But those sales aren't coming easily, because Target, Kohls and other retailers are battling to get recognized for value while simultaneously offering benefits consumers demonstrated they enjoyed before economy went kaput. It's not at all clear that the small uptick in sales at Wal-Mart is anything more than a short-term blip in a very flat environment for Wal-Mart.
It's unclear that there's much growth. This week Wal-Mart admitted it was finding fewer opportunities to open new stores as saturation of its low-price approach appears imminent in the USA (read article here). Instead of opening new stores capital expenditures are going to decline by 1/3, and dollars are being shifted to store remodeling rather than new store opening. This implies a far more defensive tactic set, reacting to inroads made by competitors, rather than an understanding of how to regain the growth Wal-Mart had in the previous decades.
So now Wal-Mart is saying it will turn investments toward emerging markets (read article here). Sure. Wal-Mart wrote off huge investments and exited failed efforts in Germany and France, It's efforts to expand in Canada and the U.K. have been marginal. In Japan it only avoided a huge write-off and failure by making an acquisition. And its China project has gone nowhere, despite much opening hoopla 5 years ago. So why should we expect them to do better with a second attack into China, possibly going into India and Mexico?
The Wal-Mart Success Formula worked in the USA and drove incredible growth, but it is unclear that shoppers in developing countries get much benefit from a strategy largely based on buying goods from low-cost underdeveloped countries and importing them to the USA for mass-market buyers in low-cost penny-pinching store environments. What's the benefit to Wal-Mart's approach in Mexico or India? In India and China customers must pay high duties on imported goods, and low-cost retail exchanges already exist across the country for domestic products. Additionally, lacking a robust infrastructure (meaning a big car and good roadway to carry home mass quantities of stuff bought in large containers) it's unclear that Wal-Mart's approach is even viable. If you have to carry goods home on a bicycle, why would you want to go to a big central store? Isn't buying regularly what you need better? Wal-Mart has made no case that it's Success Formula is at all viable outside the USA, and especially in emerging countries.
Compare the Wal-Mart approach to Google (see chart here). In the last year Google has moved beyond mere search into other high-growth businesses such as mobile telephones. And today Google announced it is going to legally offer books and other copyrighted material to customers in some ways unique – but competing with Amazon's e-book (Kindle) business (read article here). Google keeps entering new high-growth markets with new demands from new customers. And in each market Google enters with new products intended to be better than what's out there today.
Wal-Mart keeps trying to find a way to Defend & Extend its old, tired Success Formula. Wal-Mart is huge, but its growth has slowed. Competitors have entered all around it, and every year they are chipping away at Wal-Mart by offering different solutions to customers. The competitors are getting better and better at matching the old Wal-Mart advantages, while offering their own new advantages. And we can see Wal-Mart is now being defensive in its histiorical markets while naive in trying to export its old Success Formula to markets that don't show any need for it. Wal-Mart is mired in the Swamp, struggling to fight off competitors while its growth is disappearing and its returns are under attack. On the other hand, Google keeps throwing itself back into the Rapids of growth in new businesses that offer new revenues and increased profits. And it enters those markets with new solutions that have the opportunity of changing competition. Google doesn't have to have everything work right for it to find growth through its White Space projects and continue expanding its value for customers, suppliers, employees and investors.
by Adam Hartung | Oct 20, 2008 | In the Swamp, In the Whirlpool, Leadership, Lock-in
With the economy soft, and sales harder to come by, more companies are thinking about what changes they can make to be more competitive. But what we’re seeing now is the emergence of competitors that Disrupted when times were good, and the decline of those who chose to Defend & Extend old Success Formulas in order to maximize profits back then.
Let’s take a look at Sun Microsystems (see chart here.) Trading today at $5.25/share, Sun was a darling of the internet boom – peaking at about $250/share in 2000. But $5.25/share (adjusted for splits) is about what Sun was worth in the mid-1990s. At that time Sun was a big winner as internet usage exploded and the telecom companies – as well as industry participants from tech to manufacturers – could not get enough Unix servers. Everyone was predicting that the need for servers was never going to decline, and Sun was "#1 with a rocket", to use an old radio term for a big hit song.
In 1995 Sun held a management retreat for all its managers and higher in Monterey, CA. Scott McNealy, the chairman and CEO, asked the audience "if you could buy Apple, would you do it?" The audience reacted with a positive roar! These managers all saw the benefit of having a low-price workstation line to augment their expensive servers. Further, Unix was notoriously difficult to use and the hope of bringing a better GUI interface was very appealing. They saw that if they could help the sales of Macs it would be a great way to slow the Wintel (Microsoft Windows plus Intel microprocessor) PC platform – which was the biggest competitor to Unix. And Apple had lots of applications in media and the office that eluded the very techie Sun products. These managers, directors and V.P.s had all thought about an Apple + Sun merger, and they saw the opportunities.
Mr. McNealy looked at the raucous, hopeful crowd and said, "you think you could fix that mess? With all we have to do to keep up with market growth, you don’t see buying Apple as a major diversion?" The air was sucked out of the room. Obviously, Apple was troubled. But there was real hope for growth in new and unpredictable ways from combining the two companies, their positive brands, their great technologies and their creative roots. But Mr. McNealy went on to tell the audience that the executive team had thought about the acquisition, and just couldn’t see doing it. It would be too disruptive.
That management retreat had as its keynote speaker Gary Hamel, author of Competing for the Future. Mr. Hamel gave a great presentation about how his research showed great companies figured out their core – their core strength – and then reinforced that strength. The rest of the retreat was spent with the management personnel in various break-out sessions defining the "core" at Sun Microsystems and then identifying how Sun could reinforce that core.
Of course, it only took 5 years for the internet bubble to burst. The telecoms were some of the first victims, with their value plummeting. Demand for servers fell off a proverbial cliff. Meanwhile, Unix servers from IBM and others had increased in performance and capability – giving the once high-flying Sun a competitive kick in the pants. Worse, the power of Wintel servers had continued to increase, making the price difference between a Unix server and a Wintel server much less acceptable. IT Department customers were beginning to shift to PC servers in order to lower cost. And Sun, with its focus on servers, had no desktop product to sell – no competitor to the PC – nor any software products to sell. The internet market was rapidly shifting toward Cisco and those who sold robust network gear. Sun was watching its market disappear right out from under it – and happening in weeks.
Now it’s unclear what the future holds for Sun Microsystems (read article here). Sales have not recovered. Losses have been mounting. Sun’s dealing with hundreds of millions of dollars in restructuring costs (again), and some of its businesses are now worth so little that the company is probably going to be forced to write off millions (maybe billions) in goodwill on the books. If it has to write off too much good will, Sun could end up declaring bankruptcy.
The time for Disruption at Sun was when business was good – in 1995 and 1996. Had they bought Apple, who knows what combination might have happened. At the time, Cisco (see chart here) was growing quite handily. But Cisco built into its ethos the notion that the company would obsolete its own products. This desire, to never ride too far out the product curve and instead cannibalize their own sales before competitors did, has allowed Cisco to keep growing revenues and profits. Instead of "focusing on its core" Cisco keeps looking for the competitors (companies and products) that could make Cisco obsolete – and using those competitors to help Cisco drive growth.
Even with Disruptions, many competitors will not survive this recession. Not because the managers are lazy or sloppy. But because they will become victims of better competitors who built Success Formulas more aligned with future market needs. Those who Disrupted in 2005 and 2006, who positioned themselves for globalization and rapid market shifts, will do relatively better in 2009 than those who chose to Defend & Extend what they used to do. The best time to Disrupt and create White Space is when things are good – because that prepares you to win big when markets shift and times get tough.
by Adam Hartung | Oct 16, 2008 | General, In the Rapids, In the Swamp, Leadership, Lock-in, Openness
Traders help markets function. Because they take short-term positions, sometimes hours, a day or a few days, they are constantly buying and selling. This means that for the rest of us, investors who want to have returns over months and years, there is always a ready market of buyers and sellers out there allowing us to open, increase, decrease or close a position. Traders are important to having a constantly available market for most equity stocks. But, what we know most about traders is that over the long term more than 95% don’t make money. Despite all the transaction volume, their rates of return don’t come close to the Dow Jones Industrial Average – in fact most of them have negative rates of return. Only a few make money.
For investors it’s not important what the daily prices are of a stock, but rather what markets the company is in, and whether the markets and the company are profitably growing. On days like today, which saw the DJIA down triple digits and up triple digits in the same day (read article here), it’s really important we keep in mind that the value of any company in the short term, on any given day, can fluctuate wildly. But honestly, that’s not important. What’s important is whether the company can exp[ect to grow over months and years. Because if it can, it’s value will go up.
Let’s take a look at a couple of companies in the news today. First there’s Google (see chart here). Despite the recession, despite the financial sector meltdown and despite the wild volatility of the financial markets, the number of internet ads continued to go up. Paid clicks actually went up 18% versus a year ago. (read article about Google results here). Gee, imagine that. Do you suppose that given the election interest, the market interest during this financial crisis and the desire to learn at low cost more people than ever might be turning to the internet? Does anyone really think internet use is going to decline – even in this global recession? Google is positioned with a near-monopoly in internet ad placement (Yahoo! is fast becoming obsolete – and is trying to arrange to use Google technology to save itself see Yahoo! chart here]). By competing in a high growth market – and constantly keeping White Space alive developing new products in this and other high-growth markets – Google can look out 3, 5, 10 years and be reasonably assured of growing revenues and profits. And that’s irrespective of the Dow Jones Industrial Average (where Google might well replace GM someday) or whether Microsoft buys the bumbling Yahoo! brand (read about possible acquisition here).
On the other hand, there’s Harley Davidson (see chart here). Motorcycles use considerably less gasoline than autos, so you would think that people would be buying them this past summer as gasoline hit record high $4.00/gallon plus prices. Yet, Harley saw it’s sales tumble 15.5% (much worse than the heavyweight cycle overall market drop of 3%) (read article about Harley Davidson’s results here.) The problem is that Harley is an icon – for folks over 50! The whole "Rebel Without a Cause" and "Easy Rider" image was part of the 1940s post war rebellion, and then the 1960s anti-war rebellion. Both not relevant for the vast majority of motorcycle buyers who are under 35 years old! Additionally, long a company to Defend & Extend its brand, Harley Davidson has raised the average price of its motorcycles to well over $25,000 – a sum greater than most small cars! Comparably sized, and technologicially superior, motorcycles made by Japanese manufacturers sell for $10,000 and less! Worse, the really fast growing part of the market is small motorcycles and scooters that can achieve 45 to 90 miles per gallon – compared to the 30 mile per gallon Harley Davidsons – and Harley has no product at all in that high growth segment! Harley Davidson is a dying technology and a dying brand in an overall growing market. No wonder the company is selling at multi-year lows (down 50% this year and 67% over 2 years) . Even though the stock market may be down, Harley Davidson is unlikely to be a good investment even when the market eventually goes back up (if Harley survives that long without bankruptcy!)
Watching the Dow Jones Industrial Average, or the daily stock price of any company, isn’t very helpful. Daily, prices are controlled by the activity of traders – who come and go incredibly fast and mostly lose money. What’s important is whether the company is keeping itself in the Rapids of Growth. Google is doing a great job at this. Harley Davidson is Locked-in to its old image and thoroughly entrenched in trying to Defend & Extend its Lock-in – completely ignoring for the past decade the more rapid growth in sport bikes, smaller bikes and scooters. As investors, customers, employees and suppliers what we care about is the ability of management to Disrupt their Lockins and use White Space to stay in the Rapids of growth.
by Adam Hartung | Oct 15, 2008 | Defend & Extend, In the Swamp, Leadership, Lock-in
Are people risk averse? Or do they like risk? Would you believe those questions don’t matter, when trying to understand risk?
Today we’re being told that the bankers who ran some of the world’s largest investment banks were taking ridiculous risks – and the decisions to take on those risks is now undoing financial services globally. Were these bankers all gunslingers – willing to take crazy risks? Would you believe me if I said they didn’t think they were taking much, if any risk?
Risk is a relative term. What’s "risky" is really a matter of perception. Let’s say I drive to work on a local highway every day. The traffic cruises at 65 miles per hour, but since I’m always late I drive 75. On a particularly late day I drive 80. Because I usually drive 75, the relative risk seems small. But the reality is that at 80 the chances of a minor mishap becoming a disaster are far greater. Once you are comfortable driving 75, the perception of greater risk is only the marginal difference between 75 and 80 – so it seems small. Over time, if I choose to keep driving a bit faster, within short order I’ll be driving 100 miles per hour. This may seem crazy – yet there are many drivers on Germany’s high-speed autobahn highways that drive this fast – and faster!! To those of us who poke along every day at 65 miles per hour these speed demons of the autobahn seem to be taking a crazy risk – but to them, working up to those high speeds gradually over time, the relative risk now seems quite small.
And this is what happens in our business. When a bank takes a deposit, it then can loan money. But should it lend dollar for dollar – deposit compared to loans? While nonbankers might say "don’t lend more than you borrowed" that seems ridiculously conservative to bankers. Bankers say that because most loans are repaid, they only need enough deposits to cover the normal ebb-and-flow of the cash demands on the institution. So they feel comfortable loaning out 2 or 3 dollars for every dollar of deposit. Of course, the more loans the banker makes and the rarer defaults occur, the more likely the banker will start to give loans that are 4 times the amount on deposit. Where does this stop? We know with Lehman Brothers the leverage reached 30 to 1 (read about financial institution leverage and regulatory recommendations here)!!! It didn’t take many defaults for Lehman to suddenly find itself unable to meet its obligations and disappear.
The bankers at Lehman Brothers learned not to fear what they knew. Not only that, but they hired immensely smart mathematicians and physicists to try calculating the amount of risk they were taking on with their leverage and their obligations. Using mathematics far beyond the grasp of all but a fraction of the population, they asked scholars to try calculating the risk in the loan packages they sold, and the credit default swaps. They continuously studied the risk. The more they studied the easier it was to take on more risk. The longer they kept doing what they had always done, and the more knowledgable they became, the less risky they perceived their behavior. Of course, as we now know, Lehman Brothers took on far more risk than the company, its investors and its regulators could afford.
The other side of this coin is how we perceive things we don’t know. Almost none of the buggy manufacturers in the early 1900’s transitioned to making automobiles. To them automobile manufacturing involved engines, and that was too risky. By the time buggy manufacturers felt they had to change, it was too late. When we are brought new opportunities to evaluate we don’t evaluate the real merits of upside and downside. Instead, we first question if the opportunity falls into our realm of expertise. If not, we deem it too risky. Because we don’t know much about it, we choose to think it’s too risky for us. Yet, the risk might be quite low.
Take for example buying Microsoft stock in the early 1990s as PC sales skyrocketed and Microsoft already had a monopoly on operating systems – and was building its monopoly in office software. The risk was quite small, since all Microsoft needed was for PCs (PCs made by anybody – it didn’t matter) to continue selling. That was not a high-risk bet. Yet most investors shied away because they didn’t understand tech stocks – including Warren Buffet who famously bought a mere 100 shares, declaring he didn’t understand the business! (Just think, if Warren Buffet had bought a large chunk of early Microsoft, he’d be as rich as himself plus Bill Gates today – now that’s a mind-boggler.)
When markets shift, relative risk can be deadly. If we continue to perceive things we know as low risk, we will "double down" our bets on customers, market segments, technologies and products that have declining value. If we think that doing what we always did will produce old returns we will do what’s comfortable, even when the market is moving headlong toward new solutions. Look at U.S. manufacturers of televisions (remember Quasar, Magnavox and Philco?). Experts in vacuum tubes and other analog technologies, plus the manufacturing expertise for those components, they were all late seeing the shift to solid-state electronics and all ended up out of business. All that expertise in the old technology simpy wasn’t worth much when the markets shifted – even though the new technology seemed risky while the old technology seemed familiar, and reliable.
When markets shift, the greatest risk is the "do what we know" scenario. Although it’s the easiest to approve, and the most comfortable – especially at times of rapid, dynamic change – it is the one scenario guaranteed to have worsening results. There’s an old myth that the last buggy whip manufacturer will make huge profits. Guess again. As buggy whip demand declines everyone loses money until most are gone. But there isn’t just one remaining player. The few who remain constantly see prices beaten down by the excess capacity of buggy whip designers, manufacturers and parts suppliers ready to jump in and compete on a moment’s notice. Trying to be last survivor just leaves you bloody, beaten up and without resources to even feed yourself.
It’s not worth spending a lot of time trying to evaluate risk. Because rarely (maybe never) in business is there such a thing as "absolute risk" you can measure. Risk is relative. What might appear risky could well be merely a perception driven by what you don’t know. What might appear low risk could be incredibly risky due to market shifts. So the real question is, are you Disrupting yourself so you are investigating all the possibilities – good and bad? And are you keeping White Space alive so you are experimenting, testing new ideas? New products, new technologies, new markets, new distribution systems, new components, new pricing formulas, new business models —- new Success Formulas? The only way to avoid arguments of risk is to get out there and do it – so you can get a good handle on what works, and what doesn’t, in order to make decisions based on opportunity assessment rather than Lock-in.
by Adam Hartung | Oct 9, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
The news is really bad in the auto business. For the first time since 1993 the number of cars sold in the USA in a month has declined to below one million. Sales are down over 25% from the previous year. And sales are predicted to decline considerably more in 2009. The value of General Motors (chart here) has declined to what it was in 1950 – when the Dow Jones Industrial Average was about 269 (GM is a component of the DJIA). (Read article here.) In the 1960s, when GM was king of the industrial companies, a popular phrase was "As goes GM, so goes America." This was based on the notion that GM was a microcosm of the American industrial economy. Is this still true – does GM portend the future of America?
A lot has changed in the last 40 years. Most importantly, the globe is no longer dominated by an industrial economy. Fewer and fewer people are employed in industrial production. We see it all around us as we realize that there are more people writing computer code than making computers. We’ve shifted to an information economy. Companies that ignored this shift, like GM, without finding opportunities to get into the growth economy are now suffering. GM started down the new road once, in the 1980s, by purchasing EDS and Hughes electronics. But later GM leadership sold those businesses in order to "focus" on the auto business. So now it’s only natural to recognize that the most industrial of the industrial companies are at the greatest risk of failure. No longer is GM a microcosm of any economy – including America. As GM goes so goes GM – but that doesn’t say anything about the future of America.
Some companies have shifted. They find new opportunities for growth. Today, wind energy is getting a big lift due to higher costs for petroleum fuels and increasing restrictions on greenhouse gases from using fossil fuels. Wind farms already exist offshore European countries, producing over 1,100 megawatts of power. Now such farms are being built not only on the great prairies of Texas and the American plains, but off the eastern U.S. coastline (read article here.) While there isn’t much interest for investing in auto manufacturing, there is lots of interest for investing in these wind farms to produce electricity – especially in high-cost electricity locations along the eastern seaboard.
And in the middle of this market we find – General Electric (see chart here). GE is the only U.S. company that makes wind turbines, and is a leader in promoting the new source of power. While many people have fixated on GE Financial and its woes, they have ignored the fact that GE is an American leader in many markets seeing rapid growth globally – such as wind power, water production, health care equipment and municipal infrastructure development. These markets are benefitting from the ecomomic boom in China, India and other developing countries, as well as emerging growth in the USA.
Any country’s economy can continue growing if it develops Phoenix companies that keep their eyes on the future and create White Space projects to keep them moving toward growth. These companies don’t fall into the trap of being "focused" on a single business, and dependent upon growth within that historically defined market. They constantly look for places to grow, regardless of what the company has previously done, and develop opportunities to learn in those new markets so they can create a new Success Formula maintaining growth. As long as America has companies that keep repositioning themselves for growth – such as GE, IBM, Cisco Systems, Apple, Google, Genentech, Johnson & Johnson, Baxter, etc. – America can have a great future.
