by Adam Hartung | Aug 19, 2008 | Defend & Extend, General, In the Rapids, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
Last week BusinessWeek reported on how Dell was making a strong play to catch Apple’s iTunes in the digital music marketplace (read article here). On the surface, it sounds like a good set of tactics that might work. But it probably won’t.
Apple (see chart here) is a company filled with Disruption. In fact, Disruption is the lead in the Businessweek story. The reporter, Peter Burrows, discusses how a very disruptive Steve Jobs made it impossible for one of Apple’s engineering execuutives to remain at Apple – subsequently causing a lawsuit and payout by Apple. Typical for Mr. Jobs, he was ready to Disrupt rather than continue on a path he had lost faith in. So he made a hard turn to drop Tim Bucher. It is through this process of Disruption (painful as it is) and using White Space that Apple’s market value has increased by some 13x the last 5 years.
As a disruptive leader, heading a Disruptive organization, Mr. Jobs has Apple constantly creating White Space and doing new things. Apple has gone from the Swamp – practically the Whirlpool – back into the Rapids. It is sustaining its big hit products like iPod and iTunes with new innovations, while using White Space to jump into new markets like mobile telephony and wireless hand held computing. These Disruptions and White Space projects keep Apple working on the process of innovation to grow existing markets and enter new ones.
Dell (see chart here) is a very different company. Dell is still working hard to "leverage" its "core competency" in direct-to-customer sales. This approach has led Dell to attempt augmenting its "core" product lines of PCs and laptops with high definition televisions, and even its own mobile MP3 device. Both are long gone. Dell is still Locked-in to the culture, processes, IT systems, HR practices, decision-support approaches, vertical silos and knowledge sets that are focused on personal computing. Dell keeps trying to find ways to Defend & Extend its "core" in the hopes that late entry into new markets will allow the company to regain past rates of return. And it’s market value is down about 1/3 in the same timeframe.
Dell has added an acquisition (Zing) to its market approach, along with the engineering exec formerly fired by Mr. Jobs. But what Dell has not done is Disrupted itself. It has not admitted it must change its Success Formula to really be successful. And, it has not created White Space with permission to do whatever is neccessary to succeed – rather than operating within the confines of the old Success Formula and old Lock-ins. Without Disruption and Lock-in this project will be hamstrung by old assumptions, culture and structural restrictions which will stand in the way of creating a new Success Formula and market success. So even though the new Dell project sounds pretty good, it is probably won’t work because the project is still in an organization that first and foremost wants to sell more PCs – it wants to sell boxes in very, very high volume to businesses that can buy thousands.
You may ask if this isn’t possibly a replay of Apple versus Microsoft (see chart here)? And the answer is no. In both markets Apple took early leadership. But in the case of the Mac versus the PC Apple Locked-in on its hardware and software platform as a system sale and was unwilling to consider any other option. At that time Apple fixated on Defending & Extending the Mac. Meanwhile, Microsoft focused solely on software – and not only the operating system but the most critical and common applications (word processing, spreadsheet, presentation and database). By changing the competition to a "Windows + Intel" platform Microsoft was able to focus on software innovations which it could then take to market faster than Apple could react.
In the early 1980s, Microsoft was not saddled with a two decade Locked-in legacy like Dell, and Microsoft was not trying to Defend & Extend its DOS operating system when it launched Windows followed fairly quickly with Word, Excel, Powerpoint and Access. Meanwhile in 2008 Dell is a 25 year old company that has historically eschewed R&D and new product development, relying on vendors to do such work as it put all energies into supply chain management and direct-to-customer selling. Now in its effort to compete with Apple, Dell is trying to build its new solution inside this old fortress – which is designed to do something entirely different. Because Dell won’t Disrupt itself, admitting it needs to evolve, and won’t create White Space, it’s Lock-ins will be the hurdles that will stop progress. It’s this legacy – a very successful one producing above-average results for most of the 1980s and 1990s – that will hinder Dell’s success. One it can overcome – but shows no signs of taking the necessary actions.
by Adam Hartung | Aug 14, 2008 | Disruptions, General, Leadership, Lock-in, Openness
The Phoenix Principle applies not only to companies, but industries and even whole economies. There is no doubt countries Lock-in on a market approach, and then Defend & Extend it. And these Locked-in countries become victims of market shifts and new competitors who are not afraid to Disrupt and use White Space to change.
Just think historically for a moment. There was a time when the Dutch controlled more land than any other country. As leading explorers, their territories were the most vast. But they were unable to evolve a system of government which would allow them to Defend & Extend their territories, and they fell from the top perch. The Spanish became the next big economic engine, developing extensive colonies for their King, Queen and church. But, a Lock-in to how they would govern became rife with corruption and eventually they lost their leadership as their floating armada was destroyed. The British led the industrial revolution, and took over global economic leadership, but unable to evolve quickly enough from a monarchy to a more participative government they lost leadership to competitive countries who built systems of self-rule (such as the Americans.) This is not intended to be a chronology, but rather examples of economic Lock-in and inability to Disrupt and use White Space to maintain economic leadership.
We are now looking at what appears to be another major transition. In 2009 or 2010 China will become the #1 manufacturing country in the world, pushing America to #2. As the world has witnessed this week, watching the Olympics, the Chinese are making great strides in pushing forward – changing the face of business competition as they grow in almost all parts of the global economy. Today, the price of gasoline globally is being increased largely by exploding Chinese demand for fossil fuels to promote their economy – and current prices are something they are able to pay while still achieving their country goals for growth in jobs and economic prosperity. Meanwhile other economies, like the USA, are plunging into recession partly aided by high energy costs.
We can see that the Chinese have been good implementers of The Phoenix Principle. Let us not forget that within our lifetimes this country was a deep economic backwater under the no-growth leadership of Chairman Mao and his Gang of Four. Despite one of the world’s oldest cultures just 50 years ago China was not an important economic force. But:
- The Chinese demonstrated an ability to visualize a very different future. After Chairman Mao died the leaders developed scenarios for China that were built upon ideas for how they could lead. Remember that China had no foreign exchange, nor available assets (such as oil or timber) to sell. Yet, the leaders were able to create scenarios of China as a world power. Thus, when the Soviet Union failed the Chinese were primed and ready to stop spending money for tanks on their western front and invest in manufacturing and infrastructure for growth.
- The Chinese focused on competitors to learn how to succeed. And they looked not just at the Japanese and Americans – who were the leaders – but at all countries for how to build a strong, high growth economy. By looking at emerging nations they learned what worked, and where the problems layed, and they designed an approach that would allow them to unseat the Americans, Japanese and Europeans. They did not try to compete like Americans, but rather built their own competitive engine which was unique – and we now see almost beyond competition with U.S. manufacturers.
- The Chinese were quick to Disrupt. Old practices, some enforced with death sentences, were overturned to allow people to do new things. When necessary, entire cities were flooded to create better waterways and fresh water for industry. Homes were destroyed, and some historical landmarks, to make way for highways. The Chinese were willing to challenge their internal Lock-ins, and use Disruptions to create opportunites for doing new things.
- And they have been very willing to create and use White Space for developing a new Success Formula. It wasn’t long ago China retook possession of Hong Kong from the British. Thousands of Hong Kong Chinese fled to American, Canada, Australia and elsewhere fearing a loss of freedoms. But the Chinese turned Hong Kong into the White Space from which they could learn how to operate a capitalistic system that would work for China. As they learned, they utilized those learnings to open new industries and new cities which allow intense capitalisitic style competition in a country that still values central planning. White Space has allowed the Chinese to hone a new Success Formula which is now growing much, much faster than anything in the "developed" world.
The Chinese have emerged as fierce competitors. The market has shifted. Fiddling with exchange rates may help U.S. manufacturers, but it is just so much short-term financial machination. While America sits in a debt crisis threatening to shatter real estate values and strangle economic growth, the Chinese are rapidly becoming the world’s economic leader through manufacturing. For Americans to think they will ever recapture the manufacturing lead is nothing but fairy tale thinking. That game is over, and they won. Americans can hope for a return to the past, but hope won’t grow the economy.
America, and Europe, must realize the market has shifted. Rather than use tactics trying to Defend & Extend old Lock-ins, leaders must Disrupt. White Space must be used to define a new Success Formula. Here America has strength. One benefit of the American structure is how much White Space is created through entrepreneurship.
Now, more than ever, it is time to funnel resources to those White Space initiatives to develop a new American economy. America went from the #1 agricultural economy to the #1 industrial economy via its ability to look forward rather than backward, to Disrupt and to follow those on the front edge of the economy into new businesses. And that is what must happen today. The focus must be on building upon leadership in advanced electronics and telecommunications, nanotechnology and bio-engineering (3 examples – not exhaustive) to find the next economy – and build a Success Formula capable of regaining economic leadership. Or, it can slip further into the Swamp of slow-to-no-growth like those countries which are the heritage of most American leaders – Britain, France, Germany, Italy and Spain. All wonderful countries with a spectacular past.
by Adam Hartung | Aug 4, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
We all know we’re going to die. But we don’t usually think about it as we live each day. We pretty much run our lives the same until we are exposed to a new threat, like a particularly dangerous intersection or a tainted food, and then we change our behavior to deal with the threat. We know the average longevity for an American adult is around 75, so we fully expect to live that long and we don’t really think beyond that.
The same is true for most businesses. Yet, for about a decade we’ve known that the odds of a healthy public company surviving a mere decade is, at best 50/50. With such a short expected half-life, it should be surprising that pretty much all businesses do their planning as if they will go on forever. We apply optimism to our businesses the same way we do our lives. No CEO or other top executive will say "I imagine my company is in the half unlikely to make it another decade." Individually this makes sense, but collectively it is a disaster. Business leaders keep being surprised by the fragility of their Success Formulas as their businesses fall into the Whirlpool, wiping out shareholders and bondholders as well employee jobs.
Last week Chicago woke up to the painful, overnight demise of Bennigan’s (read story here). One of the oldest casual dining restaurant chains, Chicago was one of Bennigan’s top markets with 10% of its company stores located here. Also, Bennigan’s largest store was very visibly located on Michigan Avenue in the heart of the city. So Chicagoans were very surprised that at midnight on July 29 the owners called up store managers telling them to shutter the stores – the company is liquidating. Apparently the chain could not compete in a market of recession-softened demand, busted real estate values and higher food prices. So overnight, the business disappeared – leaving franchisees of 140 stores wondering what they heck they’re now supposed to do.
Bennigan’s, owned by Metromedia Restaurant Group, is a startling example of the myth of perpetuity. Despite being one of the very first casual dining concepts, increased competition was not hard to spot. Likewise, the dissolving of real estate values has been happening for months – like a slow pour of honey. And that recessions cause downdrafts in eating out has been known ever since restaurants have existed. And that food costs would increase was being predicted almost 3 years ago as fuel prices went up and showed no sign of a major downward reversal. It takes a lot of fuel to make and transport those quasi-prepared meals to restaurants – as well as a lot of energy to heat and cool the locations to customer expectations. None of these trends were hard to spot. But somehow, Benegan’s management did not plan for them.
As management Locks-in on its Success Formula it becomes blind to changes that could be very threatening – possibly business ending. As problems develop, seen in revenue or profit declines, the tendency is to say "we have to do more of this, do it faster, do it better, do it cheaper." When reality may be there is a need to take much more drastic action. But the desire to Defend & Extend becomes paramount among the optimists, who keep hoping for "things to return to better conditions." When, often, the current situation is more likely "the new reality." Or "the new normal." The past conditions are very unlikely to ever return.
Anyone expecting a return to widely available, extremely low cost credit had better think again about all those banks writing down billions of loans, and the near collapse of the mortgage industry as Freddie Mac and Fannie Mae stand on the brink of failure. And as auto leasing companies shut off all leasing products due to fear of lower residual values. Anyone thinking about a return to rapid U.S. job expansion had better take a look at the videos of hundreds of millions of workers in China, India and South America all desperate for a job at any wage. Anyone expecting lower taxes and a government bail-out had better take a look at the record-breaking deficit built up the last 8 years (when the budget was last balanced) and the expected upcoming costs for war (continued or ending), health care, and the aging/retiring population demand on social security.
What happened in the past was then, all that’s important is planning for the future. Without taking a very sobering look at what might happen, it’s easy to be Pollyanna. And that is how leadership teams fall into the half of businesses that don’t survive. It’s not lack of hard work. It’s an unwillingness to realize things change and we have to prepare for those changes. If we get stuck in D&E management, we keep doing what we always did despite declining returns. And eventually, you just can’t keep going any longer.
Failure rarely is as dramatic as it happened at Bennigan’s. Usually the wind up happens through an acquisition and slower shut down (like JPMorgan is about to complete with Bear Sterns), or through a longer process of management bleeding out the company assets (not unlike SBC’s takeover of AT&T). But the end point for Bear-Sterns and Bennigan’s were the same. They are no more. Any management team unwilling to accept the staggeringly pessimistic statistic that it has a 50% chance of failure in a decade is a likely candidate.
Keep that in mind GM, Ford, United Airlines, Delta and Citibank. We don’t like to think these sorts of iconic companies with long histories and past glory can disappear. Yet, past members of the Dow Jones Industrial Average included Woolworth’s, American Can, Johns-Manville, Esmark, Inco, Internationals Harvester and Nickel, Nash Motors, National Distillers and Swift. None of those DJIA companies thought they would ever leave the DJIA – much less disappear. Yet they did. If we run our business as if it can go on forever by doing more of the same we doom it to demise. Whether it’s fast like Bennigan’s, or more slowly.
by Adam Hartung | Aug 1, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Fear is a good motivator. But when the fear goes beyond that necessary for protection, it can become paranoia. While it’s not a word we like to think applies to us, in Defend & Extend organizations paranoia is fairly common. Defending the Success Formula, and it’s Lock-ins, becomes so paramount that anything which even looks like it might affect the Lock-in can cause extreme over-reaction.
Take the reaction Wal-Mart displayed when it started telling employees they needed to fear a Democratic win next fall (read article hear.) Wal-Mart certainly has its share of problems, but they won’t be fixed, or turned into a disaster, by whoever is elected in the next Presidential campaign. Yet, the leaders at Wal-Mart are so fearful of anything that would upset their Lock-ins that they are now telling their employees they had better vote Republican.
Wal-Mart’s credo is low cost. And somewhere along the way, this included paying its employees no more than it has to. The stories abound of Wal-Mart employees so underpaid they have to use food stamps or other government welfare subsidies to survive. And everyone is familiar with the armies of Wal-Mart employees lacking health care coverage. This Lock-in, to everything being low cost – including employees – caused Wal-Mart to develop a pathological fear of unions. A paranoia. And that has led to a fear of Democratic politicians.
Once unions were powerful in America. But you have to go back to the 1950s and 1960s. Then threats of union boycotts or strikes actually caused management to make decisions that were not balanced, but instead designed to avoid union wrath. But even at its height, non-government worker union participation never reached more than 50%. Now, union participation is only 8% – and that is down 50% since the mid-1980s. Unions are not a threat to any business leader today – including Wal-Mart.
Yet, as the article details, even minor union activity has caused dramatic over-reaction within Wal-Mart. When one store achieved union representation for its butchers Wal-Mart got rid of butchers by going to meat cut at the slaughter house. When a store in Canada had its store personnel unionize Wal-Mart closed the store. And now Wal-Mart is so afraid that unions might regain some strength they are trying to affect the votes – one of the truly independent actions all Americans have – of its employees.
A union would not bankrupt Wal-Mart. It might even make the company better! Yes, its cost might rise – but as we’ve seen low cost is not the only way to compete. The cost of a living wage with health care for all full-time Wal-Mart employees would not even cost retail prices to rise 2%. So it’s not like Wal-Mart loses its ability to be low-cost if employees had a decent wage and benefits. Moreover, if Wal-Mart had to pay better it just might have to rethink some parts of its Success Formula. And that just might help Wal-Mart adjust to changing market circumstances and become a far better competitor.
By trying to "stamp out" unions, and certainly deny their existence inside Wal-Mart, management is being paranoid. So driven to defend its Success Formula that it won’t consider options. Most Americans want their cohorts to have the basics covered. And while liking low prices, they are willing to pay for good products and good service fairly. And instead of seeing Wal-Mart as a company that abuses employees, unions could cause people to say "Wal-Mart is a great place to work. They treat people well. Let’s shop there."
D&E breeds paranoia. Protecting the Lock-ins to an extreme. And that’s the sign of a company in trouble. Because inevitably, all companies have to migrate to changing markets if they want to be profitable longer-term. The sooner management identifies paranoia, and kills it, the faster the company can react effectively to market shifts and improve its profitability. But don’t expect that to happen at Wal-Mart.
by Adam Hartung | Jul 31, 2008 | Disruptions, In the Swamp, Leadership, Lifecycle, Lock-in
I talk a lot about company Success Formulas. They are easy for us to see, and easy to discuss. But did you know that economies have Success Formulas as well? Countries, and the people who run them, have Success Formulas and Lock-in which can have a huge impact on our results.
China and India long have had Success Formulas based on limited trade, and reliance on central planning for everything they do. China focused most of its attention on its enormously long border with the Soviet Union, and it maintained its Lock-in to traditions centuries old as it protected itself from its most critical enemy to the west. After India found independence from England its leaders formed a sort of quasi-socialist government which constantly balanced trade and subsidies from the Soviet Union and the USA. Both countries, desperately poor, were more focused on protecting themselves from war with the nearby Soviets even if it meant widespread poverty – for which it asked the USA to help.
Then the Berlin wall crumbled, as did the Soviet Union. This sudden market shift challenged both countries to rethink what they needed to do. Quickly, both made changes in their policies which allowed them to open up White Space for doing more with the USA. Without a need to balance the US against the Soviets, it became in their best interests to find ways to be more pro-American. As a result, both quickly made advances to use capitalist principles for doing business with US and European companies (more US than Europe, by quite a bit however). Internally things didn’t change much in either country, as these White Space projects were really geared only on selling to America in order to gain badly needed foreign exchange which could be used for development as decided mostly by their central planning committees.
Today, despite the altered world order, the Chinese and Indian internal Success Formulas are largely unchanged. Think of the export zones in which all these offshore people work as "skunk works" projects within the country. In both countries, well over 90% of the population does not share in the wealth created by the offshore work. Poverty is still rampant, potable water scarce, and the population struggles for education and better circumstances. There was no "Disruption" within each country. Only a willingness to experiment in doing something different if it could improve its position by earning foreign exchange and increasing aid from the wealthy Americans. There was no Disruption, and largely no internal change in how either country felt economies should be planned.
Behind the business scene, largely not even known by most Americans, there have been ongoing negotiations about import tariffs and trade quotas between America and Europe – largely versus China and India. Organized under the banner of the World Trade Organization (WTO) these "Doha negotiations" have been going on for years (read about the Doha development negotiations here). These negotiations are where the official governments discuss things like subsidies and tariffs for agricultural products, and basic materials like steel. Its here where Asians yell at Americans for subsidizing farmers, which lowers grain costs, while these countries refuse to import American grain because they fear it will force their peasant farmers into starvation on their small, uneconomic farms. It’s here where the offshore players scream for market access to sell steel at their marginal cost, while Americans point out that their steel was made in grossly polluting plants, using labor barely paid above slave wages in conditions intolerable by any western standard.
This week, after 5 years of ongoing negotiations to allow for more trade growth (largely through more U.S. exports), the talks broke down. (read article here) Some say it’s "fair trade capitalism" versus "communism". But these labels don’t much help us understand the importance of this breakdown. As Tom Friedman pointed out in The World is Flat, we now operate in a global marketplace. Lots of people depend on those containers of goods moving over the ocean – or those terrabytes of digital information passing along the satellite connections and undersea cables. Everything from what we buy at the local store, to the price of rice, to the production of automobiles is affected by these negotiations. There is no doubt that our imports and their lack of imports has made a huge difference in the everything from the number of jobs in America to the value of the greenback. Because no country operates without some subsidies and tariffs, everyone has them. And right now, these agreements are highly valuable to the Chinese and Indians, while not so good for Americans.
The only way to understand how we can move forward is to understand the differences in the Success Formula for the American economy, and theirs. Americans long ago swallowed the bitter pill of agricultural reform. Today less than 5% of our population works in agriculture – compared to over 80% in China and India. Additionally, we have been willing to allow low-value work in things like textiles and metals production to go elsewhere (including Mexico and many other developing nations) while our workers moved into higher-value-added white collar jobs. The American Success Formula is to allow companies to fail, to allow market forces – brutal as they may be – to alter the what people do, and how much they are paid. So Americans see no problem with open borders – and even view trade as a form of detente foreign policy. Laissez Faire economics is largely acceptable.
But this is not true for the Chinese or Indians. If they allow food products to decline even 1%, there will be mass failures and no clear answer to where these near-subsistence farmers will find work. The governments fear mass starvation, because the central planners have no idea how they could parse out work to the remote, rural areas. If they had work. Because there is precious little manufacturing work – despite all the exporting done to the USA – given the size of their populations. And, if these central planners forced better working conditions in its plants they might lose sales to Korea, Thailand, or Bangledesh. It wasn’t long ago that shipowners who wanted to scrap their vessels didn’t bother with a dock, they just ran the ship ashore in Bangledesh where near starving people ran out when the tide left to cut it up with no safetry procedures at all (nor concern for collecting hazardous mateials they merely let go into the sea.) The Chinese and Indian negotiators are fixated on these countries that are even poorer than them! And their Success Formula is all about planning a better future for their country – without the swings of market-based systems.
Given these two very different Success Formulas, how could anyone expect negotiations to make a difference? Years ago the USA could easily give in, because it was rich, its population well fed and well employed, and its currency very strong. But now, the USA has much more at stake. Jobs are not as plentiful, huge government deficits have cut the value of the currency almost in half, and people are concerned about their future. The USA now has quite a bit to gain – and the Chinese and Indians a lot to lose. This change means we can expect other negotiations to find trouble reaching an accord – such as with the environment (read WSJ article here.)
In this environment, the only hope is for a significant Disruption in one or the other groups. Either the Chinese and Indians consider a significant switch away from central planning – toward market forces – and the inevitable pain this will cause, or the USA has to agree to far more central planning of its businesses and the detailed use of tariffs and other tools to protect its people – just as the Chinese and Indians do. Either action would be a major Disruption in what is considered permissible. But it is required. Until one group changes its Success Formula, this is a religious war unlikely to be resolved across a negotiating table.
The U.S. will take the hit for the talks failing – but that is unfair (Read FT article here). The Success Formulas are too far apart for meaningful change to happen. Until one party or the other Disrupts its economic approach, there can be no agreement. Which will change is yet to be seen – but given the mood in America today don’t be surprised if you see a lot more tariffs and other protective measures go into place – and pretty quickly.
by Adam Hartung | Jul 30, 2008 | In the Swamp, Leadership, Lock-in
The headline at Marketwatch.com this evening read "Starbucks Catches Steam" (link to frontpage at 7:30pm eastern on 7/30/08) The article (read article here) goes on to be very bullish sounding about Starbucks. "Shares turned higher" "up 4%" "reversing course". Uh huh. A quick look at the chart shows Starbucks has lost half its equity value in the last year (see chart here). So, a 4% uptick from the now lower value means its still down, let’s see, that would be 48%. Now I see why it’s time to rejoice!
I don’t agree with people who say that the stock market is good at valuing companies. In reality, investors tend to overvalue high growth, and overvalue potential turnarounds. Investors, generally, tend to be overly optimistic. So any time a company is down 50%, it’s worth being very careful before waving the victory flags and claiming the corner is turned.
There’s a comedian named Lewis Black who has recorded an entire comedy routine about how he knew he was seeing the end of the world when he walked out of a Starbucks, and immediately saw another Starbucks across the street. Lewis Black isn’t a business strategist, but he makes a valid point. If Starbucks is just a set of coffee emporiums, when do you reach saturation? At some point, there simply is no need to build any more. To continue growing, Starbucks would have to be more than just coffee emporiums.
The previous CEO recognized this, and undertook a wave of projects to grow the company. He pushed the brand into grocery aisles, licquor store aisles and even into restaurants and onto airplanes. He moved Starbucks into publishing music, and even becoming a recording agency. Starbucks produced a movie – which made money even if it wasn’t a smash hit. And as CEO he started expanding the stores internally to carry more products and more food – expanding why you would go to a Starbucks. There was a lot going to to try preparing for the "saturation day" (how’s that for the name of the next Will Smith move?).
But he got sacked. And on the high steed came riding in the "founding CEO" (although I don’t think he really was the very first CEO, he gets the credit). And his mission became – Back To Basics. He stopped all the White Space activity to "refocus" Starbucks on its "central mission" of being a coffee emporium. Oh. And let’s see, revenue declined. Uh huh. Now, he’s closing hundreds of stores and laying off thousands of employees, because revenue is down. And revenue is down because of the recession. It wouldn’t have anything to do with not pursuing additional revenue sources, would it? It wouldn’t have anything to do with being overly focused on doing one thing, would it?
So what’s really ahead for Starbucks? If you don’t think revenue will continue declining – I guess I’d ask "why not?" Face it, Starbucks may have created the coffee emporium genre as we now know it in America. But they have also spurred a lot of competitors that can make a pretty good cup of coffee. And these competitors have leased some great locations, and furnished them well, and trained employees to be friendly and helpful, and installed wireless internet service so we languish over our drinks and maybe have a second. All successful businesses breed competitors, who quickly copy what you do well. And these competitors cause price competition as they begin oversupplying the marketplace. Eventually, you are doomed to lower growth and lower profits — unless you find something else to do!! (Economists call this "the law of diminishing returns.)
It’s hard to see a bright future for Starbucks right now. Not because they originally did anything wrong. During rapid growth they Locked-in on a Success Formula and grew it fast and profitably. But the competitors squeezed in, and then the market shifted as customers started buying less costly product. So Starbucks needed to be more. To be a great company, Starbucks must avoid the foibles of Mrs. Fields’ Cookies (remember when that was all the rage?) by avoiding being a very focused competitor with a big ol’ bulls eye painted on it. And the CEO was trying. But this CEO – he’s likely to take Starbucks right where Mrs. Fields took her business. By killing all the White Space, he’s killing Starbucks.
So anybody who thinks Starbucks is possibly "turning the corner", remember that only 7% of businesses that hit a stall every grow consistently at a mere 2% ever again. And Starbucks is not doing the things likely to put it in that 7%. Making a great coffee will do just about as much for saving Starbucks as those big, soft, fattening cookies did to save Mrs. Fields after she opened a few hundred stores. It’s not about what you did last year – it’s about what you’re going to do next. And another flavor of coffee, well…….
by Adam Hartung | Jul 24, 2008 | Defend & Extend, In the Rapids, In the Swamp, Leadership, Lock-in, Openness
Another big loss was announced at Ford (chart here) today (read article here). After announcing a $9billion loss, the CEO said he was looking to convert some truck plants to make hybrid cars. And the company is considering bringing some of its high-mileage European cars to the U.S. Let’s see, after announcing a quarterly loss that was 85% of the company’s entire market value, the CEO thinks maybe it’s time to change the product line-up and manufacturing capacity configuration.
How hard would hit have been over the last 8 years to expect the need for higher mileage autos to increase? Instead of looking at what historically made the most money (which were trucks and SUVs), and trying to milk those products for profit forever, can you think of any future scenario which would not have predicted the need to switch customers to different products? Only by focusing on the past – what used to make money – could a leadership team walk so far out on the gangplank.
Compare this with today’s announcement at Google (chart here) to launch a competitive on-line encyclopedia to Wikipedia (read article here). This would appear to be creating a "me to" product in a market already well served. Why should Google bother? Such a viewpoint would be looking backward, rather than at future scenarios.
How many new users will come to the internet over the next 10 years? How many people may want a different approach than used at Wikipedia? What are the odds that it is possible to have a product that is possibly better than Wikipedia? If you look at the future, and you recognize that (a) internet use is unlikely to slow for many, many years (b) products with lots of acceptance, and no competition, are easy targets because some people have to be underserved, and (c) competition always improves products — doesn’t it suddenly seem logical to offer this new product?
Scenarios should point out not only future risks, but future opportunities. Yes, Google is #1 in search and #1 in on-line ad placement. And growth in both those markets looks very good. But your future scenarios should be looking for additional markets as well. In this case, Google sees potential to use its capabilities in both search and ad placement to better the on-line encyclopedia product market. Thus, its a market opportunity which is very likely to do well given this future view.
We can’t wait on market confirmation to make plans. We have to develop scenarios, and take management action based upon them. If we do, we can identify and test markets early enough to be prepared when customers start to shift. If we don’t, we’ll be caught "flat footed" when they shift – and as Ford is demonstrating this can be an expensive, possibly deadly, position to be in.
by Adam Hartung | Jul 23, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Everyone knows newspaper ad revenues are down dramatically. But this trend didn’t happen overnight. Ad revenues started slumping way back in 2001. At the time most management blamed the recession. Then lack of recovery was blamed on a jobless recession. By 2004 it was clear that advertisers were increasingly looking to targeted advertising like the internet and cable TV, moving away from traditional print. By 2005 movie studios were telling media companies they never intended to use traditional advertising like they previously had, auto companies were shifting large portions of advertising to the web, and real estate companies (not yet into the doldrums they face today) were shifting more and more advertising to the internet instead of full page newspaper ads for which there was no evidence of value.
Simultaneously, by 2000 eBay had become America’s permanent garage sale, making the need to buy an expensive classified ad far less necessary. Not to mention the impact Vehix.com and Cars.com was having on used auto sales. Meanwhile Craigslist.com was demonstrating its ability to find buyers for apartment rentals, autos and all kinds of things. It was clear that classified ads were now facing competition like never before seen – and that competition was going to intensifiy, not lessen.
Newspapers reacted all through the decade by slashing staff and other costs. At Chicago’s Tribune Corporation management could see it had purchases the LA Times at a market top, and by 2004 the company had already made several rounds of cuts at all its properties. Into this declining market Sam Zell decided to buy Tribune Corporation using a little of his money and a lot of debt (OPM – or other people’s money).
Now, after a slew of additional cuts, Zell has told employees "it was unfair to hold him to previous forecasts." (see quote in Chicago Tribune article here). If you can’t hold the Chairman and CEO responsible for over-optimistic decisions leading the company to the brink of disaster – and causing cost slashes which jeapardize the product while leaving no money to invest in the emerging on-line media market – who do you hold responsible?
Every management team has the requirement to do scenario development. All businesses have to be managed to succeed in future markets against future competitors. To meet these challenges, they have to develop scenarios that assess all market forces – both good and bad. It may be OK to hope for the best, but for goodness sake isn’t it up to management to plan for the worst? But Sam Zell allowed himself to listen to outgoing management, the Tribune company sellers, and use historical revenues as the basis of his projections. As he said "his team predicted a 5 percent to 7 percent decline in 2008 revenue." Rather than look at the forces affecting The Chicago Tribune and other newspapers (as noted earlier), he simply took the current results and said "surely things won’t be worse than a 5 – 7 percent decline". WRONG! As they like to say in ads for mutual funds "past results are no indication of future performance." Or, maybe you could at least have the savvy to not believe everything you’re told by the salesman.
Chicago is one of America’s largest and greatest city. Its citizens deserve great news reporting. But the Chicago Sun-Times has been gutted by a previous owner who embezzled billions out of the company leaving it on the brink of failure. And now its largest newspaper, The Chicago Tribune, is getting smaller and containing less news as Mr. Zell shows his "toughness" by laying off thousands of employees and slashing the news and editorial staff. This has led to some of the best editors in the country walking out the revolving door installed in HR due to the declining quality of the product. But, Mr. Zell claims that when he loaded the company up with more debt than it could repay he should not be held responsible.
There was another option available to Tribune Company and Mr. Zell. The internet started to affect how people searched for and acquired information by the mid-1990s. Tribune reacted by doing some things right, such as its investment in Cars.com, CareerBuilder.com and Food Channel which bred FoodNetwork.com. But it never attempted to transition news to the internet. What the company could have done by the time it sold to Mr. Zell was move its investments into building the worlds best on-line environment. Dow Jones, for example, invested in Marketwatch.com which was moving fast to displace The Wall Street Journal. And the foresighted News Corporation moved heavily into not only cable television, but internet acquisitions such as MySpace (and now Marketwatch via its acquistion of Dow Jones).
Mr. Zell should have recognized that Tribune Company was not a big building he could hope to fill with new tenants and milk for cash. Overly optimistic assumptions are the result of rose-colored glasses, which no leader should wear when planning for the future. Tribune Company was largely a group of outdated properties facing far faster growing and more successful new competitors – with a few gems that needed much more investment. He was buying old freestanding Sears stores just when the competition was throwing up shopping malls. He needed to move fast not to leverage this property up and out of cash, but instead to invest into internet opportunities with which he could migrate the news and other information base within Chicago Tribune and LA Times. Mr. Zell and his management team needed to figure out how to deliver reader eyes to web sites, and thereby serve up an enticing audience for the internet ad buyers. Not hope for a planned recovery of print media advertising in the face of the internet tsunami.
Who are the losers because of Mr. Zell’s optimistic forecasts that he now wants to say aren’t his responsibility? Chicagoans to start wtih. We’re wondering in Chicago if Wrigley field will be bought by someone and renamed XYZ park – something Chicagoans dread. We’re now expecting the landmark, and historically important, Tribune Tower to be converted into condos. And we’re getting less and less news every day as the paper gets smaller and smaller – with no good replacement for the information people seek. The same thing is happening in LA, where business leaders are frantic over the value destruction wrought at their local paper under Tribune Company control. And of course there’s all those great researchers, writers and editors who instead of transitioning to new media are simply out of work. And who knows what will happen to the bond holders who trusted Mr. Zell to be far better at utilizing scenario planning to keep Tribune Company a viable and successful company.
by Adam Hartung | Jul 17, 2008 | General, In the Rapids, Leadership, Lock-in
I regularly beat the stuffing out of organizations for Defending & Extending their Lock-in. Low growth and poor results have demonstrated for these companies that market shifts are pushing their Success Formula toward obsolescence. They need to Disrupt and use White Space if they are to survive and grow again.
There is another side to this. Some companies are in the Rapids, and they have a different set of requirements. Take for example IT services provider Infosys. Their quarter ended 30 June, 2008 saw revenues increase by 24.5% versus a year ago! The company also added over 7,000 employees during the quarter. Tata Consultancy Services (TCS – also an the IT services provider) for the same period saw revenues grow 21% as they added nearly 9,000 new employees. These companies are clearly in the Rapids, seeing revenues grow in double digits and they are profitable. They have a very different Lock-in problem.
When businesses are in the Rapids, their objective is to define the Lock-in which will guide improving results from the Success Formula. Without Lock-in, they cannot keep growing revenues and, even more importantly, improve on the Success Formula to grow profits and maintain above-average returns as new competitors enter. These businesses need to make sure they have a clear hierarchy that can guide the recruiting, hiring and new employee indoctrination process. They need clear processes for adding new large clients – Infosys added 49 clients in the latest quarter and TCS added 35. Without Locked-in processes to rapidly sell, onboard and deliver services to new clients they cannot maintain this rapid growth. Without clear IT structures, they cannot measure employee performance against client goals, and effectively implement billing and cash receipts. They need Locked-in decision-making processes that allow leaders to quickly review business issues and make quick decisions so the company can keep growing. And they need to develop experts inside the company who can oversee operations and be sure each silo maintains its performance.
When a business enters the Rapids Lock-in is GOOD! We forget about that because so often we are talking about problematic businesses. But when GM was growing fast, it needed to create Lock-in that helped it become the #1 auto company offering more styles and features than previous leader Ford. When Microsoft was growing fast it needed Lock-in to help it dominate the desktop market amongst fierce competitors threatening to fragment the PC software market. It was Wal-Mart’s Lock-in to supply chain leadership that allowed it to go from a small group of stores in backwater rural towns to the world’s largest retailer in just 2 decades. (Of course, all of them are now Challenged looking forward because eventually the let Lock-in overcome their need to change due to market shifts – but that’s a different story.)
When businesses don’t create Lock-in they can’t grow. They can’t compete effectively in a way that meets market expectations. They are chronically short capacity. They cannot onboard clients effectively, so potential buyers grow weary of the wait. They lose track of their record keeping and miss customer expectations – as well as struggle with cash management. They make erratic decisions that confuse customers, investors and employees, slowing the ability to maintain growth.
Today, Infosys and TCS are very profitable at the gross margin line – but not so on the bottom line. Their revenue per employee is a mere $51,000. Accenture produces revenue of $240,000 per employee! In the Rapids, these high growth companies that are Disrupting the marketplace need to manage their Lock-ins so they not only grow, but earn above average rates of return as well. Eventually, all Success Formulas hit the wall of diminishing returns. Market shifts allow competitors to strip out value from old Success Formulas. But first, before they stall, successful companies have to implement Lock-in to make their Success Formula valuable! Those that don’t just churn through lots of investor cash, employee turnover, beaten up suppliers and in the end fail.
In the Rapids, Lock-in is good! If you’re evaluating a growing company, you want to see that it has a clear Success Formula and knows how to Lock it in. Only after that has happened, and proof of above average returns are demonstrated, does it become critical to manage Lock-in for evergreen, long-lived results.
by Adam Hartung | Jul 16, 2008 | Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
The headline in today’s Chicago Tribune trumpeted the headquarters move of MillerCoors to Chicago. In exchange for $20million in aid, about 300-400 headquarters jobs will move to Chicago. The article goes on to wax eloquently about how Chicago is a "winner" city because of its great quality of life (read article here). Unfortunately, the article is a whitewash of the economic reality in Chicago and Illinois. Chicago’s mayor and governor are trying to focus on symbols, like acquiring a new company headquarters, rather than look at the results. Because the reality is that Chicago and Illinois have been on a long-term job decline.
The brutal reality can be found by downloading the PDF located here. What you’ll see is that from 1990 through 2007 Illinois, and Chicago as by far its largest job hub, has trailed not only the nation in job creation, but even the rest of the midwest (Indiana, Iowa, Michigan [yes, even auto-dependent Michigan], Missouri and Wisconsin). Chart after chart details how every sector of employment has been significantly trailing the national growth rate – and even far behind the region. Chicago may be a great city to live in, but it’s not a great city to be employed – or look for a job. Especially if your talents are on the leading edge of growth businesses.
What matters in business is results. And competitively, Chicago and Illinois have not met the challenge for almost 2 decades. Year after year Chicago becomes more of a "fly over" for people working on both coasts. Even though the University of Illinois is one of the top 5 engineering schools on the planet, most graduates leave to work on a coast (think Marc Andreeson and Netscape and you’ve got he message). When innovators create a new product as a result of working at Kraft or Motorola, they have to go to a coast to find funding, employees to grow the business and talented service people that can aid their growth. Large companies in Chicago are shrinking as competition steals competitors to the coast, or offshore.
In the midwest it’s common for people to relate their life to a family farm which exists today, or is a mere one generation away. But just like these midwestern urbanites migrated to the largest midwestern city, Chicago, because there were no jobs in the rural hinterlands, we now see midwesterners are forced to migrate coastal in order to maintain employment or find funding for new ventures.
By focusing on something as trivial as a headquarters win the city and state do a disservice to its citizens. This symbol overlooks the need for a much higher growth rate. Housing did not crash in Chicago like it has in LA, but it never went up nearly as much either. With few jobs, there was less demand and the boom never set in like it did elsewhere. People in Chicago cannot hope to see their city flourish if it cannot win the competition for jobs by developing more opportunities. Yes Boeing moved its HQ to Chicago, but we all know the planes are made in Seattle, and that’s where the jobs are. MillerCoors may be in Chicago, but the beer is made in Milwaukee and Denver. Neither "win" comes close to offsetting the losses from the closing of BankOne and operations move to New York, or the closing of Ameritech and operations move to Texas (just 2 recent examples of massive job losses). Or the failure of Lucent and Motorola to maintain their health thus causing tens of thousands of jobs to move to both coasts and India.
Chicago and Illinois leaders still focus too much on maintaining old Lock-ins, trying to Defend & Extend what the city was when it was the manufacturing and transportation center of America 50 years ago. For example, Chicago is no longer the city of Capone and Dillinger. By denying gambling, Chicago’s hold as the conference center of America shifted to Las Vegas while tourists flocked to Merrillville, IN or Milwaukee, WI to enjoy an evening. Yet the paranoia about its past stops Chicago from doing the obvious and legalizing casinos like cities/states have done within 75 miles. Or take for example the refusal to build a domed stadium in Chicago where weather which is less than ideal. While everyone knows a domed stadium would help bring in major events from around the globe, the city refuses to consider one as it relishes in the glory of aged facilities like Soldier and Wrigley Field. The last all-star baseball game in Chicago was delayed 8 hours due to rain, and everyone watched and wondered if the White Sox would play in the snow to win the World Series. Great is their past, and beautiful is the architecture – but Locking-in to that past is now costing citizens tax revenue and jobs! {note to readers – yes I know the Sox play in the renamed Comiskey Park and not Wrigley – but why didn’t the city dome that when it was rebuilt?}
The situation in Chicago is not dire, but neither is it good. Unless the IT jobs, healthcare jobs, biotech jobs and other occupations upon which the planet’s future is based make their way to Chicago, the city will some day be as well known as Dodge City – but possibly about as popular (Dodge City has under 50,000 people and is so far off the beaten path I challenge you to identify its location within 150 miles – hint, it’s in Kansas, not Arizona or California.) To find the future which will keep Chicago vibrant its leaders must focus on scenarios for growth, and realize they must COMPETE with cities that offer many benefits. Then the mayor and his leadership team must Disrupt Lock-ins to tradition, and use White Space to discover a new Success Formula which can regain growth leadership. If the current mayor Daily wants to have a legacy which eclipses his father, he must reset the agenda for growth by focusing on jobs – not merely symbols.
