by Adam Hartung | May 22, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Unfortunately, most of the time Defend & Extend behaviors don’t work. They don’t improve revenues, cash flow, profits or returns for employees, suppliers and investors. A case in point are the large U.S. domestic airlines. (This blog is focused on American, United, Delta – the hub-and-spoke "majors" – and specifically is not about Southwest and other point-to-point carriers that are doing far better with growth and profits.)
Today we’re learning that American Airlines is going to charge some fliers $15 for their first checked bag (read article here.) Locked-in to old practices, even this is more of the same airline behavior. In reality, not everyone is charged for checking, there is a complex set of circumstances that determines who pays and who doesn’t. Just like airline fares, this fee is almost incomprehensibly complex for the typical customer – another typical airline practice (unbelievable, incomprehensible complexity driven by over-analysis of data and over-segmentation when addressing a problem.) Even worse, at a time when we should be encouraging everyone to check their bags (and giving these bags very comprehensive screening) so we can smooth boarding and ease onboard congestion the airline institutes a practice that will create more problems than solution.
Why do this? Because the airlines are desperate for revenue and are turning to fees (read article here). As the cost of flying increases due to the largest cost component, jet fuel, skyrocketing their answer is to institute fees on bags, etc. Wouldn’t the obvious answer be to raise price? When your costs go up by a doubling, wouldn’t you simply say you have to charge more? That may be easy for us to say, but not to the airlines.
The airline leaders aren’t stupid (even though it may appear that way to us travelers sometimes). Instead they are Locked-in to the point they have limited their options for solutions to a very few – which may not save them. When deregulated the airlines had many options. But they very quickly Locked-in on a Success Formula – even before it was proven to make money or satisfy customers.
- They decided to use a hub-and-spoke system to move passengers rather than a more efficient point-to-point system. This was based on the notion of low variable costs (such as fuel) allowing for efficiency losses to be overcome by volume. This put all of the airlines into an intense volume-seeking game.
- They invested enormously into aircraft. In excess of demand, they purchased aircraft in order to drive volume. Very expensive aircraft that are high FIXED COSTS which then increased the demand for more volume.
- They invested heavily in airport gates, trying to get "mini-monopolies" in cities by having the most gates. This again was a high fixed cost investment requiring them to seek volume.
- They built very deep hierarchies modeled on the military. Most early airline executives, and pilots, had military backgrounds so they built their commercial operations on the Locked-in organizational systems they knew. These large and deep hierarchies again became expensive and semi-fixed costs driving the need for more volume.
- They created antagonistic relationships with unions, based on industrial-era views of how to manage employees. They treated employees like nearly fixed costs by relying on conflict-based union relationships, rather than creating a more variable cost approach being developed in most service industries.
- They relied on amazingly complex analytics (literally, the most sophisticated math available) to try finding ways to get people to purchase empty seats. This led to phenomenally complex pricing schemes which trained customers that they should shop, shop and shop to find the lowest price – because there may well be seats for $100 available when the "list" price is $1,000. Causing the complexity to only worsen.
- In the rush for volume, they relied on price as the primary competitive factor. Customer Service was ignored as the airlines Locked-in on price, price, price to try filling airplanes.
- There was no White Space to try anything new. When they launched "discount carriers" (Ted, Song, etc.) they made these subsidiaries use the same planes, gates, reservation systems, etc. as the parent, with the only change being lower pay for employees and less food for customers.
Amazingly, most of these Lock-ins were designed by extremely highly priced management consultants who used industrial-era manufacturing concepts to create the newly deregulated airlines’ business models. These consultants believed that they could treat the airline like a manufacturer, with each plane a machine on the line that needed to be utilized and the hubs as distribution systems. Neat concept, only within months it was clear this approach made no money in an information-intensive services business. It created enormous fixed costs, but negative cash flow and no profits. the airlines had to constantly go back to investors for more equity, and became enormously profitable customers for debt lenders.
With each passing year the airlines Lock-in produced no better results. Some airlines, like Eastern, Braniff, National and Republic went bankrupt. Yet, these "majors" kept doing more of the same, hoping if they just got fast enough, cheap enough and created enough volume somehow they would succeed. Only, the more they did the worse things got!
Now the leaders of these airlines are facing an entire industry bankruptcy (read article here.) Literally, we’re talking about all of the top 5 airlines running out of cash and failing in less than one year. This would be a national disaster – even a national security disaster. Yet, because of Lock-in these leaders see no options beyond hoping to save their airlines with tricks like charging for checked bags. Uhm, "get real" comes to mind. Baggage fees will not fix the horrible results of these airlines who have "been there, done that" as regards bankruptcy more than once. In the past, they cut employee pay some more, refused to pay several debts in full, and wiped out shareholders finding a way to stay alive. But this time, with their #1 cost (jet fuel) so high and showing no sign of coming down soon, they could well walk off the proverbial cliff of disaster with no solution.
D&E behavior has never worked for the airline industry. Not since the first days of deregulation. Yes, many more Americans fly than ever before. But for the airlines themselves (and their employees, suppliers, investors and customers), their Success Formula has been an unmitigated disaster. And this is far too often the result of Lock-in and D&E behavior. D&E causes businesses to do more of the same until they eventually fail.
by Adam Hartung | May 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Sara Lee (see chart here) missed its estimates yet again, and the CEO had no shortage of excuses for the poor performance (read article here). Let’s see, since taking over in 2005 the new CEO has made the company smaller by selling businesses for cash, yet hasn’t found any growth markets for investment. So the money’s gone, but no new businesses. She has centralized everything from headquarters to R&D to cut costs, but there has been no improvement in profitability nor new product development. She keeps talking about a turnaround, yet the equity value peaked in 2005 (when she was hired) and since has declined a third – reaching a 5-year low earlier in 2008.
What we see at Sara Lee are lots of excuses, but no real performance improvement. The CEO wants us to keep waiting for her "turnaround plan" to work, but so far – no signs. And if GE, IBM and P&G are "battleships" which are hard to turn, Sara Lee is at best a mere destroyer which should be swift and able to maneuver quickly. So saying its size has been the problem (after 3 years and several business and asset sales) is a misstatement.
I’ve predicted poor performance for Sara Lee ever since the new CEO took over (to much ballyhoo and several interviews including magazine covers). Why? Because her plan has always been to contract and rely on Defend & Extend tactics – in a company where the results clearly indicated that a new Success Formula was needed rather than trying to Defend the old broken one. As a result, every quarter we hear excuses about why she needs only a little more time, and investor patience, to reach the goals she set 3 years ago. This time the blame is all on rising commodity and energy prices. Like Roseanne Rosanadana said on Saturday Night Live over 25 years ago "it’s always something."
While she was intent to cut costs and shrink, the CEO should have been Disrupting the old Lock-ins and implementing White Space to transform the company. Without those actions, Sara Lee will remain a perpetual underperformer. Even though Sara Lee is in suburban Chicago, adopting the Cubs refrain of "wait until next year" is not good business leadership. Sara Lee needs new leadership that will create the opportunity for future success – rather than constantly trying to find past glory with D&E actions that just keep weakening the company and producing below-average performance for investors. If you’re a still an investor in Sara Lee – why? If you’re an employee, are you prepared for the next layoff or eventual take-over that will end your job? If you’re a supplier, have you insured your receivables? No business can make below-average rates of return forever, milking or selling assets to keep the company afloat. And with no signs of Disruption or White Space anywhere on the Sara Lee horizon we can only expect the ongoing demise to continue.
by Adam Hartung | May 5, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Microsoft (chart here) announced it is backing out of its offer to buy Yahoo! (read article here). We should all breath a sigh of relief.
Twenty years ago Microsoft was well on its way to taking over the desktop in corporate America – resulting in domination in homes as well. Once Microsoft won, the amount of innovation in desktops declined. As Apple (pre-iPod) fell by the wayside Microsoft became a Locked-in machine Defending & Extending its Success Formula as users had practically no option for not only operating system but the applications – such as desktop worksheets, word processing and presentations – sold by Microsoft. Microsoft developed no internal Disruption mechanisms (save for Mr. Gates’ lone effort to launch IE and turn on Microsoft to the web), nor White Space.
Microsoft’s single minded focus on the desktop meant that it never developed any skill at developing new things. Microsoft’s acquisitions always ended up in the acquirer being swallowed, and usually the people leaving as the technology was marginalized by the "not invented here" mentality inside Microsoft. If Microsoft acquired Yahoo! we can easily predict that within short order Yahoo!’s competitiveness would decline further, making life easier for Google and destroying value for Microsoft’s shareholders. Without a Disruption, Microsoft’s organization would not value Yahoo! and without White Space Yahoo! would soon disappear into the bowels of the Microsoft machine – with so many billions of dollars lost. Microsoft has no idea how to compete for ad sales, nor how to compete in the "Web 2.0" marketplace – and their acquisition of Yahoo!, which in theory might sound good, would have been a disaster leaving the market with even less competition for Google.
Yahoo! got itself into this problem by management trying to Lock-in on a Success Formula and then Defend & Extend it in a dynamic marketplace. Remember when almost all of us opened our web browser to the Yahoo! home page? But leadership frittered their early advantage away by not maintaining Disruptions and not keeping enough White Space alive to prepare for competing with Google. But combining 2 D&E organizations is not the route to success. Rather, it’s like injecting the flu into a cancer patient.
Yahoo! needs to use this Challenges as a wake up call. Leadership needs to internally Disrupt big and fast. Start talking seriously with News Corp. about some kind of relationship to grow, including possibly joint venturing with MySpace.com. Look for anything valuable left in AOL over at Time Warner. Explore new technologies and the emerging Facebooks out there. Yahoo! needs Disruption and lots of White Space, not the closed-minded D&E mentality at Microsoft which would be sure to suck all the potential life out of this struggling competitor.
And Microsoft should start paying dividends. Big ones. Microsoft is generating huge positive cash flow from its near monopoly of the desktop. But since the company won’t Disrupt (Steve Ballmer is the quintessential D&E leader), and it has no idea how to create or manage White Space, give the money to shareholders. Let them find growth opportunities. What Microsoft most needs is new leaders – people who will Disrupt and create real White Space to develop a new future. Microsoft has to overcome the powerful Lock-ins created during the Gates/Ballmer regime if it is to be a powerful competitor in 10 years. But, if the board won’t replace the leadership then at least give the money to shareholders before management fritters it away trying to pretend this is still 1988.
At least we can all breath a sigh of relief that Microsoft (at least not yet) hasn’t thrown away a ton of money on an acquisition they don’t know how to manage, and Yahoo! hasn’t lost its opportunity to evolve to a more competitive Success Formula, and we all aren’t destined to have a monopolistic controller for internet ad buying called Google. That future will leave us with about as much creativity in the Web 2.0 marketplace as we get today out of Microsoft in desktops.
by Adam Hartung | May 2, 2008 | General, Leadership, Lock-in
A colleague was bragging to me today about his company’s 3% growth. "We’re doing great" he said "given this lousy economy." Great? 3%? I looked at him and said "Great is Genpact" (see chart here.) Genpact announced quarterly results yesterday (read press release here). First quarter revenues of $234million were up 33% versus first quarter 2007. Net income of almost $20million was up almost 10X (1,000%) versus last year. Operating margin was up to 15% versus 12.2% last year. Now, that’s growth!
"Genpact?" he asked. I reminded him it was the GE company started in 1997 to do back-office operations. "Oh yeah, that’s the Indian company. That’s not a fair comparison." "You’re right I said, let’s look at what they faced developing their growth:
- The company has no sales in its local country – it is 100% export dependent
- Over 80% of sales are in the "lousy economy" U.S.A.
- The company is located in a country with terrible infrastructure problems – there is no potable water, power outages are common, bad roadways inhibit worker commuting, terrible public transit hurts commuting, the country produces no oil – so it has limits on auto usage – and almost no worker can afford a car
- Most employees cannot obtain visas to visit the country where most sales occur
- The country has one of the greatest poverty rates in the world, and struggles with education, health care and all other poverty-based problems
- It is based in a country with almost no foreign exchange, so it cannot import hardly any components, nor import managers from rich, developed countries
- The government is regulation-happy with controls and limits on practically everything
- Costs are going up faster than revenues – because the U.S. dollar keeps going down in value dropping revenues while the costs of people paid in Indian rupees keeps going up!
It really isn’t a fair comparison. Compared to my friend, he has all the advantages, and Genpact is beleagured with phenomenal problems. For most American’s facing that list of challenges (plus more) they would give up before even starting. Yet, my friend felt 3% growth was "great" – meanwhile Genpact blew the doors off almost every U.S. company last quarter – and certainly its competitors like IBM, CSC, EDS and Accenture.
When we Lock-in, we start making excuses for why we don’t grow. We blame our historical marketplace, or our historical customers, or our historical suppliers, or our historical investments – we blame all our old decisions and then say it’s OK if performance – well – sucks. To grow, to exceed expectations, requires first getting the right mindset. Instead of looking for reasons to explain bad performance the managerial mindset must be "what do I have to do to exceed expectations? What would someone looking to the future do to grow fast and make higher returns?" We have to get out of Defending & Extending our past, and being satisfied with whatever results that D&E behavior produces and instead focus on the future and be willing to do the things necessary to GROW.
Kudos to the leadership at Genpact. Quarter after quarter the company keeps growing and making better returns. If readers don’t know why they are successful, best to study them. It’s not a simple story of "they are in India". Hopefully readers realize that being in India does not create "no-way-to-lose bliss." Business as an Indian company competing offshore is cutthroat and must overcome a multitude of challenges. It’s the skill of Genpact’s management to overcome challenges while staying focused on high-growth opportunities that sets Genpact apart from competitors. The markets where Genpact competes are open to everyone – Genpact is just better at seeing the opportunities earlier, keeping themselves Disrupted to try new things and maintaining White Space to develop new solutions that allows them to keep exceeding expectations.
So the next time you want to talk about your growth – better check results at Genpact before you start bragging. And if you really want to grow, better start setting your own bar much higher and managing for the future. Succeeding is about getting out of the D&E Mindset and following The Phoenix Principle – not being in the right location.
by Adam Hartung | Apr 25, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
This week a dozen high school seniors pulled a prank at their public high school in Zion, IL (read about the prank, with video, on Chicago NBC5 news website here). Apparently the boys thought up the idea of having 1 boy dress up like a gorilla, then the others dress up like bananas, and the gorilla would chase the bananas down the hallways and into the yard. A 4 minute prank. They weren’t very secretive about their prank, letting lots of fellow students as well as teachers in on it. And they even got their parents involved, having them call the boys home so they could change into the costumes during the school day. No one was hurt, no one injured, just a comical prank. There wasn’t even anything about the prank that anyone could think of that would have made it potentially dangerous – it was well planned to be just what it was and no more.
The boys have now been given a 7 day suspension by the administration. Right. Seven days of no school, no education. Let’s see, we take a few hundred 15-18 year old kids and put them into a closed environment. What are the odds they might think up something rambunctious to do? What are the odds they would try to express their personalities in non-traditional ways? What are the odds they would like to create some laughs, and possibly be remembered for a comical stunt? Could we expect this kind of thing to happen?
Of course. Watch movies going all the way back to silent days and you’ll find scene after scene of high school and college boys running pranks. Remember when the students opened the floor over the swimming pool during the dance in "It’s a Wonderful Life"? And remember how the top administrator, after hollering for about 1 minute for everyone to stop, held his nose and jumped into the pool himself? Seems like people have expected this behavior, and learned to accept it, for decades. It was part of "the rights of passage" that is American growing up. Harmless pranks are part of what happens, and for years good administrators learned to accept it, slap the hands of miscreants, and simply move on. It let young people behave improperly before they got too stressed, or too old to act-out inappropriately.
But not today. Now, even the slightest outside the box behavior leads to actions which can destroy a students GPA, restrict their extra-curricular participation and their efforts to move ahead. Straight A students that right fictional stories about guns -the fodder of many best selling mysteries – are expelled for discussing "taboo topics" in an educational setting (a recent experience in Mundelien, IL). In the Zion case, the administration threw the book at these boys because they violated so many rules. Let’s see, how critical were those violated rules – did they carry a gun, or knife, or dangerous object (no). Did they shout profanity and make threats (no). Did they attack anyone, or block the passage of any students or teachers (no). Did they threaten the authority of any teacher, administratory or security personnel (no.) No, they were suspended for 7 days for (a) wearing a costume to school (b) wearing a mask (c) disrupting the day. And the Superintendent was unapologetic on film saying "We’re basically enforcing our policy."
Right. And we wonder why our children are less accepting of authorities. Why they act as if schools are where "all the bad things happen." Children caught fighting in Zion’s school only get suspended for 5 days. But to expect a school administrator to act like a school is a place to learn – not only about geometry but about life – is expecting too much today. So they end up sending message such as this – that a simple prank is worse than an outright fistfight – or copying another students homework (not even a suspension, only a loss of grade). That the administrator appears arbitrary and completely unable to link the punishment to the nature of the violation is completely lost in the Lock-in to school rules. Rules which should be set by parents in the community – but are now set by administrators who have become wildly out of touch with their students needs in a global labor marketplace.
America relies on innovation and creativity to be competitive. The kind of creative innovation show often exhibited in pranks. We like pranks because they show us that someone has the ability to think outside the box, and we know that ability is often key to achieving success. But our schools no longer encourage, or even tolerate, creativity or innovation. Public school administrator Lock-in has eliminated that capacity – and made our schools second rate and far from providing students the most critical skills -including learning how to think rather than merely recite. Until we change the leaders, the American public school system is destined to continue its downward spiral. And the current leaders will never understand the need to change – because they are simply too Locked-in to consider any options, any Disruptions, or any White Space at all.
(PS – Don’t miss the comments on the NBC5 news link. You’ll find them overwhelmingly opposed to the school’s decision. Yet, we can be sure the school will pay no attention to these comments. Locked-in leaders never feel the need to listen to anyone outside their organization.)
by Adam Hartung | Apr 23, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
There’s a phrase used by stock brokers – "Don’t try to catch a falling javelin." They use this to describe a stock that has fallen recently – often a lot. Clients will ask "XY company stock has dropped Z percent, has it beome a good buy?" Brokers will warn the client that trying to catch that falling stock is not a safe way to invest your money.
This actually makes a lot of sense. Just look at Starbucks (see chart here). A high flyer, and a real Phoenix Principle company for many years, it created tremendous value for investors, employees and suppliers while creating many happy customers. There was lots of Disruption, and White Space galore as the company prepared for slowing sales. But in the last year the old CEO returned – and he’s doing exactly the opposite of what the company needs. As a result value has fallen – like a javelin – and there’s really no guessing how far down it will go.
This afternoon saw a rash of reports that Starbucks’ earnings are going to decline – not just miss expectations but actually decline – for the recent quarter and for the entire 2008 year versus 2007 (read Reuters’ release here). Even worse, same store sales have declined – meaning less is being sold in each store than last year. Starbucks has hit a growth stall, and that bodes very, very poorly for the company.
CEO Schultz is already making a rash of excuses for lousy performance – even blaming lower sales on lower home prices and a generally weak economy (read quotes here.) Even though it is leadership’s job to keep the company growing, especially when slowing sales are as easily predicted as this case. While making excuses, he’s shutting at least 100 stores and pulling products out of remaining ones – like the warm breakfast sandwiches. Let’s see, sales are down – so we’re going to remove products from the shelf. Right, that’s the ticket!
We don’t care if customers go into Starbucks to buy a coffee, latte, sandwich, muffin, coffee mug, coffee pot, CD, DVD, beans, glasses or MP3 download! What customers buy doesn’t matter – it just matters that we keep getting them into the store spending money! And that’s what the last CEO focused on. Creating new ways for Starbucks to make revenues and profits out of the existing footprint – while looking for new footprints in entertainment, grocery and liquor! Yet, when the old CEO returned he couldn’t wait to enforce his old Success Formula on the company – 25 years later – as if the world had never changed and Starbucks was again a 30 unit franchise. The repetitive Defend & Extend practices that worked to grow Starbucks 15 years ago are not what is now needed to keep it growing today. Starbucks was a flying javelin, but under Mr. Schultz it’s falling out of the sky very fast indeed. Investors had better run for safety!
by Adam Hartung | Apr 22, 2008 | Defend & Extend, General, Lock-in, Openness
Educational systems get a lot of attention all over the world. For years Americans thought their educational system was the world standard. America was early in offering an education free to all citizens. And Americans quickly got to the top of world charts with its percentage of high school graduates. But that was all long ago – back in the 1950s.
Since then almost every developed country has exceeded America’s educational system. Today America is known for its graduate schools. There is little doubt that if you want a master’s or Ph.D. you will get a good program at a good price in America. Same is true for professional degrees, like law, medicine or an MBA. But below that? But from kindergarten through high school, we are no longer even competitive with other countries like Japan, Taiwan, Germany and the U.K. (just a short starter list).
Most Americans know this. It is the lead every year once or twice in the major newspapers. So Americans usually step up to vote bonds for more school buildings and equipment. And they pay the highest property taxes on the globe to cover operating costs like teacher salaries. While not the best, America’s is BY FAR the most expensive educational system on the planet. Yet, year after year America’s basic educational system falls farther behind competitively.
Today many of America’s best college admits are home schooled – they don’t go to a public school at all! Long considered an approach only used by religious extremists, home schooling the last 20 years has started to show dramatic results. This week the top high school applicant in Illinois (which includes the huge Chicago area) was a home schooled girl (read article here). She was accepted to Harvard, Yale, Princeton, Stanford, Northwester, etc.,etc. And in the last winter Olympics we learned America’s best shot at medaling was from a home schooled young male.
Again and again we are seeing people who do better on exams, are more emotionally balanced, have better self-images and are better equipped for life are home schooled. Heaven help me for saying this. My past-on father was a lifetime educator, as was his sister, as was my oldest sister and her husband. I’ve lived around educators all my life – and we all believed in public education. But today, students are increasingly miserable and under-educated in the American system. Drug use is high, absenteeism is high, extra-curricular participation is down, students are losing all their liberties to draconian security measures, and yet shootings are surprisingly common.
The problem lies in management. It’s hard to find a more Locked-in administrator than the one in your local school. Years ago we turned over the reigns of our schools to these administrators in the belief that professional management would be better than all the involvement which used to come from parents. And those professionals rapidly Locked-in a system for education, from curriculum to hours of teaching to accreditation for schools and teachers, that has served the administration well – and no one else.
I’ve had many discussions with the leaders at the nationally ranked and 4,000 student high school my sons attend. And the one thing that has always been consistent is they don’t care what I, or any other parent, or anyone else has to say. These administrators have no White Space in these schools to practice alternative educational techniques. And they don’t want any. NO DISRUPTIONS could be printed on a banner in the main hallway, since these managers have no tolerance for anyone doing anything that isn’t a defense or extension of the existing system. Results are immaterial to these administrators – all that matters is remaining Locked-in to past practices.
Talking to many school administrators the last 20 years, my impression is they have more in common with Korean dictator Kim Sung Il than early educational founders Plato, Socrates or Aristotle (those philosophers who were threatened with stoning for being teachers, yet laid the foundation for the inquisitive system of education we most value in graduate schools today). Their schools are dispassionate corridors of non-thinking supplication. Students, teachers and parents are not listened to, only disparaged if they disagree with these administrative stalwarts clearly happy to be Status Quo Police. The road to more money in education is via administration or seniority, and that route is only followed by pledging to never experiment, never do anything new and never actually open the doors to inquisitive thought and open-minded discussion.
It is hard for most parents to think that they could educate their children at home as well as they are taught at school. Yet, fledgling data (often anecdotal, admittedly) is that home schooling and alternative education is proving to be far more productive and valuable than the near-prison like conditions run by the modern wardens of thought we call principles, vice-principles and deans in the vast majority of our public schools. And we should not be surprised, because it is in these alternative and home schools that the educational process is Disruptive – like Socrates asking impossible questions of his students – and White Space is allowed where THINKING is more important than FOLLOWING RULES.
For young parents today, it should not be an automatic action to enroll their children in the local public or parochial (accredited but not public) school. If you want your child to be the next leader, someone needs to bring out the best in that child – and use the best available educational tools in new and possibly unique ways. And that is not going to happen in these Locked-in environments. American children are being set-up to fail when competing with better educated children from foreign countires once they enter universities which are increasingly filled with students from these other lands. It’s time parents get outside their box of traditional behavior and think about how their children can actually become competitive with children globally. There is no more important decision worthy of White Space than the education of our country’s youth.
by Adam Hartung | Apr 21, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Harley-Davidson (see chart here) has had one heck of a 20 years. If you put $100 in Harley stock in 1986, it would be worth $23,000 today. Profits have gone from $4.3million to $1billion in 2007. As boomers got older and richer they gained disposable income, and many spent a lot on Harley motorcycles.
In 2001 through 2005 Harley had to increase production every year. But last week Harley announced it’s revenue was declining 13%, and thus it is laying off 700 of its 9,000 employees and looking to possibly idle a plant (read article here). Of course management says this is just a short-term phenomenon created by the lack of easy credit and impending recession. Investors should just wait and things will work out. With the company value down about 50% since early 2007, leadership claims Harley will return to provide great investor returns. That would be an investment mistake.
While revenue has gone up, so has the average age of a Harley buyer (read background on Harley here). From age 35 in 1987, the typical Harley buyer today is 47 (read info on aging buyers here and here see chart on average age of buyers here). The typical customer earned $38,000 in 1987. By 1997 (almost a decade ago) the average income had risen to $83,000 (read income information here). By dealer statements, the bet is that today the average income is over $100,000. The reality is that Harley’s customers are slowly marching into retirement. These stats bode for a lot of troubles – retirement is not the best age for selling motorcycles. Just how old and wealthy can Harley hope to attract buyers? It’s not like Harley is selling a Rolls Royce.
For 25 years Harley has built its brand reputation for one type of motorcycle. Officianados will point out there are actually 4 kinds of Harley’s – but to most people all Harleys are variations on a simple theme of big V-Twin motorcycles that are – well – loud. For most motorcycle riders, Harleys are also incredibly expensive. Go to the #1 producer of motorcycles, Honda, and you can purchase a bike almost identical to a Harley for $8,000 to $12,000 – but most Harley’s cost north of $20,000 – some as high as $40,000! That sort of branding led to some incredible pricing which has created great profits. But it also priced out of the market more than 85% of all potential customers.
So what are 25-35 year old customers buying? Not Harleys. And as they age, why would Harley expect them to convert? Did boomers grow up and want to buy their dad’s Oldsmobile – or did they choose to purchase Mercedes and BMWs? So it is with younger buyers today. They are buying Hondas, Suzukis, Kawasakis and Yamahas – and they have no plans to ever buy a Harley. Harley’s CEO has felt he had to protect what Harley historically stood for, at the expense of attracting younger – and more – buyers. He chose to "milk" the brand of its value, and now that brand is about to see the udder go dry. Sure, there are a lot of older guys out there with Harley logos tattoed on their bodies – a testament to a great historical brand – but that’s not what’s getting tattooed on young people today. And Harley’s are not what they are riding when they make those first couple of motorcycle purchases.
The odds are not good that Harley will come roaring back with more volume, higher prices and more profits in 2 or 3 years as the recession wanes. They’ve had a great run, but their customers are aging, just like the technology in most of their products. Their product line is limited, their dealers are dedicated to rather out-of-date brand nostalgia, and their technology is frankly quite aged. Yes, Harley has done some things to attract new buyers, like launching its V-Rod with an engine designed by Porsche, but the company never Disrupted itself and the V-Rod has been an after-thought that has not built a following and has not kept up with competitive motorcycles in its class. There’s been no White Space in Harley, instead only efforts to Defend & Extend the old brand and products. That worked well for a long time – but all Success Formulas have a half-life. For Harley, this downturn will most likely be a permanent ratcheting down of volume – meaning negative growth. And for investors that is definitely not good news.
by Adam Hartung | Apr 15, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Hundreds of years ago philosopher Hippocrates created an oath, and for years medical doctors subsribed to it. Dramatically paraphrased, it included the notion "Doctor, first do no harm." The objective was clear – if you go messing around with a bad situation you can make it worse. Make sure you know what you’re doing – and you know how you’re going to make things better.
We should tell modern businesspeople to swear by this same oath. Delta and Northwest airlines have announced their intent to merge and make one huge Delta (read article here). It is widely expected that very shortly United and Continental will attempt the same maneuver to create an even larger United. Now, do you think this means air travel is going to get any better? Will service improve? On-time performance? Less lost baggage? Happier gate agents and flight attendants? Better maintained aircraft?
No one believes that. Even the leading industry gurus claim the only merger benefit is theoretically this will somehow lead to lower cost – and less capacity (at a time when capacity utilization is around 80%) – which is supposed to raise prices. So we should expect basically the same sort of service, with fewer flights, and yet even more attempts to cut wages and maintenance spending to increase profits? The reality is that either (or both) of these mergers will lead to mass confusion as the companies try sorting out conflicting schedules, optimizing broken systems and negotiating new contracts.
This deal is just another effort to Defend & Extend the traditional hub/spoke airline system the major airlines have used – unprofitably – for 30 years. Things won’t get better if these companies merge – for customers, suppliers and investors they will only get worse. There’s no plan here to make a new, more profitable airline. They aren’t suddenly going to become Southwest.
Monday, Blockbuster said it wanted to buy Circuit City (read article here). Why? Blockbuster is getting killed by on-line music downloads, Netflix and On-Demand direct-to-home distribution, and pretty quickly movie downloads. Circuit City was eclipsed by Best Buy in 1990 and has been choking on the leader’s dust, barely making money ever since (despite being heralded as a "great" company in Jim Collins’ book Good to Great). As on-line sales of consumer electronics grows at over 30% per year, making life tough even for leader Best Buy, this merger is supposed to somehow make things better?
The bidder says it’s an opportunity to create a 9,300 unit group of stores – right as we start the worst consumer-led recession in 30 years! As retailers of all types are rapidly closing stores in order to avoid bankruptcy, the plan here is to get a bunch of stores under one name to sell products that are being displaced by on-line and direct-to-home models and consumers are becoming more price conscious. Right. This is nothing more than a move by Blockbuster to try Defending & Extending a retail model that has already proven to be obsolete.
The reality is that Southwest and Virgin have shown airlines that approach the industry differently can make money. Making a bigger company that uses a broken Success Formula only makes for larger losses – not a new airline. Everyone should be wary, because life will only get worse as we consolidate management of most of the system into fewer hands trying to make a broken model work. If you’re an investor, keep buying Southwest and Virgin because these mergers will provide more opportunities for the Disruptive competitors to win.
Likewise, Apple has shown us all that we’ll never go buy CDs in historical quantities. All media is quickly going digital. We don’t buy newspapers, magazines or books like we once did – we go to the internet. And very soon we won’t be buying DVDs either. New competitors are causing Blockbuster and Circuit City to faulter – and trying to make both bigger will only cause them to do worse.
These companies desperately need White Space to build new Success Formulas before they fail – and not just fail investors but customers, suppliers and the communities they serve as well. These merger efforts will not help any of them to be better competitors that offer better products with better service that meet customer needs with lower cost models. And that means they are only going to make things worse. It would be good if businesspeople could overcome their desire to "do something – anything" to save their old Success Formulas and instead only undertake actions based on plans to be better. First do no harm!
by Adam Hartung | Apr 11, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Microsoft (see chart here) is huge and has a lot of cash. So do you care? What made Microsoft an incredible company was how it managed to aid the growth of PC technology, making the machines every day parts of our lives. Microsoft products ranged from operating systems to desktop applications to the prolific Internet Explorer web browser. Along the way Microsoft grew incredibly fast, literally won every marketing war it engaged in, dominated its markets and made huge amounts of money. What a great past.
But what is Microsoft doing now? It’s latest operating system (Vista) took 6 years to develop, got to market almost 3 years late, and is not even adopted by half the current customers. A year after launch, Microsoft has to strong-arm PC manufacturers to load the product rather than the older version (XP). Meanwhile both Linux and Macintosh are stealing operating system share from Microsoft – a very bad sign. Users aren’t clamoring for new versions of office automation software, and growth has stymied. And after dominating the market with IE, Microsoft is now contending with Firefox in the browser market. Quite simply, Microsoft isn’t growing. It is sitting on a huge pile of cash, but can’t figure out how to invest it to generate additional growth. And investors haven’t seen any growth in company equity value the last 5 years!
So, Microsoft has offered to buy Yahoo! But why? Microsoft hasn’t offered any new insight to what it’s ownership of the #2 browser will do for customers or investors. Microsoft has merely said it has the money to spend – like a teenager with last week’s paycheck burning a hole in his pocket. If there’s no plan to launch new products, or otherwise generate growth, why spend the money on a company that is far, far behind the #1 player Google? If Yahoo! can’t maintain or grow share versus Google, what is Microsoft planning to do to change the situation? Merely owning Yahoo! won’t help Microsoft be a better company.
Microsoft slipped into the flats four years ago. Now it’s trying to Defend & Extend its past glory, but to not much success as it is losing little bits of share all over. It has a huge war chest to fight this defensive battle. But wouldn’t investors be better off if Microsoft handed out huge dividends? Why not let investors take the money and buy shares of Cisco, Google, RIMM, Oracle or other higher growth companies? Why should Microsoft management burn this cash? No one is fooled by this action – today’s Chicago Tribune headline ran with "Is Yahoo deal set up for failure?" (read article here) and the last paragraph reads "No matter who ends up with Yahoo, the people involved are not innovators" – quoting Marc Benioff CEO of Salesforce.com. "They are followers. This is not a deal about the future of the Internet. It’s about the problems of not executing in the past against Google."
If companies don’t grow, then why do they exist? Without growth, the company should be milked for maximum cash and the money given to investors who can invest in other high growth opportunities. Microsoft had a great past – but it has not maintained its focus on markets and new opportunities. It missed the networking wave – which largely went to Cisco. It missed the PDA wave (personal digital assistants) which has gone to RIMM and Palm. It missed the digital music wave which has gone to Apple. It missed the internet search and advertising wave – which has already gone to Google.
Microsoft started Defending & Extending its personal computer business, and it lost its growth. Bill Gates demonstrated a knack for developing future scenarios and identifying emerging markets. But he almost missed the web – and it took a herculean effort on his part to get the company refocused and out with IE. Mr. Gates did not build an organization that valued Disruption and invested in White Space seeking new markets early and experimenting with new Success Formulas. He relied on himself. Mr. Balmer is a classic D&E manager – not a Disruptor nor investor in White Space. So now Microsoft leadership is doing things that will just waste our time and investor money.
