by Adam Hartung | Apr 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Last night ABC’s Nightline program featured an article on Starbucks (see print version here). This is not the first time Nightline has discussed Starbucks. The program previously chided management about it’s competition with McDonald’s (see video on YouTube here) saying Starbuck’s coffee wasn’t any better than the fast food giant. Nightline’s recent feature was that Starbucks needs to "regain its focus" under the return of early CEO Howard Schulz. Something he was happy to support. Even Marketwatch kicked-in its review of the "retro-strategy" being taken to rejuvenate the company by launching a new coffee blend (read article here).
Wrong. Do we need a lot more Starbucks? At 15,000 units, one could easily argue that it’s sensible to expect less growth. And, as in all markets, competitors are figuring out how to duplicate Starbucks original idea – from other "shops" such as Caribou Coffee to mass chains like McDonald’s and Dunkin’ Donuts. ALL Success Formulas have a half-life. ALL Success Formulas grow tired, and lose their ability to maintain above average growth and profits. And that is happening now to Starbucks. Starbucks did the right things to grow like crazy as an early pioneer in its largest business. But doing more of the same – possibly better, faster or cheaper – is not going to get Starbucks back on the growth path. That’s just Defend & Extend activity which is already demonstrating declining marginal value.
Mr. Schulz was obviously the right guy to get things growing 20 years ago at Starbucks. Out of the Wellspring he took the coffee shop idea into the Rapids. He built systems that helped Starbucks Lock-in on all the things that could help the company grow. Imagine the skill it took to consistently open 6 new units a day!!! He was the right guy in the right place and he helped create an empire.
But that’s not what Starbucks needs today. For at least 3 to 5 years it has been obvious there would be a limit to the growth in Starbucks traditional business. Starbucks has been tailing off the Rapids, and heading into the Flats. And now it is rapidly falling into the Swamp of low growth. It was obvious the demand for shops was going to become saturated, and competitors were bound to get sharper and better. So the last CEO Disrupted Starbucks – saying the company was not just a coffee company. He got into music production, movie production, performer management, liquor production and consumer goods. He also started expanding the stores to offer sandwiches and many other products besides coffee. He actively promoted and funded White Space to find new revenue opportunities. And that is what Starbucks needs more than anything – more sources of revenue.
Starbucks is blessed with a name that does not mean anything. Starbucks doesn’t have to think of itself as a coffee company. Think about Nike – which didn’t have to be a shoe company. Only by moving beyond shoes did Nike become the megapower brand it is today. For Starbucks to now make an about-face and try to find the future in its past is lunacy. That’s trying to catch last night’s dream. The competitive market which supported rapid coffee shop growth is gone, and a new one is in its place. Focusing energy on a slugfest with its competitors will only result in price wars, lower margins, declining growth, store closings, laid off workers and lower returns for shareholders (who already know this and have knocked 50% off the company value in the last year – see chart here.)
The appeal of "back to basics" is so strong. We’ve seen too many executives fall prey to the call. It seems so logical to think that if we "focus" on "core competencies" we will somehow return to previous greatness. But that simply isn’t true. Watch old prizefighting clips, and it is amazing. Rocky Marciano looks like an out of shape thug compared to the athleticism of Joe Forman or Muhamed Ali – who look like they need another year in the weight gym compared to Mike Tyson and today’s belt competitors. Each wave of winners creates yet another round of competitors who are different – and that changes the game. Doing more may have worked for Rocky Balboa – but he had the help of a dozen script writers to make his dream come true. In the real world, we cannot capture the old glory but rather have to find new places and ways to compete as our markets become crowded from those seeking our success.
Starbucks is in for some really big trouble – worse than already seen – if Mr. Schulz stays in place and continues with his plans. For investors, its highly unlikely to be a pleasant ride. Starbucks can succeed if it realizes that its future growth is not about the coffee. It’s about finding ways to change other markets the way it changed the last one. And that means avoiding focus on past successes and instead using White Space to develop a new Success Formula that can grow and prosper – achieving past results but in new ways.
by Adam Hartung | Apr 2, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Top oil industry executives were on Capital Hill yesterday being questioned about their profits (highest ever) and the tax breaks they receive for exploration and production. (Read AP report here under headline "Oil executives defend huge profits".) Let’s not be naive. As officers of their corporations, they have an obligation to maximize the value of their companies – otherwise they could be sued by investors. No matter their personal opinions, they have to defend their profits and their product prices. So reading that they did so should not be unexpected.
It’s not the headline that’s interesting, however. It’s how they reacted to questions about the future. After all, reported profits are the past. What does the industry see in the future, and how is it preparing for it?
Does anyone doubt that crude oil is being consumed faster than it is being produced? We’ve known that since – 1940! The 1970’s "oil price shock" certainly taught all of us that petroleum is a finite resource, and we’re using it up. It’s not whether we will run out of crude – but when. So the interesting question is, when will that happen and what are our biggest "energy" companies doing to prepare for it?
Unfortunately, this isn’t a big topic for these behemoths. Typical of the industry leaders, when the Chairman of BP America was asked what he wanted for America’s future he replied "We need access to all kind of energy supply" with the writer noting "adding that 85% of U.S. coastal waters are off limits to drilling." In other words, more of the same! Drilling more holes, possibly in environmentallyl dangerous locations, does not solve the real problem – world petroleum consumption keeps growing while the pools of oil underground are being used up.
Don’t get me wrong, I grew up in the Oklahoma oil patch. I had lots of relatives that poked holes in the ground, sold oil leases, and worked in oil companies. The industry was very good for my home state, creating jobs and raising the standard of living. But that was then. What we need to address is the future. What are these companies doing to replace these massive revenues as oil gets harder and more costly to find? What are their future scenarios, and how are they proposing to help create a wonderful future? Together, according to the article, the major oil companies spent $3.5b on other options besides oil last year (solar, wind, biodiesel). Their tax breaks – $18billion. Their profits last year $123b!
These companies are incredibly Locked-in. They aren’t energy companies, they are oil companies. Right now, they are making lots. But look at history, and they have sure had their down years (or, rather, decades). These companies are the sort that make good money 5 out of every 20 years. Oil companies have never been a great, consistent, long-term sort of investment. Right now, they are making a lot of money. Shouldn’t they be taking action to make the future better than the past? Wouldn’t it be good for investors, employees and customers if they invested in something besides more oil wells to improve their consistency and growth prospects? Wouldn’t all parties enjoy these companies developing a path to long-term success, even as the oil supplies diminish? As stewards of investor value for the long-term, don’t they need to have a resolution for growth besides merely higher prices? Don’t they need to find ways to actually make more energy and add real growth to their business?
Lock-in is allowing these companies to invest in a marginally declining value proposition. More holes, and more risk. They keep doing what they know how to do, what they’ve always done. What’s needed is White Space where the best minds could really work hard on new alternatives. These companies need to give real Permission to develop a new Success Formula – not just window dressing. The amounts they are investing are small not only compared to profits, but compared to the alternative investments they make in deep water drilling or inhosptible location projects. These oil projects as well cost in the billions of dollars. So the companies aren’t truly resourcing White Space either.
We all know the oil will run out. As investors, we should be looking for leaders that are seeking new ways to compete. New solutions. It will be the new solutions that create long-term above average rates of return. But these leaders didn’t exhibit much interest in anything but Lock-in and more of the same. And that’s too bad for the industry – and all of us customers as well.
by Adam Hartung | Mar 27, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
We all find ourselves watching the news, or reading a newspaper, then shaking our head and saying "Why’d they do that?" When it all seems so obvious, why do leaders take action that seems counter to their goals?
Take the recent case at Wal-Mart (see chart here). A 52 year old employee gets hit by a truck and brain damaged. Wal-Mart’s insurance pays out $470,000 in health care costs. Yea! Great PR story for how WalMart sticks by employees that sign up for health insurance. But that wasn’t the story printed in the newspaper. When the family, at their own expense, sued the trucking company for lost future wages, pain and suffering and future care needs – winning $417,000 after expenses. But, that still wasn’t the story getting attention. No, what got a lot of attention was when Wal-Mart sued the now invalid and institutionalized former employee to get back its $470,000, won, and admitted it was taking the money away from her! (Read account of story on CNN.com here.)
Let’s just skip over whether Wal-Mart was right or wrong – legally or ethically. More practically, how much does Wal-Mart spend on Advertising and PR every year? Let’s see, $360B revenue at just 1% would be over $3B. So Wal-Mart wants customers to think well of the company and shop there.
As a result of the company’s lawsuit it gets back $470K – that’s .013% of its ad/PR budget. About enough to buy a couple of major market TV ads. Meanwhile, the airwaves (and blogsphere) get flooded with the story and its negative sounding impacts. MSNBC on its Countdown show labels Walmart "the worst person in the world" (see video here.) CNN puts the video onto its hourly loop for everyone to see (see video here). Anderson Cooper makes it a feature discussion on his television show. Even the L.A. Times writes a negative opinion about it in the newspaper (read here.) What would all of that PR cost WalMart to acquire for a positive story? Millions if not tens of millions of dollars. But it could have avoided all that cost for a mere $470,000.
Today WalMart is far from being a beloved company. There are those who like Wal-Mart, but there are those who don’t. For shareholders and employees, converting those that don’t like Wal-Mart into someone who does is beneficial, as it can raise sales, margins, future expectations for performance and even the stock price. As a simple business decision, why would anyone at WalMart decide to go after $470,000 when the risks are so enormous? Why not let this one go? Why do that (make the decision to sue this woman)?
Unfortunately, Locked-in organizations have no choice. When the Lock-in becomes too great, no options really present themselves. There is no room for creative thinking – even if that thinking were intended to help reach the goal. Behavior is no longer goal driven, but instead becomes executing the Locked-in Success Formula no matter what the potential outcomes. Just read this quote from Wal-Mart’s spokesperson (taken from the above referenced CNN article) "Wal-Mart’s plan is bound by very specific rules… We wish it could be more flexible in Mrs. Shank’s case since her circumstances are clearly extraordinary, but this is done out of fairness to all associates who contribute to, and benefit from, the plan." No room for flexibility, no matter the impact or outcome.
If every employee donated $.40 it would recover all the money Wal-Mart apparently saved by suing the damaged woman. But did Wal-Mart ask its employees if they would rather donate $.40 or sue her? Did anyone at Wal-Mart say "you know, this could cost us $10million in damaging PR – maybe it would be more valuable to our employees if we skipped this lawsuit." Obviously not.
When you wonder "Why did they do that?" remember this story of Wal-Mart. Locked-in organizations completely lose sight of their objective when making decisions that serve to Defend & Extend the Lock-in. And once decisions are made, the Status Quo police and all the rest of the organization jump to its defense — rather than think through what was going on. All any executive had to say was "oops, I think we blew this one. Let’s tell that to the press, drop the suit, and give this woman a $20,000 bonus while offering her husband a job in janitorial" and the bad press would have been diffused – possibly leading to a positive spin. But that’s not how Locked-in organizations behave – and that’s Why They Did That.
by Adam Hartung | Mar 25, 2008 | Disruptions, Leadership, Lock-in, Openness
Whenever we want change too often we can’t. Everyone will agree to change, but we are so Locked-in that we we can’t seem to behave differently, even though we realize poor performance requires change and we agree we have to do things differently. That’s why Disruptions are so critical. Disruptions cause us to stop – and realize other options are possible.
As we ended the 1970s the U.S. was struggling with a host of problems, and some pretty poor performance. The 1970s had seen a huge jump in petroleum prices, runaway inflation with interest rates nearly 20% on everything including corporate debt and mortgages, job stagnation with high unemployment, and tense international relations as American diplomats were trapped in a multi-month hostage situation in Iran. The decade’s last President (Jimmy Carter) referred to America as being in a "malaise". American GDP was going nowhere as Japanese producers looked like they were quickly taking over global manufacturing as well as demonstrating superior quality in a wide range of products.
So what happened in the 1980s to turn this around? President Ronald Reagan implemented a Disruption that changed the way almost everyone thought about many issues. Unlike any other President, early in his presidency Mr. Reagan fired all the striking air traffic controllers. This was unprecedented. He risked the recently deregulated airline industry, the image of government paid jobs (air traffic controllers were FAA employees) as "untouchable", his reputation and decades of labor/management relations by simply refusing to negotiate with the striking controllers and setting up a program to replace them all. In days, everyone in America knew something very different was happening. Whether they agreed with Mr. Reagan or not, everyone knew that this was not going to be "business as usual." Right in the core of American employment, the federal government, a leader had said he was going to do things very differently. And everyone saw he meant business.
This was an enormous Disruption. Not just to airlines and the flying public. This Disrupted how the federal government worked, and how employees and legislators thought about how government would lead. The Disruption was so dramatic that it caused people to say "what else could be different? If we don’t have to negotiate with unions, what else could be changed?" Within months Mr. Reagan took to Congress, and the American public, a radical idea popularized by a fairly obscure economist named Arthur Laffer saying that lowering taxes would actually increase government revenue. To all traditionalists, and most people, this seemed absurd. But in the Disrupted environment post strike-firings Mr. Reagan said "why don’t we give this a try. What we’ve been doing hasn’t worked. Maybe this will. We need to give this a try." And Congress passed the most extensive income-tax rate reduction in American history – literally halving the rates on top taxpayers and cutting rates for everyone else.
The Disruption opened the door to White Space. And once he had White Space, Mr. Reagan used it. He offered as experiments new programs to cut taxes, new user fees to fund parks and other government facilities, and the increased use of outsourcers to cut the cost of government operations. All of these had an impact on rapidly changing what was happening in America – and all were made possible by first Disrupting and then creating White Space to try new approaches. Helped by a release of the hostages on his first day in office, dramatically falling oil prices, and a much more effective federal reserve run by monetarists that had finally gotten control of the money supply leading to much lower interest rates and inflation, Mr. Reagan was able to try a lot of new things which changed the direction of America. But without Disrupting, none of his ideas would have been tried and who knows what the outcome would have been.
America’s Labor movement has never recovered from the Disruption Mr. Reagan implemented. As the attached chart shows, strikes have almost disappeared. And average incomes in America have not kept up with basic inflation, much less core costs like health care, for 25 years. But no one can doubt that Mr. Reagan changed things. And it all started by firing the air traffic controllers – a Disruption that caused people to stop, altered how everyone thought, and created the opportunity for White Space.
by Adam Hartung | Mar 23, 2008 | Defend & Extend, General, Innovation, Leadership, Lifecycle, Lock-in
Most management planning processes are designed to perpetuate the past. They are designed to figure out how to do what happened last year, or quarter, only a little bit better. In a high growth environment, no problem. Doing more is a good thing. And if markets were stable, it would be OK in any market. But too few companies compete in high growth markets, and no markets are stable any longer. Simply doing more of the same better, faster or cheaper isn’t enough.
Stuff happens. Just take for example some facts recently published in The Chicago Tribune (read full article here.) VCRs in 1978 were advertised at Sears for $795 ($2,500 in today’s money). A basic 5-cycle washer sold for $320 ($1,000 in today’s money), priced equivalent to a top-of-the-line washer today. Fifty years ago families spent almost 20% of income on food; today that has fallen to about 10%. But insurance premiums have gone up almost 80% in just the last 5 years. Today attendance at many private colleges – like jesuit or other private schools, not merely ivy league – costs more than the average family has as gross income in a year. My favorite — a 2008 Honda Accord produces more horsepower than a 1990 Porsche 911 Carrera.
All right, so we all know this. But we completely forget about it when planning. Yet, they all had really important implications. In 1978 most of us still watched movies in theatres – now many adults haven’t been in a theatre for years (hurting revenues and profits at everything from movie producers to theatre chains) because home entertainment systems and purchases/rented movies are so cheap. Meanwhile "big box" electronic/appliance stores have come on the scene wiping out mom-and-pop TV/appliance stores and probably Sears. In the 1970s laundromats were very popular for new families and people in small homes, but today it is a rare married couple living outside of an apartment that doesn’t have their own washer and dryer, making laundromats practically a concept of the past. I grew up tending to a family vegetable garden, and most families used part of their backyards growing vegetables to save on groceries. Today it’s cheaper to buy corn, green beans, tomatoes, carrots, potatos and broccoli than grow and preserve them at home – good for consumer goods companies and bad for seed vendors like Burpee as well as home canning suppliers like Ball and Kerr. While every working person in the U.S. had health insurance in the 1960s, today more than 40% of working adults have no health insurance. My older sister, like many girls in the 1960s, attended a Christian college paid for by my father who was a school teacher in a rural 5,000 person town and the only breadwinner in our home. Today, that college is long gone as are more than half the private colleges which used to exist in America – or they’ve been converted to satellites of state university programs. And I can well remember when I, working part time as a minimum wage college student, would earn over $2,000 a year and could buy a brand-new American made car (Ford Maverick anyone?) for less than that amount. Now new car sales are stagnant/down, and people are driving cars many more years creating opportunities for auto repair, auto parts and used car sales.
The competitors in all these businesses changed dramatically over just the last 50 years. And in each industry, the early leaders have been displaced. Why, planners kept trying to perpetuate the past rather than focus on the future. Companies failed to keep White Space alive that tracks market changes adapting the Success Formula to meet emerging Challenges.
Today we can look at eggs. I remember when every Easter eggs were on sale, usually at 50 cents/dozen. Not this year. Eggs are up 30% – and now over $2.00. Why? Many factors (read full article here), such as new regulations to improve the health of chickens has increased their personal space by about 10% but has led to taking millions of hens out of production. A new industry council focusing on improving hen welfare has caused most farmers to invest in new technology, siphoning funds for expansion into updating old facilities but without improving production. A national focus on increasing renewable energy has raised corn prices (for ethanol production) to record heights, increasing chicken feed cost 70% (remember when we referred to small amounts as "chicken feed") which accounts for 60% of egg cost. And the current financial crisis is causing lenders to hold back on loans to farmers, making investment dollars for new facilities very scarce and very expensive.
The result, egg prices have doubled in two years. But who planned for that? Practically no one. Is it a big deal? Well yes if you are Denny’s, IHOP or any other restaurant chain that focuses on breakfast. Or how about bakers, who need eggs for cakes, bagels and many breads. Or dairy companies that depend on eggs for a significant portion of their revenues, as demand declines due to price. It may seem trivial, the price of eggs, but it can make a big difference on businesses – and how many of them developed scenarios to prepare for this kind of change? Those that didn’t find their planning, based on Defending & Extending the past, not worth very much as they scramble (excuse the pun) to adjust to changing market conditions.
Good companies build scenarios of the future for planning. Not just "most likely" scenarios, but scenarios that could make a big diffference even if considered unlikely. It’s not what we plan for that hurts our businesses, but rather what we don’t plan for. The things that surprise us. Companies that survive for decades, and make above average returns, are ones that plan for unlikely events – and prepare themselves for conditions that are unlike the past. And they keep White Space alive to rapidly learn from these Challenges providing Success Formula adaptations that can keep the winning company out front and making above average returns. These are Phoenix Principle companies.
by Adam Hartung | Mar 17, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lifecycle, Lock-in
Almost since I began this blog I’ve talked off and on about newspapers. Living in Chicago, I’ve taken more than a few pot shots at the local establishment – Tribune Company, owner of The Chicago Tribune. Don’t get me wrong, I love "the Trib," as we call it in Chicago. For decades a great newspaper. And because I’m over 49, I still like reading papers. Heck, I very frequently put links in these blogs to the Trib’s web site. Good product at a good price. In fact, in today’s economy, probably too good a product for what I have to pay as a discount subscriber and on-line reader.
Even though all of us are used to the daily newspaper – including the travelers that pick up USA Today and those who just get the Sunday paper for "the ads" – it will disappear. Or at least change form so drastically it won’t appear like it used to be. That may be hard to accept – but then again, do you remember listening to 33’s, 45’s (and if that means nothing to you don’t worry, you’re just young) and LP records; Or 8-tracks, or cassettes? And soon, even CD’s will disappear to the growingly popular MP3 player. Nowhere is it given that we deserve a daily printed newspaper, and in today’s world it’s existence is becoming less viable by the month (read CBS Marketwatch on "Death Knell for Newspapers" here.)
You may be surprised to know that newspaper readership peaked in the 1950s. But you shouldn’t. After all, radio, television and cable TV all ate into newspapers’ share as a source of entertainment and news. The internet is just the latest competitive technology – but it is the one which has pushed the industry into the Whirlpool from which it won’t return. Newspapers have used their resources in many valuable ways, but they have little to none left they can use to become the next Google or Marketwatch. Most are overleveraged (read my past missives on the debt ladening of Tribune by Sam Zell), and all are short the cash (or debt capacity) to catch up with those who invested heavily into web growth a decade ago.
Defend & Extend Management never stops believing there is some way to save a dying business. But businesses do become obsolete. Mail order catalogs were once great, but in an internet world? Printed stock prices were valuable until on-line brokers came along. Heck, I remember when we used to have television repairmen – and they even came to our house and picked up the TV then returned it after repairing! Now we throw the thing away – and I don’t know where you’d find a repair person. My parents helped make the Kerr and Ball companies a lot of money by home canning vegetables they grew in the family vegetable garden -but what is the current market for companies making quart jars and home canning lids? Would you believe that we used to have operator manned printing presses in corporations to make copies of business documents? And carbon paper for multiple copies out of typewriters? Obsolescence happens, but D&E managers never see it. They are paid to follow a "never say die" approach to markets.
Only by constantly Disrupting and maintaining White Space can we hope to keep our companies long lived. No manager has a crystal ball for the future. Predicting the demise is very hard to do. It’s smarter to keep looking for growth, and be optimistic in finding it. Constantly looking for the direction to go is far better than trying to defend a business bound to shrink. Now that even the newspaper industry’s own study group is saying the industry won’t come back investors should start thinking about where they are putting their resources. No, it may not be commonplace to take a laptop in for the "morning constitutional" – but we’re bound to lose that broadsheet sooner than most people think.
by Adam Hartung | Mar 16, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
I was in Junior High when I learned about isotopes. By measuring the amount of radium in an object you could measure its age. Thus, knowing the speed at which radium degenerated gave us a "half life" of the isotopes – and with that we could judge the age of things like rocks and bones and other very interesting items.
Businesses don’t have isotopes, but their Success Formulas definitely have a half-life. New ideas develop into new Success Formulas which earn above average rates of return while growing. But, unfortunately, competitors can rapidly copy your Success Formula and the value drops amazingly fast, surprisingly far. And while the Success Formula remains, the returns don’t justify reinvestment and growth slows. Lock-in keeps the business running the old Success Formula even after its value has started declining. Great companies can fall victim to their own good management if they let the Success Formula age.
Target (see chart here) is just in the beginnings of this phase. Make no doubt about it, Target has been very well run. By introducing new ideas to discount retailing, Target took on Wal-Mart very successfully. Target grew, and it made good money growing. It was innovative, and it made innovation in housewares and clothing – at a low price – a new Success Formula within an industry long focused merely on price. Kudos to its great success, and its ability to slow the giant WalMart.
But being innovative and cheap – what’s called "cheap chic" – has been easily copied (read more here on Target and its competitors.) Lots of other very well run retailers, such as J.C. Penney’s and Kohl’s, have brought out their own innovative merchandise. Now Target is running hard-up against these companies, slowing growth and profits. Target has made product innovation it’s own Defend & Extend. Today, doing more handbags, lamps, dresses and shoes that knock off very expensive designers has become their Success Formula to which they have behaviorally, structurally and with their cost model Locked-in. It may sound surprising, but what is hurting Target today is focusing on making more of these innovations – because that is the Success Formula they are trying to Defend by Extending into more products, and their competitors are successfully copying. And there simply isn’t the same profit in that game there was a decade ago.
Some analysts are noting this, and ranking Target’s equity a "sell". I don’t blame them. Target has become internally focused on "execution" of its Success Formula. It doesn’t appear to have any White Space looking for the next retailing wave that will have above average profits. Target is squeezed between the low-cost (and completely Locked-in, do it until they die) WalMart and copycats. Unless Target quickly Disrupts, recognizing its Lock-in, and gets some White Space going the next round of handbags and red TV ads isn’t likely to do much for revenues or profits.
All Success Formulas, even great ones, have a half-life. The length of time they can earn above average returns is not dictated by the company. Rather, returns are dictated by competitors with their abilty to copy and even one-up the original good idea. And of course substitutes (like all those pesky on-line retailers that keep popping up stealing Target sales) come into the market slowing growth and hampering margins. That’s why everyone has to constantly maintain Disruptions and White Space. Otherwise, they keep optimizing their orginal good idea too long – and become too Locked-in – until even their own innovation skills become passe. You’ll never known you stayed too late at the dance until you look around and notice the band breaking set. It’s far better to keep open the White Space looking for the next party so you don’t get stuck – and watch your profits get mopped up.
by Adam Hartung | Mar 12, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Back on October 18, 2006 I blogged about Motorola (see chart here) hiring a new marketing chief, Kenneth "Casey" Keller. I was pleased because in his career he had demonstrated an ability to create White Space and launch new products even in stodgy old H.J. Heinz. Of course then I was an advocate of Motorola.
I guess we shouldn’t be surprised to now learn the new Motorola CEO has let his top marketer go (read article here). Not even 2 years on the job. Motorola’s wrong turn in the mobile phone business surprised me – and a lot of other people. And why would Motorola want a Disruptive White Space kind of marketing leader when the company is backpedaling as fast as it can to old ways?
After opening the company to lots of Disruptions, former CEO Mr. Zander decided to milk the Razr letting new products slow precipitously. While Disruptions and White Space continued in the other Motorola businesses, the mobile phone division drifted quickly back into old habits – Locking-in on technology, Locking-in on distribution, Locking-in on engineering, Locking-in on old product development and launch processes. So the competition caught up, and Motorola’s profits fell out of bed.
Conventional Wisdom got Motorola into trouble. Conventional wisdom says it’s good to extend product life and milk products. Conventional Wisdom says being #1 in market share is good – which Razr clearly was. Conventional Wisdom says it’s lower cost if you Lock-in on a single technology and engineer its use into all applications. Conventional Wisdom says to listen to your distributors, which Motorola did as it cut prices dramatically to drive volume. Conventional Wisdom says to reduce joint projects if you’re #1, which Motorola did by dropping its joint product development program with Apple after launching Rokr (opening the door for iPhone launch.)
Once the profit problems hit Motorola, more Conventional Wisdom. Stop all possible projects to preserve cash. Focus on trying to find a replacement product for the one you milked to death. Redirect resources toward your biggest business, even if it’s losing money and market share. Get everyone on board to doing the same thing, and let go those who dissent. Kill all projects not clearly tied to trying to "save" the old, crippled business. Focus on the problem business, even if there are other emerging business opportunities showing great promise (like set-top boxes, new applications of commercial 2-way radios and installing corporate wireless networks.)
Firing the marketing chief shows Motorola is using conventional wisdome to try fixing its dire situation. More than ever, Motorola needs Disruptions and White Space. Motorola needs to find an outside the box solution. The company needs different kinds of thinkers, and new projects that can return growth to the company — which probably will not be in mobile handsets any time soon. Conventional Wisdom will likely lead Motorola where Conventional Wisdom usually does – down the road of Sears, Marshall Fields, Montgomery Wards, Brach’s Candies and other long-lost once great Chicago companies.
by Adam Hartung | Mar 8, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
If you read material printed on paper (and not just stuff on your computer screen), you’ve had contact with R.R. Donnelley and Sons (see chart here.) This was one of the industrial era’s venerable companies. In the time of Lincoln, books were somewhat rare and very precious. But in the industrial era improvements in printing technology allowed printing to become everyday – commonplance. And the world’s largest printer became R.R. Donnelley. So everything from phonebooks (do you remember phonebooks?) to books to magazines to financial reports and a lot more were printed, and continue to be printed, by R.R. Donnelley.
But, you’ve probably noticed that the world shifted. We don’t read as many newspapers, magazines and books – printed items – as we used to. The web changed things. We now do company research on-line, rather than through paper-based company reports. We want analyst reports on stocks, markets, new products, technology and everything else sent via pdf download rather than a booklet. There is still a place for printed material, but every year we see the shift toward digital distribution continue picking up steam. And that is bad news if you’re business is printing. A reinvention gap is being created between businesses focused on printing, and markets consuming information from analog but increasingly digital sources.
Alas, R.R. Donnelley saw this trend and made big acquisitions in 2005 and 2006 (Astron and Office Tiger, to name a couple) to move the company into business process outsourcing (BPO). These services were, and are, growing very, very fast as companies move all kinds of back office operations from payroll to accounts receivable, HR, payables, document design, etc. into someone else’s hands. GE created and spun off a company with more than $1B revenues (and as much market value captured by GE) named GenPact to compete in this business (Genpact chart here, and info on GE Genpact ownership here). Moving into BPO was a great way for R.R. Donnelley to migrate toward the new information economy.
But, R.R. Donnelley implemented its transition all wrong. Now the company is losing money, and undertaking massive writedowns (see Marketwatch news release here.) Instead of these acquisitions closing R.R. Donnelley’s reinvention gap, the company has fallen into a growth stall – and is farther from the Rapids than before! R.R. Donnelley is stuck in the Swamp – and headed for the Whirlpool if it can’t find some growth markets to patch up its leaky boat.
R.R. Donnelley did not put its BPO acquisitions in White Space and allow them to flourish. Instead, after acquisition R.R. Donnelley leadership tried to apply company practices to these acquisitions. They tried forcing these acquisitions into alignment with old-economy management techniques currently used by R.R. Donnelley. This resulted in acquired management, those that had built revenues and profits in the new markets, quickly deciding to leave – and leaving R.R. Donnelley with floundering ventures no longer as competitive.
Since then, R.R. Donnelley has continued making acquisitions. But not in growth businesses. Most recently management agreed to acquire a company that prints newspaper inserts! Imagine that, traditional printing in the declining newspaper market! R.R. Donnelley’s current CEO is committed to old Lock–ins and efforts to try Defending & Extending the expiring Success Formula. He’s blaming the problems on his predecessor – who led the charge toward innovation, while saying – in the midst of announcing losses and write-downs – "We are pleased with our performance in 2007"! (Read this quote plus more about R.R. Donnelley’s business reported in The Chicago Tribune here.)
Investors should run, not walk, to their computers and place orders for selling positions in R.R. Donnelley. Even though the value has declined by 50%, to levels not seen for 4 years, this company is very unlikely to ever have the glory it had when running printing presses was as profitable as making railroad cars, American automobiles and selling products at Sears.
by Adam Hartung | Mar 6, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you’ve read this blog the last 2 years you know I’m no fan of Mr. Lambert and the company he runs – Sears Holdings (see chart here). I have a vested interest in watching this story, because the day KMart announced it was buying Sears I was quoted on the front page of the business section of The Chicago Tribune saying that I gave the merged company no chance of success.
Since then I’ve been right. Sears and KMart sales have declined, sales per store have declined, Sears and KMart have lost market share as retailers, and the proprietary brands (such as Craftsman, DieHard and Kenmore) have lost share. Dividends for shareholders have been nonexistent and assets have declined in market value. Thousands of employees have lost their jobs, and many vendors have lower revenue and margins. So far, there are no winners as a result of this misguided venture by Mr. Lambert.
Prior to acquisition Sears was a very troubled company. It was no longer a retail leader, and it was using all possible tricks to Defend & Extend its outdated Success Formula – to minimal avail. Then along came Mr. Lambert – himself quite Locked-in to his own outdated, industrial era Success Formula. His plans to "milk" Sears and Kmart of value to feed his hedge fund has not worked out as he would have liked (to put it mildly).
When Mr. Lambert bought Sears there was value that could have been unlocked by Disrupting and using White Space. He should have moved very fast to sell off the large real estate holdings in a red-hot real estate market. Given the disastrous situation at Sears, he should have moved fast to shut down lots of stores not competitive with vastly better operators Wal-Mart, Kohl’s, Target and J.C. Penney’s. The well known brands mentioned above could have been rapidly sold to other retailers, possibly making lucrative deals with one of the major companies. And he could have converted Sears to a much greater on-line retail company, building on the strong skills at subsidiary Lands End (while building on long ago company history in catalog retailing.)
But Mr. Lambert didn’t Disrupt, and he didn’t open White Space to quickly change Sears and Kmart. Now…… his actions are far too little and far, far too late since the likelihood Sears Holdings will ever be worth much is pretty dim. Given the sales declines, and facing a major recession, the value has slipped away and how investors will ever capture it is completely unclear. Especially as Mr. Lambert promises more of the same as he intends to cut expenses further and purchase less inventory for upcoming shopping seasons. Those tactics haven’t been working, and nothing magical is going to make them work soon.
Mr. Lambert is now blaming the horrible condition of Sears on economic conditions – "Despite the perception during the first two years that we were not focused on growing our business, we were planning to do just that in 2007…. we did not foresee the severe economic turbulence ahead." (read article on current Sears conditions, and the source of this quote, here) Give me, investors, vendors and employees a break! This is simply making an excuse for the future while refusing to acknowledge the value destroying decisions previously made! Sears has gone down, not up, ever since this acquisition was made – and that can be blamed fully on Mr. Lambert. It was his job to prepare Sears for the future, not blame the future economy for his failures. If we were back when Sears was first founded, it’s safe to say town leaders would be tar and feathering Mr. Lambert and running him out of town on a rail — but then, of course, Mr. Lambert doesn’t live in Sears’ hometown of Chicago – he’s ensconced in New York where he doesn’t feel the pain his demonstratively lousy business decisions have created.
Postscript – readers should keep in mind that it’s been only about one decade – on mere short 10 year period – since Sears was one of the 30 Dow Jones Industrial Average companies. We should all remember how very fast companies that remain Locked-in to outdated Success Formulas can move from the Flats to the Whirlpool. Sears’ fall has been swift. Don’t ever think the past can protect you into the future – let Sears remind you just how fast failulre can sweep over any business, no matter how large and previously successful!
