by Adam Hartung | Feb 8, 2007 | Disruptions, General, Innovation, Leadership, Lifecycle, Lock-in, Openness
It’s easier to recognize a problem than it is to find a solution. I’m sure you’ve noticed this. In practically everything we do we can see the need for improvement, but we often find that nothing happens to make things better. Even when a crisis happens,we often see lots of people discussing the problem – and some talk about potential solutions – but not much progress is made.
Take for example the U.S. health care situation. We now have a country where 20% to 40% of the population has no health care coverage with between 30% and 50% are significantly under-insured (ranges are offered because it depends on what study you read.) Virtually everyone agrees that this is a big problem, because the U.S. health care system is not designed to deal with the uninsured. We hear stories of people waiting for hours in hospitals for basic care that is often poorly administered. We hear about total health care costs rising because the uninsured drive up costs that are then born by insured patients. And the medicare and medicaid system we are told is nearly bankrupt, unable to meet many basic needs and not providing necessary life-sustaining assistance. Increasingly, doctors, clinics and even some hospitals refuse to take uninsured patients.
The problem has been easy to see. In America, the system has been based upon employer-provided health care. But, as employees have changed jobs they have lost insurance due to "pre-existing condition" clauses that deny coverage. And people who lost jobs to downsizings lost all coverage completely. Employment has shifted dramatically from manufacturing to services in the U.S., yet a far higher percentage of service employers offer very limited insurance, or no insurance at all. And the vast army of those who work part-time (under 40 hours per week), have no access to insurance as employers limit their hours and limit access to coverage as a cost saving measure. Employer-provided health insurance worked in the far more stable employment practices of the 1940s to 1970s, but the program simply isn’t sufficient to meet the needs of nearly half of Americans today.
Yesterday, Wal-Mart agreed with the largest service union in the USA (their bitter enemy, the Service Employees International Union) that dramatic changes were needed in health care coverage (see article here.) Obviously, Wal-Mart does not believe it can provide universal coverage to its 1.3 million employees and compete. But interestingly, the unions which have fought hard to get employees health benefits agree that far too many employers cannot be expected to offer health care and compete in a global economy. Democrats have easily joined the ranks of those asking for a different system, but interestingly now noteworthy Republicans agree – including Howard Baker former Chief of Staff to Ronald Reagan.
So, what is to be done? There is no shortage of opinions about the solution (see article here). Many people want universal coverage from the federal government – but that has many detractors as well. Some states say a universal program should be implemented state-by-state, and Massachusetts has taken this direction. The President has offered to push for universal coverage with a series of changes to taxation of health care benefits. Lots of ideas – but most of these have existed for well over a decade. So it hasn’t been a lack of ideas that has stopped progress toward a different solution.
What we have with Wal-Mart’s announcement is a Disruption inside the business community. A Disruption saying "stop, we have to do something different here. The old way won’t work. We’re Locked-in to an outdated health care solution that must change." Having the country’s largest employer, in tandem with one of the largest unions, make this admission serves as a Disruption.
But this will make no difference if we don’t find White Space to actually create, test, pilot, learn, and define a new Success Formula for health care. Politicians often say "we need a debate on the options." Debates we’ve had. What we need is to try new solutions, and see if they work. We need to begin variations of the multiple scenarios so we can see what works, and what doesn’t. Massachusetts, for example, is a great experiment in a state-implemented program. But we also need to experiment with changes to the federal systems (Medicare and Medicaid) to see what they can actually do. And we need to experiment with subsidies and tax changes in the workplace to see what private programs can be developed. In the end, only in White Space do we actually test possible answers and thereby develop a new solution to which people migrate. The best solution is not the one debated to success, but instead the solution which is proven to work – and that is the solution to which people migrate. Anyone will change when they can see a better result, and that can only happen in White Space.
This is exactly what businesses have to do as well. The Phoenix Principle has demonstrated that whether a problem needs to be solved at the macro level (like national health care coverage) at an industry level (like national access to broadband telecommunications) or at a company, or function, work team or even an individual level Disruptions must be supplemented with White Space if a solution is actually to be developed and implemented. New solutions don’t come out of the universities or other "brain trusts". They come out of White Space where new Success Formulas that include strategies and tactics are actually tested and demonstrated to work. Then these new Success Formulas don’t have to be foisted upon people, because the better results attract people to them. Of course there are laggards, but we see that migration to a better result works far better than trying to debate, design, declare and then demand change – a model that almost never gets implemented nor works well.
So, we need White Space for experiments in health care coverage. And the state programs fit as one example. Let’s hope this Disruption will lead to more experiments. And we need more White Space in our companies, our departments and our lives so that we can experiment and find ways to produce better results. In the end, we can equate long-term success with White Space – and we’ve never needed more of it than we do today.
by Adam Hartung | Jan 9, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
If you aren’t tuned-in to ad agencies, and if you don’t live in Chicago, you might well have missed a furor that erupted in early December regarding America’s largest retailer. Wal-Mart made a switch in ad agencies last fall, moving their $500million account to DraftFCB. But then, shortly after making the switch, Wal-Mart fired the company’s head of marketing and fired the agency. Wal-Mart then, and now, was unwilling to offer an explanation. They hid behind a veiled claim of "ethics violations," using besmirching language to imply wrong-doing while offering no facts.
Since then, Susan Chandler at The Chicago Tribune has unearthed a pretty good explanation of what went on (see article here.) [Like lots of news stories, it takes some time and research to start piecing together what really happened.] Seems more than a year ago Wal-Mart hired a new 35 year old marketer to help change the Wal-Mart image and promotion program. Given how Wal-Mart’s growth prospects, and stock price, had stagnated since 2000 this appeared like a very good idea.
The new marketer started moving Wal-Mart away from selling on Price, Price and Price. As my old marketing professor said "Price is nothing but a blunt club that has no meaning. Skilled marketers use other tools to create customer value and over time make a lot more money." So this new marketer’s actions looked like a good move to actually help Wal-Mart get back on the growth track.
She actually had Wal-Mart underwriting fashion shows. And launched advertising in Vogue magazine. And she moved much trendier merchandise into the stores. She also started Wal-Mart selling higher margin products, such as wine, gourmet coffee and sushi. She did this in selected stores, testing her ideas. In effect, she set up her own White Space and began working on a new Success Formula to replace the old, tired one at Wal-Mart.
But, she made a small mistake. She didn’t really have Permission to use Market Challenges to create a new Success Formula. Wal-Mart had not (and still has not) Disrupted itself. The company has not agreed that it’s Success Formula needs to change, and its leaders have not expressed any need for a new Success Formula. Operating in denial of the marketplace Challenges which have let Target, Kohl’s and JCPenney take away customers and sales, Wal-Mart really wanted the new marketing head to Defend & Extend the old Success Formula. She may have thought she had White Space, but she didn’t. While she had resources, she lacked Permission – Permission to attack old Lock-ins and Permission to develop new solutions.
So the top brass at Wal-Mart fired her. And they fired the ad agency. It’s easier to deny Challenges, and fire those who take on Lock-ins, than it is to Disrupt your thinking and commit to White Space. It’s easier to live in Lock-in than use White Space to find a new and better Success Formula.
Wal-Mart has had many "industry experts" support these actions. According to the Tribune, once the firings were done the Chairman of a retail consulting company (Howard Davidowitz) said "Wal-Mart’s lifestyle advertising is all wrong. It shows in the sales." Uh, with 99% of the company stuck in doing wat it’s always done, you don’t suppose the weak results are dure more to a failing Success Formula than some new White Space efforts? The consultant is as Locked-in as Wal-Mart’s maangement. Even this outsider was willing to give the new marketer permission to try new things. Supporting management may help him get future fees, but it isn’t doing the investors or vendors much good.
Or, take this quote from George Whalin, another "industry expert," – "They [Wal-Mart] don’t attract 25-year-old trendy women. Their customers are older women. They’re not skinny-jeans buyers…. They [Wal-Mart] lost their minds." Maybe the need for new customers is the problem, George. You think it’s a poor idea to attract younger customers? It’s bad to expand your customer base? To upgrade your product lines to higher margin items and to improve your competitiveness against your fastest growing and most successful competitors is "losing your mind"? Not only is Wal-Mart Locked-in, so are the "experts." If they won’t support White Space, with Permission to develop a new Success Formula, how do they suppose Wal-Mart is to turn-around its sales trends?
As this firing happened, Wal-Mart had its worst November sales in a decade. How does Wal-Mart talk about this performance? According to the company spokesperson, "We have found the thing that appeals to everyone is price… We will continue to emphasize price leadership."
Reinforcing the old Success Formula isn’t going to solve Wal-Mart’s competitive problems. If you keep doing what you just did, you’re going to get what you just got. Without Permission to Disrupt Lock-ins and create a new Success Formula, all the size and resources of even a Wal-Mart won’t create success. Too bad for Wal-Mart’s top marketer, too bad for the agency, too bad for shoppers looking for an improved Wal-Mart, too bad for vendors that want Wal-Mart to do more than beat them up for lower prices, and too bad for investors.
by Adam Hartung | Jan 3, 2007 | General, In the Rapids, Innovation, Leadership, Lifecycle, Lock-in
Did you buy any CDs this Christmas? If you did, the odds re you didn’t buy as many as you did in previous years. A freefall in sales of physical music products (CDs and music DVDs) has been going on since 2000. (For more data see Chicago Tribune article here.) That year CD sales peaked at 942 million units. By 2005, the volume was down to 705 million – a full 25% decline! And sales were off an additional 15.7% in the first six months of 2006.
Meanwhile, according to the Recording Industry Assocition of America, Sales of digital singles increased 71.3% in the first half of 2006. Since inception in 2003, sales of iTunes have reached a staggering 1.5BILLION songs – making Apple Computer Company the 4th largest music seller in the U.S. According to ComScore networks (see more data here), sales at iTunes increased a whopping 84% in the first 3 quarters of 2006. According to the V.P. of communications at RIAA, Jonathan Lamy, "This is a markeptlace that went from nothing 3 years ago to this year surpassing a billion dollars in retail revenue" (quote from Tribune.)
You have to wonder, why is Apple capturing all these sales and all this value? After all, they didn’t invent MP3 technology – the format that made digital music possible had been around for several years before Apple created its iPod version of the music storage and playback device. Likewise, Napster had gone on to great infamy demonstrating the huge demand for a digital music site years before iTunes was launched. Obviously it wasn’t a technology breakthrough that gave Apple this big success.
Furthermore, before Apple launched either iPod or iTunes Sony had already been a long-term leader in consumer electronics. Sony’s famous Walkman, Discman and other products had pioneered portable music. Sony had a global distribution for its products in stores of all types, including its own. And Sony was a brand synonymous with quality in consumer electronic devices and music playback. Sony even owned its own music label, and a huge archive of popular songs as well as contracts with several popular artists. Sony had all the pieces to create and dominate the digital music business. But it didn’t.
Sony was, and is, trapped in its Lock-in. The company had two separate division for hardware and software (music), and the two didn’t talk to each other. Worse, both divisions committed to the old music industry Success Formula, and had Locked-in on the physical distribution method for selling music (CDs). [For White Paper on music industry Success Formula and Lock-in visit here.] Both feared cannibalization more than they sought breakthrough solutions, as Sony joined EMI, RCA and others in suing Napster into oblivion during 2000, hoping it would stop digital music sales and help them regain sales and profits.
Today the traditional music companies are still Locked-in, and Apple is making enormous profits. Like Southwest in the airline industry, Apple is simply doing what the market wants and is reaping huge benefit because the most likely, and most powerful, competitors are more interested in preserving Lock-in than succeeding. Just because competitors are large, and well funded, and full of good product development does not mean you can’t effectively compete against them. When markets shift Lock-in often means that the most logical activity – that of existing competitors reaping the benefit – is often NOT what occurs. And it makes enormous markets available for new competitors to develop new Success Formulas that create above average returns.
by Adam Hartung | Dec 31, 2006 | Defend & Extend, General, In the Swamp, Innovation, Leadership, Lock-in
I’m almost 50, and if you’re age is anywhere near mine, and you’ve lived in the U.S.A., you probably have a really bad attitude toward electricity created by nuclear power. Back in the 1970s electric utilities set about building nuclear power plants which cost up to 10 times (not 10% more, 1,000% more) than they forecast. As a result, electric rates were shooting up beyond everyone’s expectations in order to pay for these enormous cost overruns. Additionally, construction timelines were extended out 2x to 5x expectations, causing power shortages which further drove up rates. And then, on top of all of this, serious concerns about safety developed as we saw various problems in nuclear operations – not the least of which was the core exposure at Three Mile Island which put a scare in everyone across the U.S.A. as we all genuinely feared a Chernobyl-style meltdown and radiation leak.
The electic utility leaders of the 1970s made a series of mistakes when they went about implementing nuclear power. Not the least of these was a complete lack of standardization. As a famous study at the time reported, in the U.S.A. no two nuclear power plants were the same. Successful nuclear programs in France, Germany and Japan had demonstrated that by utilizing the same engineering, the same plans, and learning from each and every build then improving those plans, they had developed extremely cost effective nuclear powered electricity which was proving to be extremely safe. As a Harvard Professor (definitely not a hotbed of support for nuclear power) reported, the French program was producing electricity at rates so low that you could completely encase the spent fuel rods in platinum 3 foot thick and blast it into outer space, or bury it into a core hole 15 miles below the earth surface, and the added cost would still make their cost per kilowatt hour a fraction of the cost of fossil fuel generators in the U.S.
But, that was then. What about now? As recently reported (see Chicago Tribune article here), nuclear power is starting to make a U.S. comeback. Fossil fuels are more expensive than ever. And, this time the industry seems to be intent upon utilizing all the lessons from the past 50 years. Yes, that’s right, we’ve been making electricity from nuclear fuel for 50 years (the U.S. wasn’t first, but even here nuclear power is over 40 years old). But will this program move forward?
That all depends upon our Lock-in. As a country, we can choose to remain locked-in to our previous assumptions about nuclear power. Assumptions based upon a single history (the U.S. experience versus the global experience), and based upon a very poor implementation. Or, we can view recent world events as a Disruption to our thinking. We can view the 5 year old war in Iraq as at least partially connected to our need for secure fossil fuel reserves. We can view the breakdowns in domestic offshore supplies from storms in the Gulf of Mexico as indicative of the risks inherent in our fossil fuels based supply system. We can view the ongoing reports of global warming as having at least the potential of being accurate (and if so, potentially deadly). We can utilize these market challenges to our energy supply strategy as creating within us a need to disrupt our approach to energy production in the U.S.A.
If we do this, we then can see the validity in using White Space to restart a nuclear energy program domestically. We should not wholesale change strategy – we need to learn. We should set aside Permission for a handful of companies to utilize all the accumulated knowledge on nuclear power to begin implementing some new plants. We should observe these projects closely. Monitor their progress and results. Learn from them as much as possible. And ADAPT in these White Space projects to develop solutions which work. Then, we can begin to MIGRATE toward a nuclear power as an effective part of our national energy policy.
As a nation, we’ve been Locked-in to an "anti-nuclear" energy strategy. But, 30 years have passed since Three Mile Island, and a lot has been learned. Our approach, our strategy, is being Challenged by a range of forces. What we must do now is see these Challenges as reason to Disrupt ourselves – our approach – and realize we must move beyond our Lock-in. We can use White Space to give Permission for trying a new solution, and potentially develop a new Success Formula for American energy supply.
by Adam Hartung | Dec 31, 2006 | Defend & Extend, Ethics, General, Leadership, Lock-in
Do you ever wonder how people get so locked in to doing something that they end up doing the wrong thing? Do you think they are all bad people? My experience has shown me that rarely do people do things because they have no internal moral compass. Rather, it’s the systems we use to Lock-In behavior which causes behavior to end up creating negative "unintended consequences."
Take for example compensation for attorneys. As everyone knows, attorneys charge by the hour. As do plumbers, electricians, retail store clerks and a raft of other occupations. On the face of it, this makes complete sense. But, as the Chicago Tribune recently reported (see article here), when you couple this simple billing process directly to compensation, you can get some pretty bad outcomes. By "promoting" what is seen by top management as a key success factor, your Lock-in can lead well-meaning people to do things which are less than…… shall we say….. positively correlated with customer success?
As the Tibune reported, by Locking-in on the metric, billable hours, what starts to happen in law firms is people "fudge" their billing. What appears to be a good thing, tieing compensation to a key firm growth metric, leads everyone up and down the firm to do unnecessary work, take longer time to do work than is necessary, utilize resources on projects that are hard to justify, and even outright exagerate the time spent on client efforts. As a result, some clients are finding they need to challenge their attorney’s bills – not an activity you want to spend time doing with someone who is supposedly your advocate, hopefully looking out for your best interest. And some judges have been considering attorney’s bills too high, and refusing to force the payment of those bills.
I don’t mean just to pick on attorneys here. More than a dozen years ago I took a leading position with the consulting firm of Coopers & Lybrand (later merged with Price Waterhouse and then later acquired by IBM.) I had worked at the firm only 6 months when I was in a meeting with the top officers of the firm to discuss "firm direction." As the meeting droned on, talking about nothing but billable hours per type of project, I finally said "you know, I’m getting the sense that no one here cares what kind of work we do. I could have armies of MBAs operating jack hammers and no one would care as long as it generated thousands of billable hours at market hourly rates." One of the top 5 firm officers turned to me and said "you know Adam, now you’re starting to get it."
What we all have to be careful about is Locking-in on metrics which can lead to behavior that does not serve our customers well. This Lock-in, often a key sign of good implementation of strategy or quality (locking-in metrics is a cornerstone of Six Sigma), can become deadly when disassociated from market conditions and customer needs. Yes, billable hours are good – but only when those hours are serving the client’s best interest.
That’s the problem with Lock-in, at first it seems like a really good idea. You use a metric to help drive repetition of behavior which has proven to lead to success. Locking in on the metric improves results. It clearly is beneficial, and a good thing. But these same locked-in metrics can prove problematic, even disastrous, if we don’t regularly Challenge them in the face of market requirements. We need to alter our metrics in order to keep ourselves aligned with customer needs. Metrics must be seen as guideposts, not ends into themselves. And all of them need to be viewed as flexible and alterable – before they lock us in to a tour of the Swamp and eventually failure.
by Adam Hartung | Dec 22, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
I’ve talked a lot about the business lifecycle, but not recently. For newer BLOG readers, I describe the business lifecycle as being like a river. Companies start out in the Wellspring, looking for a working Success Formula. After it hits on a functioning business model, it enters the Rapids where it uses innovation in all parts of its business to fully develop the Success Formula and make maximum returns while growing. Then the company hits a growth stall, and enters the Flats – where paddling suddenly becomes critical. Hoping that they can now extend their life by doing more of the same, they hope to stay in the Flats. But, unfortunately, in today’s economy there is no energy in the Flats and companies find themselves rapidly in the Swamp, where they become so obsessed with killing mosqitos and fighting alligators that they forget entirely what the Rapids were like and their real objective is to find fast moving water again. Finally, they fall into the Whirlpool when competitors simply pull them into failure.
I’m often asked how to identify transitions in companies across these sectors, and I point to how Lock-in during the Rapids leads to the stall in the Flats. Look at Lock-ins, and adherence to Lock-in even after the market has shifted and the Success Formula results are deteriorating. As focus becomes all about Lock-in adherence, even as results have become mired, and you see companies in the Swamp. Very few recover from the Swamp – the use up their resources as competitors push them toward the Whirlpool.
WalMart has exhibited all the traits of a company deeply in the Swamp. Despite their poor results, chronicled in this blog, Walmart rigidly sticks to its doctrine and hopes the market will bring them fresh water so the paddling isn’t so tough. A great example showed up recently, in the form of WalMart’s business cards. In the midst of it’s worst monthly and quarterly performance in over a decade, WalMart chose to react by reducing the physical size of their business cards (see Forbes article here.) Yep, amidst a crisis in growth this management team has reacted by cutting costs – it’s core Success Formula Lock-in – in the trivial area of business cards. WalMart is schrinking the cards in order to lower the paper cost and ink cost in printing employee cards. Give me a break – this is going to make any difference in the competitive problems with Target, Kohl’s and JCPenneys?
This joins the pantheon of key indicators that investors, employees and suppliers can use to identify a company in deep strategic trouble. I used to call it "the paper clip memo phenomenon." Look for the CEO of a troubled company to send out an email telling employees to be sure to save and reuse paper clips before discarding materials. This memo has come in many forms – such as "please start printing on the back side of paper as well as the front side", or "from here forward printing documents in color is forbidden," to "we are reducing all email archive space by 75% in order to save on server costs in IT." All real world examples of business leaders who are effectively telling the world they have no idea how to deal with the strategy problems they face, and they hope to survive as long as possible by adhering to Lock-in.
WalMart is huge and it won’t fail tomorrow. Heck, if we get a recession next year (predicted by several economists) WalMart might even see an up-tick in business and a jump in it’s stock price as customers go on a cost-saving binge. But, longer term, WalMart has demonstrated that it is out of touch with its customers and competitors – and it’s low cost no matter the consequences strategy is not the path to growth. Sometimes, the smallest things can demonstrate the biggest strategy problems. Just look at their business cards.
by Adam Hartung | Dec 4, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
So what business is Sears in? I don’t think anyone knows any more. But it is certain that without a direction, Sears will burn through its cash and leave shareholders with nothing soon enough.
After months of whipping Sears management in this blog for extending its Lock-in to failing retailing practices, in my last Sears post I recognized that I finally could see the management team was milking Sears and KMart of cash. They weren’t trying to actually compete with Target, JC Penneys, Kohl’s and WalMart. They are interested in pulling as much cash out of Sears and KMart as possible. Recently the Chicago Tribune reported (see article here) that Sears was in fact using its "excess cash" to invest in derivatives. Buying into the equities of other companies in a fashion so that no one, not even Sears’ investors, would know what Mr. Lampert and his team is buying.
What’s wrong with this picture? Well, to start with, businesses no longer have some extended lifetime where they can sit back and "clip the coupons" as they rake in the cash. Sure that was possible in the less dynamic era from the 1940’s through the 1970s when competition was dominated by huge players (like Sears) who grabbed market share and then simply held onto it by erecting barriers to competition. But today the flow of products, money and information is so fast that no barrier actually holds back the tide of competition. Sears and KMart have to contend with all the old competitors, all the emerging new traditional retailers, and all the on-line retailers. And they are doing so without the benefit of a powerful supply chain like WalMart. When you go to "milk" the business, the poor cow finds itself malnourished and no longer producing a lot faster than most people predict. WalMart is too busy cutting prices to feed its machine, while Target and Kohls are out finding the latest new products and fashion goods. There isn’t much of a storehouse of value in a brand when everyone can see the number of stores declining, the costs and prices rising, and the employees less satisfied than at competitors. "Milking" the business was a strategy for the 1980’s and before – not really applicable today.
And is Mr. Lampert’s team using this cash flow to invest in something where they can achieve competitive advantage? Well, we simply don’t know. All we know is he’s investing in lots of derivatives – and hiding his investments from anyone to see. What’s wrong with this picture? Well, firstly, do investors have a right to know how their money is invested? I seem to recall investor information being a bedrock of importance to publicly traded companies.
"But what about Warren Buffett and Berkshire Hathaway?" you may ask. Alas, we know that the go-go era of Berkshire Hathaway was at a time when Mr. Buffett and his cash stockpiles could be used to rescue situations where management was somewhat desperate. He offered a White Knight approach to helping those with cash needs to rebuild their business. But today, with the flourishing of Private Equity and Hedge Funds the marketplace is awash in dealmakers with lower capital costs hunting for the kinds of opportunities that were delivered to Mr. Buffett for most of the 1980s and 1990s. The value of such opportunities has shrunk so low that even Mr. Buffett himself, in the Berkshire annual reports, has stated that there are insufficient opportunities for him to keep Berkshire’s capital effectively employed for investors.
Beyond deals, Berkshire Hathaway has made almost all its money in insurance. Berkshire is a primary player in the sophisticated, and highly analytical, world of insurance underwriting and re-insurance (that’s insuring the insurers). Several times Mr. Buffett has explained that the primary profit generator for Berkshire comes from understanding risk and insurance products and knowing how to be the low-cost player in the insurance business. Something Berkshire has mastered and maintained for over 20 years. His investments in other companies, such as Pier One, have done no better than the overall marketplace – and at times far worse. In the end, his whole acquisitions of companies such as Dairy Queen have produced cash for investing into insurance – a target business where Berkshire Hathaway is not only low cost but also the most innovative company in the industry.
So where does that leave Sears? Their plans to "milk" the Kmart and Sears stores for cash I don’t buy into at all. As every quarter has demonstrated, revenues are falling and costs are rising faster than management can predict. Opportunities to sell the real estate into a REIT or other cash producer have not developed, and the real estate market has long ago peaked. Its plan to be a public "hedge fund" holds little promise of long-term above average returns or growth in an ever increasingly competitive world for "deals" where they are no better than any other sharp team of MBAs with a lot of cash from a pension fund or elsewhere. And there is no business, like Buffett’s insurance, where Sears management team claims to have any leadership or innovation.
Otherwise, Sears is a great company. The fact is, management has not really stepped up to any of the Challenges which faces the company in retailing, or in hedge fund investing or in identifying a new business which can grow and return above average profits for years into the future. There is no White Space at Sears, no effort to find a new business with advantage. Right now, Sears is just a vainglorious story of a CEO who wants to spend other people’s money. As Cramer says on Mad Money "You buy Sears to buy into my friend Eddie Lampert." With a below market average Return on Equity of 10.7%, a low Return on Assets of 3.9% and an above average Price/Earnings multiple of 22 – that’s a very risky buy.
by Adam Hartung | Nov 30, 2006 | General, In the Swamp, Innovation, Leadership, Lock-in
WalMart prides itself on great execution. For years management has bragged about the company’s ability to get things done quickly and cheaply. But now the company has run into problems. Revenue growth has slowed, and the future is very unclear. A five year stock chart shows declining equity value of about $80billion. WalMart is finding out that when innovating, it’s execution skills are greatly lacking.
This week it was reported (see Tribune article here) that WalMart is going to report that it’s November sales actually FELL for the first time in a decade. This is just the latest in a string of bad news. Included is the fact that WalMart is planning to cut back its expansion plans in response to its declining year-over-year same store sales. The company’s foray into more trendy fashion goods has flopped, with those products being pulled. It’s taking on the drug retailers with flat price generic pharmaceuticals – largely to a market yawn. Net – WalMart monthly sales are up only half of Target‘s (who’s 5 year chart shows they found the $80B Walmart lost).
Readers of this blog know I’ve long stated that WalMart‘s future is dicey for investors and employees. Totally Locked In to its strategy of low cost, management has pruned any skills at innovation. Long gone are the people who in the 1960s helped Sam Walton pioneer the innovations to drive the low cost strategy. So now, when it needs to innovate, WalMart doesn’t have the right people to do the job. To paraphrase an old southern expression "even if the mind is willing, the flesh is weak."
WalMart desperately needs to change. But to do that the company needs to implement White Space. It needs to first own up to its Challenges. It needs to tell employees, vendors, investors and customers that they see a need to change and fully intend to. Then management needs to put in place a team that has the permission to develop a new Success Formula, reporting directly to the CEO (outside the existing management system), and fund that team with enough resources to really try something different. All these piecemeal ideas are getting lost in failed implementations by an organization too massive and tightly directed to do anything more than run the old Success Formula. The White Space group needs permission to develop a new store concept. To test things their own way and prove out the new Success Formula – not just a new tactic here or there. And then, instead of trying to push the tactic into the massive WalMart the company must migrate the traditional stores toward what works in the new Success Formula.
WalMart has done this right before. Sam’s Club is a huge success – a pioneer in the club store concept. There WalMart followed all the rules of White Space and created a Success Formula that worked.
If they will hire some new managers, and give them the kind of White Space they gave the Sam’s Club team, WalMart could migrate toward a more successful future in a matter of months. But if management keeps doing all these tactical actions they’ll only succeed in confusing everyone. Much to all of our dismay.
by Adam Hartung | Nov 3, 2006 | Defend & Extend, In the Swamp, Leadership, Lock-in
OK, I guess I’m dense. For months I’ve been asked what I thought of the management at Sears. And I have been pretty brutal, saying that Sears was not a viable long-term competitor against Wal-Mart, Target, Kohl’s and other major retail players. Especially as that competition intensifies. Why Sears can’t even get it’s own partners in Canada to go along with an acquisition of that unit (see article here).
But in October, I finally "got it" regarding Sears. Many newspapers reported that Sears equity value was jumping on the notion it would buy Home Depot, or another big company (see Chicago Tribune article here.) And I realized that Mr. Lampert wasn’t trying to develop a strategy to have Sears compete Sears long-term. Nor was he converting Sears into a Real Estate Investment Trust for long-term value. Instead, he’s "draining the Swamp" to get all the cash out of it he can before it rots.
Sears and KMart are at the end of their lives. Years of bad management has locked them into weak operations. But in American business, we never know how to deal with a business once it’s trapped in the Swamp – too busy killing mosquitos and fighting alligators to remember the primary mission. What we need to do is get the cash out. And that is clearly what Mr. Lampert is doing. He’s getting the cash out of Sears and its many holdings.
So, does that mean I’ve changed my mind on investing in Sears? Not really. It’s certainly OK to decide to exit a business in a fashion that actually creates a positive return (rather than keep running the business badly until Chapter 13 wipes out the investors and creditors). But Sears Holdings’ value has to be based upon what Mr. Lampert will do with this cash he plans to get out of Sears. That we don’t know. What will Lampert’s team do to create growth? He can’t create a positive future merely as the grim reaper. There has to be growth for investors to create long term value. Today, you would pay a heady 23x earnings for a company who’s future we know nothing about. That’s quite a premium to place on an unknown horse.
Will he invest wisely like Warren Buffet – the person he loves to be compared with? Will he invest in growth oriented enterprises like Buffet did in insurance, and later in public investments such as Coca-Cola? We don’t know. All we know is that like Berkshire Hathaway – which is named for the textile mill Mr. Buffet bought decades ago – Sears will soon enough stop being a brand name retailer and instead become something else.
In being smart about draining the Swamp – getting out of KMart and Sears with maximum cash – the Sears management team is doing something few business people in America do. For that, they are to be applauded.
If you’re a supplier to Sears, you’d better start looking for new customers to grow. For customers, they would be wise to realize that Sears and KMart will never again be what they once were – and we don’t know what they will be. For investors, the story is yet to be told. Will Sears pay out massive dividends giving investors a great return? Or will they invest in businesses at very low valuations that show great growth opportunities? Or will they invest the money poorly? Only time will tell. But we can be certain that Sears is no longer a retailer – it is now a diversified investment vehicle for Mr. Lampert and his management team. And only one of those kinds of companies has done well – a tough act to follow.
by Adam Hartung | Oct 25, 2006 | Defend & Extend, General, In the Swamp, Lifecycle, Lock-in
Wal-Mart has started selling prescriptions priced at $4 for a month’s supply (see article here.) Why? To get more people into the stores, silly. As I’ve blogged before, the world’s biggest retailer has the world’s biggest Lock-in, and they will do anything they can think of to keep their Success Formula unchanged. Now they are looking to drastically cut prescription prices.
This is good news for consumers. But what about Walgreens? After all, they have prescription sales as a central part of their Success Formula. What was their reaction? To say they aren’t worried, because Wal-Mart is a small player in prescriptions. In other words "we’re Locked into our Success Formula, and we don’t intend to change it no matter how large the Challenge." In the face of mounting pressure by insurance companies to force insureds to order medicine on-line, and corporate support for mail-based prescription delivery, and now a frontal assault by the world’s biggest retailer Lock-in allows Walgreens to blithely look the other way.
This is bad for investors in both companies. We now have two large companies planning to club each other to the bitter end in a battle to see who’s Success Formula can survive. Along the periphery of this fight are other retailers, like CVS, Target and KMart each ignoring the Challenge to their future (according to Associated Press [see here]some have said they don’t think this is an issue because customers with insurance only care about the co-pay and not the price) holding their own clubs and planning to defend themselves while putting in a few good licks as they seek to protect their individual Success Formulas.
This is simply bad management. There is nothing but hubris in undertaking such tactics. Smart management sees the Challenges, and reacts early. They avoid the club fight altogether, seeking out new markets where they can prosper. Only competitors who are Locked-in, and would rather take hits and possibly die would take on such a fight. The result of fighting is someone eventually falls into the Whirlpool and is swept away.
Again, for consumers such club fights can be a great cost saving opportunity. But for investors, it’s time to get out of the way! You don’t want to be an idle participant in the latest bloody version of business WWF Crackdown. You’ll most likely come out a bloody mess yourself.
