by Adam Hartung | Oct 16, 2006 | Defend & Extend, In the Swamp, Leadership, Lock-in
I hear frequently about the conflict between management and investors. The argument typically goes along the lines that management could do many exciting and strategic things if it wasn’t for those pesky investors who want a consistent return on their equity. It sounds like somehow investors know too little, and they hamstring managment’s ability to succeed. In too many occasions, however, the opposite seems to be true.
Readers of this blog know I see McDonald’s as hurting its own future. The company has systematically been selling off its best growth prospects to protect itself from an outside investor who would like to make changes. Recently, a number of other investors voted that sentiment. As I blogged a few weeks ago, McDonald’s offered to investors that they could trade their McDonald’s stock for Chipotle shares – in an effort to finalize the sale of Chipotle and bring back in more McDonald’s stock to protect itself from a hostile investor. Last week Bloomberg reported that 262.7 million shares were tendered for the mere 18.6 million shares of Chipotle available. The offer was 14X oversubscribed. Indicating that a lot of investors knew a good deal when they saw it – swapping shares of a low-growth, Locked-in McDonald’s for the high growth innovative Chipotle – even though its profits were lower and its P/E much higher.
But now Wendy’s has decided to join the act. As reported on 10/13, Wendy’s is offering to sell its Baja chain in order to get cash to —– buy back more Wendy’s stock. Apparently influenced by the fast run-up in McDonald’s shares (which have had a very nice run this last year), Wendy’s is willing to sell off its new growth machine in order to protect its aging hamburger franchise. Rather than look to Baja as a replacement for the sagging Wendy’s, which has had declining same-store revenues for 6 of the last 8 quarters, they are going to sell it in order to buy back stock to prop up the equity value in a concept that has little growth opportunity left. In order to maximize its short-term value, Wendy’s is literally trading in its White Space future.
Too often, management behaves like Lemmings. One competitor follows another. Lock-in doesn’t exist just at the company level, but at the industry level as well. In several industries (steel, airlines, automobiles to name a trio) we’ve seen competitors simply walk off the cliff as they follow a Locked-in industry paradigm that does not produce returns. Management should listen to investors, and recognize that their chorus is not just for short-term profits. Rather, they seek growth and a market or higher rate of return on their equity. No private owner would expect less. But to meet this hurdle requires creating and maintaining White Space rather than letting Lock-in turn you into a Lemming.
by Adam Hartung | Oct 7, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
If you don’t live in Chicago or Los Angeles you might have missed a recent set of stories about problems in the newspaper industry. The Tribune company (owner of Chicago Tribune and 9 other papers) also owns the LATimes. Like the New York Times company, Dow Jones and many other newspaper companies, the last 2 years has seen the equity value of Tribune plummet. Newspaper margins have been narrowing, caused by rising competition from new entrants, such as Google and other on-line sources as well as more nimble local competitors and brazen new business models from the likes of oil and railroad billionaire Philip Anschutz (articles here, here, and here). All traditional competitors have been cutting costs, including big layoffs.
Recently, this created an enormous bruhaha between the publisher and top editor at the LATimes and the owners in Chicago. This week things took another difficult step as the Tribune fired the LATimes publisher (article here) for outspokenly disagreeing with top management. The newspapers are reporting on themselves as they discuss the difficulties being encountered inside the executive suite – as well as by competitors (additional coverage here).
The problem is that these companies are following other large newspapers in trying to wring more blood out of the proverbial stone. Margins are down, and the answer they’re trying to implement is "more, better, faster" of what they always did. But, as the fired Times publisher recognized, when you try to get more out of a broken business model by working it faster and harder, all you get is worse results quicker. You can’t fix a failing Success Formula by trying to operate it better, or faster, or with fewer resources. Those actions just help you fail faster.
The problems in these newspapers, like all newspapers, relate to more competition for readership from the internet and other targeted news products. The old big-city newspaper "natural monopoly" has been erased by these new players. As a result, subscribers are declining – especially in coveted younger demographics (see article on shifting readershipfrom 2005! here). That leads to lower advertising rates and dollars, because who will pay for declining readership? Why pay $75 for a classiifed ad for your used cars when you get one, with pictures, from Vehix.com for $39? Why buy full page movie ads for one shot at viewership when you can get a week of repeated hits on Yahoo!? So ad dollars have been moving to on-line media, and other new competitors. All the fighting inside the newspaper companies about how many writers, or copy-editors or salespeople to lay off this quarter or next does not address the broken Success Formula. It only creates a huge opportunity for the new competitors to continue stealing customers and growing.
Lock-in can kill any business. Even the most venerable. When market Challenges emerge that create a need to redefine the Success Formula, only the companies that Disrupt themselves and move into White Space will re-create success. More, Better, Faster just creates more problems, and a vicious cycle that eventually leads to the Whirlpool of failure. The LATimes has had 12 publishers in 120 years – and now 3 of those have been put in place in the last 5 years by the Tribune company. Changing the captain will not change the destiny of a ship Locked-in on a course headed right for an iceberg.
by Adam Hartung | Sep 21, 2006 | Defend & Extend, General, In the Rapids, In the Swamp, Innovation, Lifecycle, Lock-in, Openness
On my web site I have a case study comparing Motorola and McDonald’s (download paper here.) As a reader of this BLOG, it won’t surprise you to guess that I think Motorola is a company for the future, and one into which you should consider investing, while McDonald’s is so horribly Locked-in to its past that I see precious little chance it will remain a great company.
Just look at today’s newspaper for further verification. Motorola has announced the launch of a new vending machine to sell mobile phones and accessories (see article here.) Now this might seem pretty bizarre. Who would buy a mobile phone from a vending machine? Honestly, I don’t know who and I know it won’t be me. But, I am impressed. It takes organizational flexibility, a willingness to see market challenges to conventional distribution, an openness to Disrupting old behaviors and the capability to experiment with changes to the Success Formula to try this. The idea had to be created, it had to move through the organization, receive permission for testing and get funding to make it to market. These are all traits of a company trying to stay in the Rapids, trying to maintain its growth, and organized to create and use White Space. While not all projects in such companies succeed, long term the companies do generate higher growth and long-term above average rates of returns.
Meanwhile, today McDonald’s announced their next big idea was to start selling Egg McMuffins all day (see article here.) Now there’s a big dash of creativity! The epitome of Defend & Extend Management, the company is so Locked-in to its old Success Formula it actually considers it exciting, newsworthy and innovative to simply consider expanding the hours it sells an existing, and decades old, product. I doubt Starbucks is quaking with worries about this change impacting their growth. Even by a consultant’s best estimate this will be considered a success if it adds a mere 3% to 5% to the bottom line. What tremendous ambition!
Motorola is Disruptive, willing to create White Space and test new ideas. Who knows what the value of alternative distribution for mobile phones is – such as a point of purchase vending machine. But they are willing to test the idea and see. Maybe it will turn out to be something that young people, or travelers, or some segment really wants. Meanwhile, McDonald’s is doing more of the same, and bragging about how hard it is to actually pull off this simple time-of-day extension for an existing product.
by Adam Hartung | Sep 17, 2006 | Defend & Extend, Disruptions, General, Lock-in, Openness
I am not terribly mechanically inclined. Yes, I do work on lots of things I own, but I do not consider myself a skilled professional.
I was surprised recently when my 18 year old son told me he was going to buy an old Jeep. "But you already have an old Jeep I bought you" I said. "Yes," he told me "but I want the transmission out of this other one because it is much better for my V-8 than the original one installed. I can switch these transmissions and it will be better for both vehicles, and I should make some money on the situation."
I immediately recognized that this was not a simple job. Heck, he was talking about switching transmissions in two vehicles from different years with different engines and other configuration issues. What if things didn’t line up? What if they didn’t fit? "Son," I said "this is no simple job. I’m afraid it is beyond my skills these days. Do you know what you’re doing?"
To which I got a tremendous answer. "No dad," he said "I’m not sure what it will take. But I have enough money to pull off the job, even if things go really wrong and I have to change the clutch and many other parts. I have lined up a consultant (a professional mechanic) who will advise me on problems. And even though I’m not sure what to do, I’m confident I can figure it out. And, when I’m done, the Jeep I buy will be worth at least what I paid for it and my Jeep will be worth a lot more. I just need permission to tear into it."
Voila! White Space was requested. He didn’t have all the answers, but he was certain he could figure it out. And he had prepared all the resources. Not only to do the job, but what he would do for transportation while his machine was under repair. He had created personal White Space, and all he needed was to Disrupt my Lock-in – my Lock-in that said such a job required a "professional."
Now the transmissions are switched, and things are better all around. Why? Because he created some personal White Space – and I accepted the need for a little Disruption.
by Adam Hartung | Sep 9, 2006 | Defend & Extend, In the Rapids, In the Swamp, Lifecycle, Lock-in
Now is the time to Supersize a stock that might be in your portfolio. McDonald’s has announced that it will allow every shareholder of McDonald’s to swap that stock for Chipotle’s – and in fact investors can received $1.11 of Chipotle’s stock for every $1.00 of McDonald’s stock you tender (see Chicago Tribune article here). So investors get a 10% discount on the Chipotle’s stock (see prospectus.)
Let’s see, we have a horribly Locked-in McDonald’s, with practically no growth, that is spinning off it’s best White Space project. And McDonald’s will allow investors to move from the traditional mired-in-the-Swamp business to the high-growth Rapids business and get a 10% discount in the process. Talk about Supersizing the opportunity!!
McDonald’s stock is currently propped up by a hedge fund operator who’s buying up shares in order to attempt forcing McDonald’s to spin off company owned stores and sell company owned real estate. He’s trying to force a 1980’s-style asset play, and in doing so he’s buying thousands of shares. So despite sluggish growth and limited prospects, McDonald’s shares have been rising. McDonald’s is so desparate to preserve it’s Lock-in, and beat back this guy, that they are making an incredible offer in order to bring back in more shares, hopefully raise the EPS, and beat back this fellow. Like the leaders of too many Locked-in businesses, McDonald’s is following the tactics of "If you can’t figure out how to run a good business, then you use financial machinations!"
So, here’s the "golden" opportunity to get out of McDonald’s while the value is high, and get into a high-growth company without any transaction costs – and at a 10% discount to boot. Now that is an Incredible offer!
by Adam Hartung | Aug 28, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in, Quotes
I need to thank one of my readers for bringing to my attention a recent BusinessWeek article on Dell (see article here.) As he pointed out, this article comes almost exactly 3 months after I talked about how Dell’s Lock-in was disastrous. There are some great quotes worthy of sharing:
Regarding Lock-in:
- "Dell remained slavishly loyal to its core idea of ultra-efficient supply-chain management and direct sales to consumers, even as rivals have stepped up their game and markets have shifted to take away some of Dell’s key advantages. Instead of adapting, critics say, Dell cut costs in ways that compromised customer service and, possibly, product quality."
Some readers may recall on April 16, 2006 when I pointed out Wal-Mart’s problems and discussed the risk of being a 1-Trick Pony:
- "They’re a one-trick pony. It was a great trick for over 10 years, but the rest of us have figured it out and Dell hasn’t plowed any of its profits into creating a new trick."
Regarding identifying Telltales of big problems that indicate a company is moving into the Swamp – or Whirlpool:
- "Dell’s culture is not inspirational or aspirational," says Geoffrey Moore, a tech consultant and author of Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution. "This is when they need to be imaginative, but [Dell’s] culture only wants to talk about execution."
Of course, in an execution focused company there is no room for White Space, and you don’t get innovation:
- "They don’t feel they’re part of something at Dell, and they generally leave because they feel frustrated," says Snyder. "Dell is not a fun place to work, and it’s less fun now than it used to be."
- "Even the CEO admitted so in 2003 – "There are some organizations where people think they’re a hero if they invent a new thing," he said. "Being a hero at Dell means saving money."
- "Inside Dell, ideas that break from the model are discouraged, say former Dell managers. Notes one: "You had to be very confident and thick-skinned to stay on an issue that wasn’t popular. A lot of red flags got waved—but only once."
Lock-in makes you an easy target for competitors:
- "But it was clear some time ago that Dell’s model was not keeping pace and was not going to be such a big advantage in the future… And while experts believe Dell got the best prices on components when it was outgrowing all of its rivals, these days newly ascendant HP and Asian rivals Lenovo Group (LNVYG) and Acer are offering plenty of growth themselves."
Once a company commits to a Defend & Extend strategy, it becomes so structurally Locked-in it becomes almost powerless to change:
- "So why hasn’t Michael Dell—clearly a brilliant guy—changed tactics? For starters, say rivals and Dell alums, shifting gears would upset investors who expect hyper-profitability from Dell’s hyper-efficiency. And having stuck to his guns in the past, he can’t risk letting customers think that "Direct from Dell" is no longer the cheapest, smartest way to go."
By following the Siren’s song of "operational excellence" Dell adopted a Defend & Extend strategy that has placed it at great risk. Now it lacks the tools for innovation that could help the company to have a longer, more successful future. Without a serious Disruption, and new leadership that can implement and manage White Space Dell’s future is easy to predict.
by Adam Hartung | Aug 27, 2006 | Defend & Extend, General, Leadership, Lock-in
Almost two years ago I published a case study comparing McDonald’s and Motorola (download paper here). As a reader of this blog you know the former I don’t care for, while the latter is doing all the right things.
This week, the #2 fellow at McDonald’s abruptly left. Why? Because he was considered to radical, and too quick to try and change things. As you know, McDonald’s dramatically cut back its number of stores 4 years ago. Since then, the company has sold off all it’s growth businesses, and has made minor changes to the existing stores which has helped them to improve sales and profits – although the company still does not support the number of stores it once did. And McDonald’s still is not winning the battle for growth against Starbucks and other less Locked-in competitors.
The thing McDonald’s most needs is someone willing to Disrupt the organization, install White Space and get the company on a growth path for the future. Unfortunately, the current CEO, Chairman and Board members are more interested in historical consistency. Content to Defend & Extend a Success Formula that is no longer leading the marketplace, they have pushed out their best hope for rejuvenating the organization.
Meanwhile Motorola last week again announced it is taking market share from competitors. Its phones simply keep attracting new customes, as unit volumes are up 46% versus a year ago. As you know, Motorola’s Board took the opposite set of actions that McDonald’s took, putting in place a CEO who has Disrupted the company and installed White Space in multiple locations.
While McDonald’s has shown signs of reviving the last couple of years, it is important to remember that it still is smaller than at its peak, it has sold off its growth businesses (such as Chipotles) and it is not the dominant market leader it once was. This most recent action simply demonstrates that the Board is more interested in Consistency than Success. Too bad for all those employees and shareholders.
by Adam Hartung | Aug 17, 2006 | Defend & Extend, General, In the Whirlpool, Lifecycle, Lock-in
Here in Chicago we have a convenience chain called White Hen. The stores have been a fixture in Chicago for 4 decades. But they are about to all disappear. That is, the remaining ones. Although the chain is being bought by the much larger 7-11 chain, there is no premium being paid for the company. On the contrary, investors are losing money on the sale. Sold in 2000 to Clark (a gas station operator) for $80million, the company went bankrupt and was acquired by management in 2002 for $45million. Now, 7-11 is paying $35million. So what happened?
During those 6 years, White Hen shrunk from 245 stores to 206 in Chicago. This may not sound like a huge problem, but for a debt-laden acquired company losing 16% of capacity is enough to drown it. In short, the management of White Hen spent too much focus on trying to generate fast profits, and not enough recognizing the need to grow. They kept trying to cut size and cost to create more profits, and in the end they simply cut cash flow and killed the company.
White Hen is a microcosm of what we see in far too many companies today. They forget that either you win, or you lose. You can’t simply "mark time" and try to tweak the profit model. Competitors today won’t let you do that, they are too smart and too capable. Today, you have to keep innovating, meeting Marketing Challenges, creating new Success Formulas — or you lose. There is no tie. You win, or you lose. And the leadership of those companies trying to follow the example of White Hen (such as Sara Lee and Sears) should take note of this example.
by Adam Hartung | Aug 15, 2006 | General, In the Swamp, Lifecycle, Lock-in
Today WalMart announced that for the first time in a decade it’s quarterly earnings actually declined. The stock is down again, remaining a very poorly performing equity investment since the company peaked back around 2000. Since then, investors have not been rewarded for staying with the Locked-In strategy of the world’s largest retailer.
Did you see it coming? You should have. For over a year this blog has been pointing out that Wal-Mart is horribly Locked-in to its old ways, and unwilling to use White Space to create a new Success Formula. Although it’s impossible to predict the day when things will demonstrably go south, it isn’t hard to predict the trend if you pay attention to White Space – or lack thereof.
When announcing these poor results, Wal-Mart blamed high gasoline prices. Let’s see, for 3 years now we’ve had high gas prices, and Wal-Mart has blamed petroleum costs for its problems. You’d think by now, if management was as good as it claims, the company would have adjusted to the reality that gasoline is most likely to remain expensive. At the very least, they should have executed contingency plans to react to such a market Challenge. Instead, they plod forward with the same Success Formula, fail to meet expectations, then blame circumstances that they long ago should have planned for and dealt with.
Worse, Wal-Mart leadership blamed this specific quarterly failure on selling off WHITE SPACE projects in Germany and Korea. Wal-Mart is a company that desperately needs to find a new future. To overcome its Lock-in. Yet, once again, we see they have decided to exit markets where they should be learning and growing. If they can’t succeed the Wal-Mart way, then they leave. If there was ever a big, bright red flag that says this company is in trouble, missing earnings forecast while exiting White Space and blaming the cost of White Space for their earnings problems – while ignoring market challenges like high oil prices – has got to be it.
This should be a clarion call to avoid this company as an investment, as an employer, and as your primary customer – unless you want to suffer prolonged poor performance. If they miss forecasts again next quarter they will officially enter a growth stall, and that will put them in the category of having less than a 10% chance of ever maintaining growth of a meager 2%. The chances of a turnaround are nil, simply due to demonstrated Lock-in, and the odds of a growth stall just jumped dramatically.
by Adam Hartung | Aug 9, 2006 | Defend & Extend, General, In the Rapids, In the Swamp, Innovation, Leadership, Lock-in, Openness
Once again we have the opportunity to view the tale of two companies. Both troubled, yet capable of success if they do the right things.
Motorola was struggling a few years ago. Then, a new leader came on board and started Disrupting the old Success Formula. Simultaneously, he opened up White Space all around the company. Sales went up, and so did innovation. While everyone knows about the success of RAZR, Motorola also built its business in digital video recorders and networks. Now, today, we learn that Motorola has further grown its success, winning a $3billion deal to build out a wireless data network for Sprint/Nextel. (See full article here.)
Sara Lee found itself also struggling a few years ago. They also hired a new leader. But this leader chose to disturb the organization without really changing the Success Formula – focusing on cost cutting and selling businesses without creating any new White Space. Now, today, we find out that the leader is conceding she won’t meet her margin goals (even as the business shrinks more than 50%), and isn’t really sure when the company will be growing again. (See full article here.)
Motorola is up over 30% in market value. Sara Lee is down more than 30% in market value. Those who read this blog know that I was a very early fan of Motorola’s turnaround, and recommended it as an investment. They also know I’ve been a longstanding pessimist of Sara Lee. Why? It’s as simple as White Space. At Motorola you could observe a leader attacking the Lock-in and implementing White Space. At Sara Lee there was no attack on company, or industry, Lock-in to old formulas and there was absolutely no White Space.
A successful turnaround absolutely requires fast action to Disrupt and implement White Space. It is the single best predictor of whether a company will overcome its growth stall, or not. Any time you need to decide whether to invest in, join, or supply a troubled company follow one simple rule – Follow the White Space.
