by Adam Hartung | May 16, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you want your business to be a success, attracting employees and investors alike, there’s a simple solution. You need to both grow and earn an above average rate of return. It’s the ability to both grow and make money that is attractive. But for too many executives they see these as a trade-off. And they give up growth in the pursuit of profits.
Do you remember the advertising jingle "Nobody Doesn’t Like Sara Lee"? Well lately, a lot of people have taken to not liking Sara Lee. The company has lost about half its value since the late 1990s, and it is currently valued about where it was in the mid-1990s. Since installing a new CEO and turnaround team about a year ago the company’s investors have not be encouraged.
The new leadership has chosen to implement an aggressive asset sales campaign. Rather than Disrupt the failing business by attacking Lock-in and creating White Space to innovate new solutions, they chose to try and sell their problems to someone else. They also began closing plants as they blamed poor results on industry overcapacity. The result has been disappointing prices for these assets, as others refuse to pay high for troubled brands and businesses. The executives chose to stick with their old Success Formula, despite the poor results, claiming the payoff would be in the future.
The asset sales have continued, but the results have still not materialized. Earnings have dropped 78%, and analysts such as Morningstar are saying that Sara Lee is struggling to capture any benefits from its restructuring. Nonetheless, the new management team is convinced it can follow classic industry practices, such as changing its ad campaign on Jimmy Dean Sausage, in its jouney to find improved results. The executive team is adamant that they must stick to their original plan.
So revenues are down, employment is down, valuation is down – and earnings are down. All in the quest for a quick improvement in profits. And there is no growth, as Sara Lee is making itself significantly smaller. Profits vs. Growth is destroying Sara Lee. What they will have to do is realize that what’s needed is a Disruption, an attack on the industry Lock-ins that are driving this failing program, and implementing White Space where they can find a new solution – if they want people to once again like Sara Lee.
by Adam Hartung | Apr 28, 2006 | Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
Believe it or not, in 1985 Apple sold more personal computers than all the Microsoft-based machines combined. Hard to imagine that 20 years later. By the mid-1990s almost everyone in TechLand considered Apple a non-player. Apple had become a small, niche company with limited customers using their machines for only particular applications – usually graphic intensive. Microsoft had "checked" Apple by the mid-90’s, and the vast majority of investors had considered the game over.
However, today Microsoft revealed a serious stumble. They have announced (see article) that costs are up, and profits are not going to meet expectations. Not this year nor next year. Microsoft investors have gotten nothing (other than a one-time $3 dividend) for holding their investment for the last several years. The company’s stock price reached current levels way back in 1998. Microsoft has stalled, while Apple is in the throes of a great renaissance. Apple’s value is up 2x to 3x over the same timeframe.
Not many companies do what Apple did – coming back from the brink of failure. But those that do rely upon the techniques Apple used. An internal Disruption used to face up to market Challenges, followed by installing White Space which is used to identify and develop new opportunities.
Lots of companies do what Microsoft is doing. During the heyday, high growth environment for PCs, from the 1980s through the 1990s, Microsoft developed a Success Formula. As it grew, Microsoft Locked-in that Success Formula with its culture, its structure and its costs. Microsoft optimized itself around the market conditions (the environment) that helped it succeed and grow while its first market was in rapid expansion.
Now, the markets are changing. This is creating new Challenges. Apple is using Disruptions and White Space to react to these Challenges and create enhanced value (for employees, suppliers, customers and investors). Microsoft is busy trying to Defend & Extend its past Success Formula. It’s trying to use its old skills to take on emerging new Challengers Google and Yahoo!. Microsoft is stalled, and if it doesn’t follow Apple’s lead, Microsoft could end up in with even more serious problems.
Any company can stall. All it takes is Lock-in to an old Success Formula. Then, a market shift can open the door for new competitors. The answer is to Disrupt yourself and use White Space to find a new Success Formula that meets new market requirements. Not "more, better, faster" of the old Success Formula – that leads to rising costs, poorer returns and the unlikely hope that the past will repeat itself.
by Adam Hartung | Apr 21, 2006 | General, In the Rapids, In the Swamp, Leadership, Lifecycle, Lock-in, Openness
Wow, have you seen the share price of Google? Google’s value has more than doubled the last 12 months, and risen about 5-fold since going public some 21 months ago. Why is this happening? Simply because revenues are more than doubling annually, and profits keep exceeding everyone’s expectations; including management! Google is into the Rapids. After fighting to create a viable business model, it is now exploiting its advantages in traditional, and new markets, every month. It is winning share versus competitors (such as Yahoo! and Microsoft), while it is entering new markets and launching new products. Google is living in White Space, and exploiting its advantages.
Yahoo‘s valuation has remained flat over this period. And Microsoft has also failed to gain value. Why? Aren’t these great high-tech companies? Yes they are. But unfortunately, for the last two years they have been trying to Defend & Extend their old Success Formulas. Their management has fallen into the "me-too" category with its products, and has failed to find new markets. These companies have been great companies, but they are Locked-in to what first gave them market dominance, and they are missing the opportunities Google is finding.
Lock-in can affect any company, causing it to lose sight of the prime objective – growth leading to enhanced results. Poor Kraft has been stuck for 5 years, and despite owning some of the greatest names in consumer products managed by some of the industry’s most talented people, it can’t find a way to overcome focus on its past. Thus, its sales don’t grow and its value remains – stuck.
As we can see, this phenomenon is not limited to older companies, like Kraft. Even worse than Yahoo! and Microsoft has been Sun Microsystems. An early pioneer in developing servers for corporate and internet use, Sun got so locked into its formula of selling boxes loaded with their own software that the company almost went bust. Sun’s value is only about 7.5% of what it was a mere 6 years ago. Despite being the dominant hardware supplier at the time, and one of the most important companies for launching the internet.
Creating success has the same requirements, no matter what industry you’re in. Disrupt your Lock-in, maintain White Space to explore new opportunities, and above all – fight the urge to focus upon Defend & Extend.
PS – Eric Schmidt is the CEO at Google. Did you know that when Sun Microsystem peaked, he was the company Chief Technology Officer? When all looked good at Sun he went to Novell where he led a turnaround of what many thought was a dead networking company. Oh, and before Sun Eric had been an academic – not in business but in computer science. And an R&D geek at Xerox PARC, Bell Labs and Zilog. Eric is a great example of a person who avoids Lock-in, Disrupts himself and keeps looking for White Space where he can grow. The Phoenix Principle is as important for individuals as it is for work teams and businesses.
by Adam Hartung | Apr 16, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
If asked to name the world’s top operationally excellent company, one name you would have to consider is Wal-Mart. From humble beginnings, a relentless focus on operations led this company to become the world’s largest. For two decades Wal-Mart has been THE model of supply chain management, inventory reduction, procurement excellence and using technology in support of its operational goals. Wal-Mart has out-retailed every retailer, and become a huge success.
Wal-Mart’s profits have risen consistently for many years. The company’s stock, however, has not done as well. Between 1997 and 2000, the stock went from $10/share to $70/share. Since then, however, WMT has had a series of lower highs every year. Since early 2005, WMT has been a laggard of both the DJIA and the S&P 500. The problem has been a declining price-earnings multiple, as investors wonder how Wal-Mart will continue growing. Yes, profits are up, but how will the world’s biggest company grow?
How has Wal-Mart responded? By increasing its focus on operational excellence! The latest efforts are intended to cut inventory even further. Reducing the numbers of items carried, and risking out-of-stock items in the store. Wal-Mart is willing to have customers not find goods they want in order to even further improve it’s already world-class, record-setting efficiency while seeking to lower costs.
Wal-Mart is continuing to Defend & Extend the Success Formula that made it famous. Yes, that Success Formula made Wal-Mart an incredible success. But now Wal-Mart has to learn how to do new things in order to grow. Focus, focus, focus Wal-Mart has already proven it can do. But, since the company is unwilling to Disrupt itself, it keeps hoping that "more, better, faster" of what first made it famous will somehow bring it out of a 5-year slump. Instead, Wal-Mart needs internal Disruption, and White Space, to overcome the Challenges which have slowed its growth (and investor enthusiasm.) All 1-Trick ponies are eventually eclipsed by alternatives that change the competitive playing field.
No one thinks Wal-Mart is in a slide to ruin. After all, they are ….. Wal-Mart! But, then again, no one predicted that we’d see the wholesale decline in Woolworths, then Sears … and there was AT&T, and Polaroid …. and Xerox once looked like it could copy its success forever ….
by Adam Hartung | Apr 14, 2006 | General, In the Whirlpool, Leadership, Lock-in
Sears held its annual meeting this week, and demonstrated that nothing insures failure like Lock-in to a failed Success Formula. (See coverage in New York Times and Chicago Tribune.) Sales are down, store concepts are failing and the Chairman said he has "no grand solution" as he hopes a "back-to-basics" program can revitalize sales. After all, the Chairman said he was "comfortable with ambiguity."
Chairman Lampert asked "A plane goes from 40,000 feet to 10,000 feet. Is that a good thing or a bad thing?" Well, the CEO said "No one likes double-digit sales declines.." Double-digit sales declines for consecutive years – hey – that’s what we would call a "free fall," and that’s a bad thing Mr. Lampert. You don’t have to be a billionaire hedge fund manager to figure out that one. Growth is your jet fuel – and you ain’t got any!
Sears stands in the middle of the ring, while in one corner is WalMart and the other is Target. Here’s a question for you Mr. Lampert, can you spell "punching bag?"
Not even Sears’ own subsidiary, Sears Canada, will agree to be bought out by the parent. And the convicted Martha Stewart has refused to let her goods be sold in Sears stores. If that isn’t repudiation…..
While the execs follow their old Success Formulas, the losers are employees and vendors. While taking their pay packages, and paying out multi-million dollar severances to former Chairman Lacy and other departing execs, they have gutted the corporate staff. They’ve laid off thousands in stores as they shut them down. And turnover of Sears managers was 35% last year (25% at Kmart) as Mr. Lampert blamed the troubles on his front-line managers and began kicking them out the door.
Sears is in the Whirlpool. "Pride goes before the fall" according to Proverbs, and there’s nothing but pride in Sears’ executive suite. Too bad they were unwilling to use White Space to find a new competitive opportunity for Sears. But that would have meant Disrupting their Lock-in, and that’s the one thing they’ve promised they won’t do.
by Adam Hartung | Apr 5, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Lifecycle, Lock-in
Newspaper stocks are getting the snot kicked out of themselves the past year. Investment analysts, industry analysts – why at this week’s industry trade show even the industry executives – are all saying that newspapers are losing readers, losing advertisers and losing their margins. Newspaper values are at unheard of lows.
So why is one of America’s billionaires starting a new newspaper in Baltimore? Philip Anshutz, of oil and telecom wealth, has been buying small newspapers in San Francisco and Washington – and now he’s starting one from scratch in Baltimore. Is he nuts?
Think about the competitive situation for a moment. The Baltimore Sun is really the only newspaper in town. It’s owned by the Tribune Company way back in Chicago. The paper has been under pressure to improve margins, so it has been cutting costs and people. It hasn’t changed its business model in decades, so it’s struggling to maintain what it used to provide. In other words, The Baltimore Sun is Locked-in to a declining Success Formula – which it is trying to Defend and Extend. With not-so-good results.
The Baltimore Sun is a target. It’s Lock-in means that this upstart new paper can see exactly how the only competitor is behaving – and can predict their behavior pretty darn well. With only one competitor to deal with, the upstart can take a focused attack. And, since the new Baltimore Examiner is just starting its life cycle it is in White Space to develop all new solutions for editorial, copy desk, graphics and advertising production, as well as printing and distribution. This new paper is able to start with very low overhead, use part-time reporters, go offshore for its editing and page layout work, and find some low-cost new printer. Whatever weaknesses exist at the Sun, they’ve made them obvious and the Examiner is in great shape to exploit them.
Newspapers are not a growing business. But that doesn’t mean the local scribner is going to be allowed an eloquent and profitable decline. When the leading competitor becomes so Locked-in, they become a target. And that provides an opportunity for a new competitor to benefit – even when the market isn’t growing 15%/year.
As a local monopoly, the Sun has no where to go but down. If they keep trying to Defend and Extend, well that’s exactly where they will end up. They are in the Swamp, and the Examiner is trying to push them into the Whirlpool. If the Sun doesn’t re-invent itself, it’s already depressed profits will evaporate. It’s a painful lesson to deal with – and it’s going to be tougher to re-invent now that a new competitor is on the scene.
by Adam Hartung | Mar 20, 2006 | Defend & Extend, Innovation, Leadership, Lock-in, Openness
Success Formulas are nested. We have personal Success Formulas, which interact with Work Team Success Formulas, which connect with Functional and B.U. Success Formulas, which tie to Industry Success Formulas those are impacted by Success Formulas within the larger economy. Whew! That’s a lot of Success Formulas. But, in fact, achieving superior results mean these Success Formulas all line up. When they are misaligned, resources are spent ineffectively and results suffer.
We frequently focus on the Success Formulas at the top of the pyramid. But, big Challenges occur when changes happen deep. At the deepest are changes in the economy – which we tend to ignore – and yet they create the biggest Challenges.
Just a decade ago the emergence of all the linked PCs across the world wide web created a change in the economy. It challenged Success Formulas throughout the pyramid to align with the new capabilities. We all had to learn how to move faster, and more effectively to keep pace competitively. And it opened the door for international trade on a previous unheard of scale, as we discovered we could use the web to manage work anywhere, from Indiana to India (as detailed in the book The World is Flat).
Now, there’s a new Challenge emerging. And we need to find White Space to identify new solutions.
Any business watcher knows that complaints are high about the cost of health care. Estimates are that $1,500 of every car’s cost is worker health care. And the auto companies are fighting with their unions to cut this cost. The same has happened with health care cost in the airlines, steel, and most other industries. For those of us working in America, we’ve all seen our employers raise our contribution to the insurance premiums, while watching the dreaded co-pays go up and the services offered go down. According to a 2004 Harris poll, a majority of Americans actually favor price controls!
U.S. employers are learning that in a new, no-barriers world they have to compete with companies that effectively have no health care cost. In most other countries, the cost of health care is handled dramatically differently – with the result that employers do not pay for their worker’s plans. As a result, a manufacturer in the U.S. finds the marginal cost of health care actually causes him to lose sales against a global competitor – such as China. And the same with a U.S. services vendor competing with Indian companies.
What’s happening is that we no longer can look just to how we manage the American economy when we compete. We’re now on a world stage. We have to compete with countries which standardize health care, recover much of the cost through various taxing systems, and leave the employer largely out of the equation. The Challenge to American employers – and thus to all of us who work – is very real.
The issue is no longer becoming "what’s the right answer." Instead, we have to realize that Americans are Locked-in to a system that is globally unique. It is affecting our competitiveness – on a company-by-company basis. This system of employer funded private insurers worked well when constructed as part of our Success Formula post Depression. But now it’s hurting our competitiveness. The world has changed.
So far, we’ve been pretty unwilling to recognize this Challenge. We’ve remained Locked-in. Governmental programs to change have been met with attacks from not only insurers, but by most Americans. What’s needed is White Space for us to test some new approaches. Americans are unlikely to change just because they see merits (and deficits) to programs in Canada or the U.K. Instead, we have to develop our own solution. And that will require us giving ourselves permission, and dedicated resources, to experiment with different solutions.
We compete now globally. Thus the requirement becomes aligning our industries, companies and ourselves with changes in the economy. EVen where such alignment can be wrenching. Where will this White Space occur? Probably not in government, that’s not our way. But rather through some form of private approach where we can experiment and learn. The sooner we create this White Space, fund it and put talented people in it the better. And the businesses that pioneer these solutions have the opportunity to generate enormous value, and wealth for investors.
by Adam Hartung | Mar 15, 2006 | General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you’ve read this BLOG for a while you know I am no fan of Sears. Since the merger of KMart and Sears the combined company has done nothing to change its competitiveness versus better managed companies like Target, Kohls and WalMart.
Today Sears stock jumped almost 13%. Oh my, should I reverse my position? After all, the company said (Marketwatch reported) it doubled fourth quarter profitability since a year ago when the companies merged. And revenues are up to $16Billion, from last year’s $5.95billion – wow! And Kmart stores eeked out a .9% same store sales increase during the holidays – the first such increase since 2001! Yeah!
Let’s see… Let’s read a bit more.. what else did they say? "Competitor’s are opening more stores and spending on promotions and marketing – which Sears Holdings isn’t" … Oh, let’s see, these results don’t compare today with combined results from a year ago… Revenues of the combined companies actually declined by 4.5%… well, well… For the year, same store sales at Sears fell 8.4%, while KMart same store sales dropped 1.2%…. oh, the solution — the management is "adjusting its apparel strategy to better meet customer demand" and therefore "expects declines will moderate"…
Those positive headlines, as they said in Oklahoma when I was young, is putting lipstick on a pig.
Sears is still Defending and Extending two completely broken Success Formulas. And the financial heads that put this deal together still haven’t internally Disrupted the operating practices, nor have they created effective White Space to develop a new, more competitive, solution (see previous BLOG on the failure of Sears Essentials). Without those two actions, these results are just financial reporting shenanigans – and those who invest in them deserve the risk they take.
by Adam Hartung | Mar 15, 2006 | General, In the Swamp, Leadership, Lifecycle, Lock-in
Today I got a call from a friend, asking me my opinion of DuPont. I worked for DuPont from 1987 to 1990, and of course DuPont is one of those large and historically great American companies. An early manufacturer of gunpowder for our war efforts, the company went on to innovate such great products as Nylon, Teflon and Kevlar. In The Graduate the famous recommendation to Dustin Hoffman to think "Plastics" is often credited as a plug for DuPont.
But, innovation has been slack at DuPont for quite a few years. They haven’t brought forward one of those great products for a long time. And, their returns have suffered as the company shrunk – through a combination of selling businesses (they owned, and then sold in the 1990s, Conoco for example, and spun off their pharmaceutical business in a joint venture to Merck) and declines in some "core" markets – like printing and other films. Their stock price has suffered.
Today, however, Dupont’s stock broke out to a short-term high after announcing expectations for better earnings. Several technicians said that with only a small additional move upward the stock could jump another 20%. Is this a juicy investment opportunity?
When I read the Marketwatch release, I was disheartened. DuPont didn’t jump up on an announcement of new products. Nor a breakthrough innovation. Nor was there any sign of any major Disruptions happening to their Lock-in, or new White Space projects being created. Instead, I learned that earnings are predicted to rise from closing several labs, shuttering plants and laying off more people. That, plus they think a horrible European market will finally take a turn for the better – no thanks to any new products from Dupont but rather just because enough time has passed while the marketplace stunk to expect an upturn.
It’s hard for me to get excited about DuPont. Even though their history is undeniably great. They keep cutting capacity, cutting jobs, taking restructuring charges and waiting for an economic turnaround. Their improved profits are short-term financial machinations. What would excite me would be to hear about some Disruptions in their internally focused Lock-in. Or to hear about new joint ventures, or other White Space projects intended to spark innovation and create new markets. Without those signs, I’d worry that the short-term stock improvement will just be short-term.
by Adam Hartung | Mar 7, 2006 | General, Lock-in
Did you ever wonder why Sony doesn’t dominate the digital music market? After all, they are historically strong in consumer electroncis (i.e. walkman). And they own a recording studio. Yet, Apple dominates and the word "I-Pod" is synonymous with digital music. Sony was locked into different divisions with differing goals, and a desire in those divisions to fight digital music in order to extend the life of CDs. They didn’t see the I-Pod coming. They were blinded by their Lock-in to their old Success Formula, so even though they could observe MP3 technology, and Napster’s first inroads into their market, they waited way too long to effectively react.
This week’s Oscars is a showcase for recognizing Challenges. The event was dominated by movies from small production houses, and best picture was won by "lowly" Lions Gate – best known for low budget slasher movies, urban films and documentaries.
It’s easy to discount this experience. You may not have enjoyed many of the movies which dominated the nominations, and the wins. After all, for best song to to be the urban rap "It’s Hard Out Here for a Pimp" is more than a bit jarring for many people over 40. It’s easy to say "I don’t connect with these movies, and this doesn’t make any sense to me" and then walk away. As a viewer, no problem.
But, if you work for Universal Pictures, you should think again. The early stages of change look just like this. A market shifting Challenge looks exactly like the 78th Academy Awards. A bit odd, easy to discount and explain away. But the fact is, films made differently, and for a fraction of what the big studios spend, just ran away with all the awards.
Lions Gate is a different sort of company from Paramount, et.al. These companies represent the front edge of a shifting marketplace. They demonstrate a new Success Formula for filmmaking. Larger competitors will ignore them at their peril, for they could well do to movie companies what Apple first did to large computers (such as DEC and Wang), and then later what a struggling Apple did to analog music.
