by Adam Hartung | Jul 6, 2010 | Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in
All organizations must move into new markets with new customers buying new solutions. It’s inevitable. Over time, all product markets shift to new solutions. Given this inevitability, isn’t it amazing how few make the shift?
BloggingInnovation.com published a GREAT article “20 Phrases That Kill Ideas and Innovation.” What I like is that we’ve all heard these 20!!!! Here we go with “That’s a good idea, but…”
- It’s against company policy
- It’s not practical
- It’s not necessary
- We don’t have the resources
- It will cost too much
- We’ve never done it that way
- Our customers (or vendors) won’t like it
- It needs more study
- It’s not part of your job
- Let’s make a survey first
- Let’s sit on it for a while
- That’s not our problem
- The boss won’t go for it
- The old timers won’t use it
- It’s too hard to administer
- Why hasn’t someone else suggested it before?
- Let’s form a committee
- We should wait until the economy improves
- Who else has tried it?
- Is it best practice?
Really! I bet you’ve heard all of these. Defend & Extend Management becomes so embedded in the culture managers don’t even realize they’ve turned off to new markets and fallen into focusing solely on trying to protect the old. And as markets shift these phrases never go away – they just maintain Lock-in!
The next time somebody brings you an idea – an innovation – I want you to gauge your reaction. Before you speak, see if your mind brings you one of these 20. If so, you’re more dedicated to Lock-in than growth. You’re stuck in D&E Management. And that means you need a healthy dose of The Phoenix Principle. Time to do some scenario planning, dig deeply into competitors, Disrupt those Lock-ins and set up a White Space team to explore new opportunities! Overcome these objections before they stop you – cold!
by Adam Hartung | Jul 1, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
"Stay the Course" is a popular phrase. It sounds all macho, and committed to a destiny, to proclaim you must "stay the course." However, as bnet.com pointed out there are times when "Stay the Course is a Recipe for Disaster." The article calls it "Stay The Course-Itis" (or STCI) for leaders that don't know when it's time to change direction. We can now see that BP simply drilled one too many deep-water holes in the Gulf – just as Exxon let one too many tipsy captains steer oil vessels before the Valdez crashed. Staying the course may sound good, but too often the course isn't right. And a bad course can lead you into disaster.
Take for example Dell. As reported by The New York Times, and picked up by CNBC.com, "in Suit Over Computers, Window into Dell's Fall," we learn that Dell went just a bit too far in its effort to be a low cost industry supplier. Hoping desperately to maintain a slight lead in lowering costs, Defending & Extending Dell's long-term Success Formula as industry supply chain leader, Dell simply bought bad parts. It then replaced bad product with more bad product. Refused to admit to itself that it had gone "too cheap" in its effort to be cheap. Things went from bad to worse as the Lock-in to keep costs low led to multiple customer disasters – even at the law firm defending Dell in court! And Michael Dell is being accused of financial irregularities in his effort to make Dell's results possibly look better than they were. Both corporately and personally leadership made some big mistakes – not unlike BP – in the effort for Dell to "Stay the Course."
Microsoft certainly isn't without it's STCI as CEO Steve Ballmer keeps dropping new projects to funnel money and other resources into old desktop/laptop products. The Wall Street Journal reported "Microsoft Kills Kin Mobile Less Than Two Months After Launch." Kin was a product targeted at the hot market for youthful cell phone users. A double-digit growth market. But Microsoft is backing out, despite its ballyhooed launch – including announcements to take the product to China very soon. Microsoft can't seem to do much but "Stay the Course" supporting old products.
Both tech companies have had no improvement in their market value the last decade. And BP has watched its value drop more than 50% since the spill started. Some now actively wonder if BP could disappear as SeekingAlpha.com discussed in "How Likely is a BP Takeover bid?" Staying the course in the Gulf, drilling for more oil in deeper water and taking on more risk, could cost BP its existence if another company buys up the discounted equity. Of course, there is still reason to think BP could get wiped out from the costs of the disaster without a takeover.
Companies can get over SCTI if they follow advice given at ABCNews.com "Reboot Your Small Business by Reinventing." The article applies to all size businesses, however. When you see your business doing poorly, especially relative to competitors, it's time to attack sacred cows and do some things differently. Instead of "doubling down" on the old Success Formula, do new things!
You don't want to end up like BP, Dell or Microsoft today. Once great companies that are floundering now – struggling to find growth as they continue spending so much energy trying to "Stay the Course." When the seas are too calm to sail, leaving you stranded with no growth, or the waves are crashing too heavily, as competition is derailing your efforts, why not set a new course? One that can lead you to better growth? There's no harm, or shame, in heading where the market is going, using Disruptions and White Space to develop new solutions. Don't let your ego, pride, or history/legacy push you to "stay the course" when better results can be found in new markets, new customers and new solutions.
PS – Yesterday SmartBrief on Leadership newsletter ran ""For Real Innovation, Pick Up the Phone" linking to the BloggingInnovation.com repost of "It's the One You Don't See That Kills You." Compliments to Braden Kelley for a great web site, and getting the word out about how important it is to apply innovation! I enjoyed how the newsletter grabbed the conclusion, that businesses need to obtain more outsider input, and ran with it as the title. better than my title, to be honest!
PPS – PRLog.org just picked up my blog on "Journalism in 2020." Great to see the media enjoying my comments about their industry, and passing them along through this communication site!
by Adam Hartung | Jun 29, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Science
I weighed in late on the Gulf Coast disaster – and my impressions of British Petroleum. I wanted to be thoughtful, as the ramifications of this will be with us for decades. Compared to the hurricane that wrecked New Orleans this situation is far worse. Many more businesses are being shut down, the ecological disaster is far worse, and the clean-up will take much longer – even though New Orleans is far from a full recovery from hurricane Katrina. And there was lots (lots) of finger-pointing going around. It is going to take a lot of money and energy to deal with this mess – and lots of blame-laying (lawsuits) are inevitable
But I'm always the guy looking forward, and that's why my Forbes article, "BP's Only Hope for Its Future," focused on what BP needs to do now to recapture the more than $100B of lost value its investors have suffered – not to mention out-of-pocket cash costs still rolling up.
There is a raging debate about what investors can expect, as typified by the SeekingAlpha.com article "Where is BP Headed: $70 or $0?" Unfortunately, most of these articles focus on 2 factors: (a) what are the estimates of cash out to fix the mess and legal battles compared to historical cash inflows from revenues, and (b) contrarians typically think no situation is ever as bad as it initially looks so surely BP is worth more than it's currently depressed value.
Addressing the latter first, I'd recommend investors look at GM, Chrysler, Lehman Brothers and Circuit City. Things definitely can get worse. Problems created across years of sticking to an outdated Success Formula, remaining Locked-in to following historical best practices, wiped out their investors. Things can definitely get worse for BP. It will not be acceptable for the company to remain focused on "business as usual" hoping to "weather the storm" and allow "things to get back to normal." That scenario is a death sentence. We haven't yet seen what new regulations, taxes and restrictions – nor the eventual cost of 20 years of dead seas charged to BP and its industry brethren – will cost. BP has to make changes if it wants to regain growth – and most likely if it wants to survive.
And this leads to item (a). Nobody knows the long-term costs chargeable to BP. Nor do we know what the future cash inflows will look like. We don't know the brand impact. Nor do we know how changes in regulations or industry practices will hurt cash flowing in the door. It's the inability of the past to predict the future that makes efforts at cash flow planning mute. Lots of number crunching isn't the answer – it's understanding that the assumptions could well be seriously changing. There are more unknown variables than known right now. Which makes it all the more important BP realize it must change it's Success Formula to make sure it not only avoids another disaster, but finds a way to profitably grow in the aftermath of this event and its changes on the industry.
Many are calling for firing the CEO, as 24×7 Wall Street does in "BP Can Deny CEO Departure Story; But Fate Already Set." I call this the hero and goat syndrome. Americans like to think that the CEO should be lionized as a hero when results are good, and blamed as a goat when results are bad. Unfortunately companies rely on lots more than CEOs (despite their pay) for results. The problems at BP are with the Success Formula – now some 100 years old – and the inability of the total management team to attack old Lock-ins in order to develop something new. As my last blog pointed out, even HBR doubted there was any reality in the "Beyond Petroleum" headline.
BP must attack its historical ways of doing business. This isn't just a short-term crisis. The Gulf disaster is the result of pushing an old Success Formula too far. Of going into deeper and deeper water, at greater and greater risk, for less and less yield in order to keep finding oil. Unfortunately BP seems to be viewing this not as an example of what happens when marginal economics keeps you doing the same thing, over and over, even as returns decline. Too bad, because this is the kind of event that highlights a serious change is needed in BP's future direction.
I was impressed with a Harvard Business School Working Knowledge survey result in "How Do You Weigh Strategy, Execution and Culture in An Organization's Success?" Respondents overwhelming voted that success requires managing "culture." And that is largely what BP now needs to do. The Beyond Petroleum strategy was clearly enunciated, but execution remained focused on the old direction because the culture did not change. And that's what attacking Lock-ins and implementing White Space is designed to do – move an organization's culture forward by addressing behaviors, decision-making structures and old cost models.
When I was a boy I'd see a tree show foliage problems and my father would say "we might as well cut it down, that tree is dead." I'd be shocked, the tree looked fine. But my father, a farmer, knew that the roots had been damaged. We were just seeing the slow process of death, that might take a year or two. Fortunately, BP isn't a tree. And although its Success Formula roots are in trouble, unlike a tree they can be changed. Let's hope the Board takes action to make changes quickly so BP's future doesn't remain completely imperiled.
For more on using Disruptions to address problems listen to my radio Interview "Disrupt to Win." Or listen to a short podcast on how to "Drive Innovation by Disrupting the Status Quo." Or read my CIOMagazine column on how to "Use Disruptions to Move Beyond Legacy" in thinking and planning.
by Adam Hartung | Jun 25, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
Leadership
BP's Only Hope For Its Future
It must throw out its formula for success.
"Beyond Petroleum?" BP looks anything but that now. How could a
company that spent so much money trying to make us think it was
something else remain so tied to, and now so damaged by, that product?
Was it just trying to fool us with those ads? Or is there something more
fundamentally wrong here? Perhaps something wrong in the management
system used not only by BP but by almost all companies today?
That's the first paragraph in my latest column on Forbes.com (Read BP's Only Hope For Its Future here). British Petroleum's situation was avoidable – if the company hadn't simply remained so dedicated to "Defend & Extend Management" – the practice of doing more of the same because it's what the company does best. Unfortunately too many companies follow this "best practice," sticking to their "core," and don't use White Space to find new opportunities for growth. All the way into disaster!
The Harvard Business Review web site describes the mismatch between BP's claim of heading in a new direction versus company reality in "The BP Brand's Avoidable Fall." British Petroleum's campaign is now a decade old, trying to convince everyone they weren't just an oil company. Looking back HBR recalls that authors then claimed about BP's campaign "this [strategy] seems to be at variance with organizational reality
and the [firm's] actual identity….[BP's] stated corporate aim of
being green-oriented…is an aspiration which to us bears arguably
questionable resemblance to near-term reality. At the time,
environmentalists estimated that only one percent of BP's activities
came from sustainable sources…Now, the stark contrast between BP's image and reality has substantially
weakened its reputation."
BP simply couldn't quit drilling for oil – because it was so dedicated to Defending & Extending the BP legacy. So it kept moving into more difficult fields, at higher cost, with lower yields. Now all those billions of dollars in advertising are lost, along with all the money for the clean up. Costs it will take shareholders years to recover. Even while leadership knew it had to move in a different direction – and advertised the need!
The spill costs of course move well beyond BP. For example, the network of small businesspeople that run BP refilling stations have been hurt as Crain's Chicago Business reported, "Chicago Gas Station Owners Hit By BP Spillover." Miles, and billions of dollars, removed from BP headquarters decisions, thousands of independent small businesspeople are losing revenue, due to the brand destruction created by BP taking greater and greater risks to Defend & Extend their oil business. Customers have a choice, and when a reputation is sullied many often change suppliers. Remember how Toyota car sales tanked as reports of their safety mishandling became available?
Despite the problems of Defending & Extending a business, leaders don't give up easily. The Daily Caller reports "Experts Say Obama's Drilling Plan Could Cause Another Disaster." Amidst this huge clean-up effort, there are many who want to maintain drilling activity – because short-term they want the jobs and economic benefits such drilling creates. Just the sort of marginal, Locked-in decision-making that is now hurting BP. The region is already losing fisherman, tourists and other businesses from this disaster. When will the Gulf Coast identify other ways to grow besides the economically and ecologically risky deep-water drilling activity?
BP, and the states affected by this disaster, desperately need to move "Beyond Petroleum." But doing so will require extensive use of White Space for finding and cultivating new businesses. It can be done. Yet so far, despite the horror of this disaster, there is more effort being expended to find ways to continue on the same route than disrupt old behaviors and find new sources of revenue. Not even a disaster of this magnitude disrupts those really dedicated to Defend & Extend their locked-in success formula.
As the article says, once you succumb to a Locked-in Defend & Extend strategy – like British Petroleum – management just can't help itself but to do "more of the same." Dedicated to Defend & Extend Management, no company could move "Beyond Petroleum." Are all (or most of) your resources dedicated to Defending & Extending your legacy business? Do you have White Space in your organization to move beyond your legacy? Or will it take a disaster to demonstrate how risky your strategy has become?
by Adam Hartung | Jun 22, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
According to Reuters news service "Dell in Talks with Google over Chrome O/S." I would like to think this is a big deal for Dell, and positive, but I'm doubtful.
Eight months ago I wrote (10/20/09 – Keep an Eye on Dell – Good Things Happening) that Dell's efforts to bring a smart phone to market showed real promise for the company. Michael Dell seemed committed to shaking things up in order to launch new products. And in February I wrote (2/22/10 Looking for Winners – Dell) not to be too worried about Dell's small desktop market share losses because Dell needed to be heading into new markets – like Smart phones – seeking growth rather than over-investing in its old desktop business.
But I've since turned much more negative. The Reuter's article points out that Dell still hasn't gotten the smart phone to market in the USA. A phone was released in China last year, but sales have been minimal. There is a vague promise (no date) to release a new product in China – but none in the USA. And a potential tablet (competitor to iPad) is considered by end of 2010, but the company stresses no firm date.
Dell is moving far too slowly, and is far too uncommitted, to new businesses. The company is listening to the analysts who have traditionally followed them – the large customers who have bought Microsoft products and are still doing so – and large vendors who want to maintain the status quo. All of these folks are as locked-in as Dell.
Meanwhile Apple and Google keep selling thousands of units into these rapidly expanding new markets, growing share as well as sales at substantial profit.
This effort by Google is certainly good for its Chrome O/S. Even if Dell moves slowly, having Chrome adopted into any part of the historically monopolistic Microsoft community is a good thing. And the announcement itself shows the fragility of Microsoft in its historical market as growth slows and large distributors look to new solutions for "cloud computing" from new vendors. So this is good for Google, and another dart into the wounds of Microsoft.
The market keeps shifting toward new technology and the vendors supporting it – making the re-invention gap bigger and bigger at Dell. I don’t think Dell’s management is up to the market challenges. They had a shot at real change, but by not giving the growth projects (then or now) real permission to do what it takes to succeed, including moving much faster to market, nor sufficient resources to meet market needs, Dell is hastening its own demise. With its outdated, and now low-return, success formula firmly locked in, Dell looks likely to follow Wang, Lanier, Burroughs, DEC, Silicon Graphics and Sun Microsystems into the history books.
by Adam Hartung | Jun 13, 2010 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
If your boss told you that he enjoyed your hard work, but he wanted to cut your pay 50% I bet you would feel – well – violated. Your hard work is just that; hard work. If you received $100,000 (or $50,000 or $250,000) for that work last year it would be hard to accept receiving some fractionally lower amount for that same work next year. Especially given that every year you are able to work smarter, better and faster at what you do. Because your execution constantly improves you'd expect to receive more every year.
But in reality, it doesn't matter how hard we work. What matters is the value of that work. It's why nearly incoherent ball players and actors make millions while skillful engineers barely make 6 figures. In other words, pay inevitably ends up being the result of not only the output – it's volume and quality – but what it is worth. And that the compensation is a marketplace result – and not something we actually control – is hard for us to understand.
Every years many pundits decry "excessive" executive pay. There is ample discussion about how an executive received a boat load of money, meanwhile the company sales or profits or customer performance was less than average, or possibly even declined. Of course the executives don't think they are overpaid. They say "I worked hard, did my job, did what I thought was best and was agreed to by my Board of Directors. I did what most investors and my peers would have expected me to do. Therefore, I deserve this money – regardless of the results. I can't control markets or their many variables (like industry prices, costs of feedstock, international currency values, or the loss of a patent or other lawsuit, an industrial accident, or the development of a competitive breakthrough technology) so I can't control the results (like total revenues, or total profits or the stock prices). Therefore I deserve to be compensated for my hard work, even if things didn't work out quite like investors, customers, employees or suppliers might have liked."
This answer is hard for the detractors to accept. To them, if top management isn't responsible for results, who is? Yet, shockingly, each time this happens investment fund managers that own large stock positions will be interviewed, and they will agree the executives are doing their jobs so they should get paid based up on their title and industry – regardless the results.
An example of this behavior was reported by Crain's Chicago Business in "Tribune's $43M Bonus Plan Lambasted by Trustee." Even though Tribune Corporation's leadership, under Sam Zell, took the company from profitable to bankruptcy, and even though they've been unable to "fix" Tribune sufficiently to appease bondholders and develop a plan to remain a going concern thus exiting bankruptcy, the management team thinks it should be paid a bonus. Why? Because they are working diligently, and hard. So, even though there really are no acceptable results, they want to get paid a bonus.
We all have to realize that our company sales and profits are a result of the marketplace in which we compete, and the Success Formula we apply. The combination can produce very good results sometimes; even for a prolonged period. Newspapers had a good, long profitable run. But markets shift. When markets shift, we see that the old Success Formula must change because RESULTS deteriorate. Slow (or no, or negative) growth in revenues and/or profits and/or cash flow is a clear sign of a market shift creating a problem with the Success Formula. When this happens, rewarding EXECUTION (or hard work) is EXACTLY the WRONG thing to do! Doing more of the same will only exacerbate bad results – not fix them
What's bad for the business, in revenues/profits/cash flow, must (of necessity) be bad for the employees. Not because they are bad people. Or lazy, or incompetent, or arrogant, or any of many other bad connotations. But because the results are clearly saying that the value has eroded from the Success Formula . Usually because of a market shift (like readers and advertisers going from newspapers/print to the internet). What we MUST reward are the efforts to change the Success Formula, to get back to growing. Not hard work. As much as we'd like to say that hard work deserves money – we all know that money flows to the things we value regardless of how hard we work.
I've long been a detractor of many executives – Brenda Barnes at Sara Lee has been a frequent victim of this blog. Whitacre of GM another. Steve Ballmer at Microsoft. That the Boards of these companies compensate these leaders, and the teams they lead, is horrific. It reinforces the notion that what matters is hard work, willingness to toe the line of the old Success Formula, willingness to remain Locked-in to industry or company traditions – rather than results. Results which give independent feedback from the marketplace of the true value of the Success Formula.
Let's congratulate the Tribune Trustee. For once, more attention is being paid to results than to "hard work" or "execution." Tribune – like General Motors – needs a wholesale makeover. An entirely new team of leaders willing to Disrupt old Lock-ins and use White Space to define a new Success Formula. Willing to move the resources in these companies, including the employees, back into growth markets. If more Boards acted like the Tribune Trustee we'd be a lot better off because more companies would grow and maybe we'd move forward out of this recession.
by Adam Hartung | Jun 9, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
I so enjoyed the feedback from my article on Chicago and Illinois politicians I decided to take on another sacred cow – so let's talk about education.
According to Inside Higher Education's article "In Search of Innovators" there is a distinct lack of innovation in higher education. They cite a number of studies that show colleges are much better at enrolling students than graduating them. Especially private schools and junior colleges. And, imagine this, professors and administrators are more interested in continuing their positions and jobs than what students learn ("learning outcomes" in the industry vernacular.) Seems that keeping things from changing is the highest interest for educators, rather than actually teaching anything students need to learn to compete today.
But, we all know this. We've all seen colleges that have courses taught by only one or two professors, who only teach at odd hours, only allow a few students, refuse to keep office hours, or refuse to post previous exams. We're all familiar with schools that limit the hours administration offices are open, and are intractable about the requirements for graduation – even if they were set 20 years ago.
Quite simply, Lock-in drives most schools. Programs like tenure which make it impossible to fire anyone help maintain Lock-in. And professors would rather argue about what they don't want to do than try anything new and different. For all of us who went to college, and especially for those of us with students in college, it's clear that students are a route to their money (or their parent's money) – sort of little money pumps – intended to allow the college to not change. Many colleges even brag about how little they've changed over the last 20, 50 or even 100 years! In a world where change is every present, and dealing with change is now one of the most important skills a young person needs!
According to The Chronicle of Higher Education "For Innovation to Occur, Colleges Need a Big Push, Scholars Say." This journal cites program after program where a college tried to start up something new, only to have the program fail. But of course, because there is no White Space in colleges. White Space is where you give Permission to break all Lock-ins and do whatever it takes to be successful – and then provide the resources for success to occur. This does NOT exist in a college, where none of the Lock-ins can be violated. A professor can't even decide to change from teaching in class to using video instruction or on-line training because it's not allowed. So how can something new really be tried?
Where we have seen growth in higher education has been in for-profit schools like Devry and Phoenix that have rapidly challenged tradition and moved into new education models. Traditional schools decry these institutions, claiming the quality isn't acceptable. Of course, the "quality" argument is what printers used to claim Xerox machines would never succeed. It's what DEC said about AutoCad – before DEC went out of business. It's what Kodak executives said would make digital photography a tiny market compared to film. It's what executives at Sony said would keep music customers from buying MP3 devices/music before Apple launched the iPod. Quality is the #1 excuse used by Locked-in organizations to justify why they shouldn't change.
Forty years ago it was pretty clear that if you could afford college and grad school, it was worth it. But as costs/prices have skyrocketed, and the relevancy of education in many institutions has declined, that argument has lost a lot of credibility. Increasingly students are saying they want their education to be meaningful, practical and applicable. The market has shifted. They want to study on their schedules, without giving up their incomes or struggling with horrible commutes. And increasingly, these customers are moving to the suppliers that meet their needs – rather than trying to Defend & Extend old practices.
It's ironic that in the one place where we should most be open to new models we have almost no innovation. But it's impossible without a change in the structures and processes – and that requires a willingness to create a lot of White Space. For most colleges, I'm not optimistic.
by Adam Hartung | Jun 6, 2010 | Current Affairs, Defend & Extend, Innovation, Leadership, Lock-in, Openness, Web/Tech
According to Crain's Chicago Business, "Walgreen's Same Store Sales Nearly Flat." Walgreen's has been Locked-in for 3 decades. Build more stores. Simple. Just like WalMart did for many years. Demand seemed insatiable, until there was a store on almost every corner. Build stores, turn the product fast and keep people coming in for prescriptions or something on sale. Their Success Formula worked, and it helped them grow and grow.
But then about 3 years ago growth slowed. A lot. Raising capital got a lot harder to build these stores, and the apparent need for more stores was a lot less obvious. But Walgreen's didn't attack it's Lock-ins to the old Success Formula. Management kept defending it, and trying to extend by acquiring other chains they could convert into Walgreen's. But as we've seen in same-store results, Walgreen's has stalled. And we know that less than 7% of stalled companies ever consistently grow more than 2% ever again. Walgreen's just refuses to realize that health care programs are forcing more people to drugs over the web, and that retailing is fast moving to on-line sales for both convenience and price. So the Success Formula keeps struggling a bit more every year, with hope that things will somehow return to the "good old days."
A much better management team is in place at Netflix. Netflix has clobbered Blockbuster with their on-line model for movie rentals. You'd expect them to keep pushing hard for on-line rentals, in order to Defend & Extend the Success Formula – just like Walgreen's management has done. In spite of the fact that everyone knows DVD rental growth is threatened by more people simply downloading movies. Thus, I was delighted to see Netflix publish this chart:
Source: BusinessInsider.com
Netflix has admitted that its "core" business will peak in 2013! How great. And what's even better is that they are rapidly changing their model by investing heavily into streaming downloads. Where most management would say "we have to stop that transition, it will cannibalize our very profitable existing revenues" Netflix is planning for the change – and preparing to help the market move in that direction!
Only by allowing a streaming download White Space team to be formed 3 years ago is Netflix able to make this transition. It attacked its Lock-in to the traditional – and wildly successful model – in order to allow a team to have the permission and resources to figure out how to move into the new business profitably. That means Netflix has a really decent chance of keeping the company growing as the market shifts! Great news for investors, suppliers, employees and customers!
You don't want to be like Walgreen's management. They may have a chart showing the maximum number of stores needed in the USA – but they won't publish it. Because they have no idea how they'll migrate away from the old Success Formula. They have no Disruptions or White Space. They are fighting market transitions, and slowly seeing results falter. But the growth stall is a big sign that Walgreen's has a lot of heavy problems ahead.
You do want to be like Netflix. Be honest about where markets are headed. Quit trying to protect an old Success Formula with arguments like cannibalization. Instead, attack the old Success Formula with Disruptions and launch White Space teams designed to figure out how you can grow with the market shift – even if price points are destined to deteriorate. Long-term its the only way to survive – and thrive.
Don't forget, I will be the keynote speaker for the breakfast CIO Perspectives meeting hosted by CIO Magazine this Wednesday, June 10. You can hear more about how to be a market leader using The Phoenix Principle at the Intercontinental Hotel Chicago – please register and I hope to see you there!
by Adam Hartung | May 26, 2010 | Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
In theory, Sustaining Innovations that help a company Defend & Extend its products are supposed to be cheap. The breakthrough is done, and the investments on variations, derivatives and enhancements are "engineering" as opposed to "science" so the development is supposedly more easily planned, the costs better understood and the returns more predictable. That's the theory, anyway, and as a result most managers constantly defend their decision to keep investing more in Defending & Extending past products rather than investing in new things which would develop new markets and new revenue streams.
But, like a lot of business myths, there's really no proof for this theory. It just sounds good. It seems "to make sense", and the big issue is that "it simply has to be less risky to spend on what you know rather than what you don't know." And "after all, this is investing in our own market and what could have a higher rate of return than defending our mother ship?" I'm sure everyone has heard these kind of comments when it comes time to allocate resources. Management supports doing more of what's been done, reinforcing Defend & Extend behavior. It just HAS to make sense to do more of what we know rather than invest in something new that we don't know as well – right?
But look at this chart from Business Insider:
Microsoft has spent billions of dollars in R&D Defending its desktop PC near-monopoly with enhancements to Office (Office 2007 and now Office 2010) and the operating System (Vista and System 7). It has spent heavily on other things as well, but in the end its entertainment division and mobile O/S products as well as others have not successfully grown revenues. As a result, Microsoft's value has not risen and Apple is about to eclipse Microsoft's value despite being a smaller company (see yesterday's blog for a more thorough review of valuation issues).
Now we can see that all this spending on R&D to Defend & Extend is in no way cheap. In dollars, Microsoft spent 3.5 times as much as Google and 8 times as much as Apple in 2009 – companies which as a result of their spending generated considerably more growth than Microsoft. Microsoft even spent more dollars, and more money as a percent of revenue, than IBM and Cisco (companies that rely heavily on hardware as well as software sales)! By any measure, Microsoft's efforts to Defend & Extend its "base," or its "core" has come at a very, very high price – in dollars or as a percent of revenue.
Consider that a good measure of R&D should be its ability to generate incremental revenue. Using that yardstick, Microsoft is a disaster, while Apple is a star.
Far too many companies Lock-in R&D and New Product Development to the existing business. The decision-making systems are geared to invest more in what is known. New investments are tagged with "risk adjustments" and "cannibalization charges" and a host of other costs to make them look less positive than doing more of what has historically been done. Lock-in to the Success Formula means that the financial review system, along with the technology assessments, are designed to give a major benefit to doing more of the same, while dramatically penalizing anything new!
In almost all companiess decision-making systems are designed to reinforce the Success Formula, not give an "independent" answer based upon markets. The processes are designed to do more, not do something new. And in the case of Microsoft, we can see how that has led to huge investments in simply defending the PC business while the technology marketplace is now rapidly shifting to new platforms – like mobile devices (smartphones and tablets), cloud-based applications and data access, and even gaming consoles. Competitors are developing a huge advantage by investing R&D and New Product Development dollars in new markets which provide greater growth opportunities – and higher rates of return over any time period other than the very short term.
Even if you're not in the computer/tech business, you don't want to end up like Microsoft. You don't want to over-invest in yesterday's solution trying to Defend it in the face of market shifts. That did not work out well for Polaroid, Kodak or Xerox which lost their luster as customers switched to new solutions and new competitors. Be sure to look not just at how much you spend, but that your spending is linked to markets and their growth, not simply doing more of what you already know!
by Adam Hartung | May 25, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
The leadership of Microsoft's entertainment division are leaving, as reported at TechFlash.com "Bach, Allard leaving Microsoft in Big Shift for Consumer Businesses." Whether by their own choice or by request, the issue is simply that Microsoft has not driven the XBox to a dominant position versus the Sony Playstation or the Ninendo Wii. It is competitive, but not a big winner. The entertainment division has only recently moved beyond break-even, after years of losing billions of dollars. In the high-growth gaming business, Microsoft has simply not performed, despite its vast resources. And mobile devices developed in this division have lost over half their market share in under 2 years to Apple and Google.
Some of the weakness may have been that the leaders were long-term Microsoft veterans, comfortable to Mr. Ballmer and other leaders, rather than executives committed to their markets. Messrs. Bach and Allard were not they type of leaders to challenge the Microsoft Success Formula, instead willing to accept mediocre results rather than violate Microsoft Lock-ins that would have jeopardized their careers. Microsoft was willing to lose money, and not be a big winner, as long as the division leadership didn't challenge Lock-ins or the company focus on desktop computing products.
I'm not optimistic now that the division is reporting directly to CEO Steve Ballmer. He had an enormous role in the company decision to commit vast resources to Defending the old Success Formula by massing hundreds of billions of dollars behind development and rollout of Office 2007, now office 2010, Vista and now System 7. Yet, these projects have done nothing to grow Microsoft; instead only helping the company hold onto old customers. Worse, Mr. Ballmer himself recently informed the world in his CEO Summit (as reported in Computerworld "Microsoft's Ballmer admits 'Window's Vista was just not executed well") that he's not a good leader of product development – costing the company thousands of man-years in wasted development when admittedly mismanaging Vista!
Chart source Business Insider
Now, largely due to the ongoing Defend & Extend management practices of Mr. Ballmer, Microsoft and Apple's valuations are in a dead heat. Growth at Microsoft is poor, while Apple with its multiple new products is growing much faster – causing Apple's value to catch up to what has historically been the world's largest software company.
As I commented on the recent interview for bnet.com (available as a podcast) Microsoft's Defend & Extend management practices are deeply rooted in the industrial economy. But they are insufficient for success in today's rapidly shifting marketplace. I discussed this in more depth for my keynote address at the Western Michigan Innovation & Energy Summit last week, and a second article was published in the local newspaper on Saturday "Customer is Always Right? Columnist says not for Innovative Businesses." Specifically, Microsoft's total commitment to maintaining old operating system and Office customers has created an inability to re-focus resources on high growth markets like gaming and mobile devices.
Although Microsoft has solutions – including tablet technology – it's management is Locked-in to Defending what it always did and not committing to new growth markets. Anyone who thinks Microsoft will be the major player in cloud computing, just because it has demonstrated some new products, must look closely at how poorly the company has developed these other growth markets. Technology and products are not enough when management is Locked in to protecting past markets. Microsoft is far behind Google, and has practically no catch of being a major player with so much resource dedicated to Office 2010 and System 7.
Thus investors as well as customers and employees are not doing so well at Microsoft. In the rapidly shifting technology and gaming markets, this inability to commit to new markets is deadly. For Microsoft, replacing the heads of the entertainment division is most likely analogous to rearranging the deck chairs on ocean liner Titanic. The pending outcome is rapidly becoming inevitable. Time to look for lifeboats!
