by Adam Hartung | Aug 26, 2008 | Defend & Extend, Ethics, General, In the Swamp, Leadership, Lock-in
Sometimes management behavior can cause outsiders to think the industry and company leaders fear growth. Take for example a new book about innovation in the movie business Inventing the Movies by Scott Kirsner (see at Amazon here or read a review in Forbes here.) As the author points out, after Edison invented the first Kinetiscope movies – which were small viewer-based single person devices – he saw no reason to move forward with a projection system. Why advance the innovation when multiple audience members appeared to risk the revenue? To Edison, he could assure each and every viewing created a payment with his single-viewer technology, but the audience viewership meant he would lose control and possibly see revenue cannibalized. Fear of cannibalization caused him to avoid new innovations which would grow total demand, and considerably grow the revenues of his fledgling movie business.
But we all know this didn’t happen. Projection systems only caused more people to want to go to the movies. Then when talking movies came about again the industry feared that investing in sound equipment would be a cost not recovered and they delayed and delayed. But talking films again increased the audience. And this cycle played out again with color movies. And lest we not forget the wars that were fought over video tapes of movies, which all industry leaders feared would kill the business. Yet, videos (and now CDs) have only increased the audience, and demand more.
All businesses develop a Success Formula early in their life cycle. That Success Formula ties the Identity of the business to its strategy and tactics. So a tactic as simple as having a single-viewer kinetiscope becomes almost impossible to change because it gets linked to the identity of the business (and often its founder – in this case Edison). Thus it takes a new entrant, often from outside the industry, to parlay the new technology into the market. This new entrant, not afraid of controlling the business through administration of an old Success Formula, is able to bring forward the new technology/solution and build the new audience/demand. And often we see the old industry leader far too late to change – stumbling, fumbling and failing.
Businesses need not follow this course, however. If they are willing to invest in White Space they can test new solutions. They can figure out new Success Formulas. They can evolve, and they can grow. Doing so isn’t really hard, it just takes a willingness to accept the requirement for White Space to take advantage of market shifts. White Space allows you to migrate forward, rather than constantly fall back into Defending & Extending what you’ve always done.
As we all know, each innovation in the movies has grown the industry, not been its doom. And that’s true in all industries. Yet, the largest players are rarely the ones who lead these shifts. Look at how it took Apple to bring about the revolution in digital music, rather than Sony. Lock-in gets in their way. If we want to avoid being pummeled by market shifts that create great growth opportunities for the new competitor we have to be vigilant about implementing and maintaining White Space that can provide our beacon for growth.
Where’s your organization’s White Space?
by Adam Hartung | Aug 25, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership
Most managers want to move up. It is characteristic to have ambition in organizations. To want to do more, to accomplish more, and to receive more compensation. So we look for opportunities to do more, inside our organizations and outside. Usually we move positions because we don’t have upward mobility internally, so we find the opportunity externally. But, not all upward moves are worth the risk.
Look at the revolving door installed by Mr. Lampert at the executive suite of Chicago headquarted Sears (see chart here). (Read more about another round of Sears executive changes here.) Mr. Lampert has convinced some very talented people to take top positions at Sears. He has hired people away from companies as well known as Yum Brands, Motorola, Proctor & Gamble, Now he’s hoping that a new crop of execs will save the company from its perilous slide which has cut equity value more than 50% in the last year. But, rather than becoming business saviors, these new executives will probably be limiting their careers when Sears continues to falter.
It’s the nature of leaders to be optimistic. To think they can accomplish what previous managers couldn’t. And some are better than others. But we should eschew the "hero" complex entirely when looking at a new position. Success will have more to do with circumstances than us as individuals. And when a business is struggling, like Sears, it’s only hope to turn around requires it give up looking in the rear view mirror at old advantages and focus completely on the future. It must be clear about competitor strengths, and ignore the temptation to think of customers as an asset. It must Disrupt the old Lock-ins, and nullify the Status Quo Police. And it must implement White Space where the manager has permission to do whatever it takes to succeed – unbounded by old Lock-ins – as well as the resources committed in advance to accomplish the goals. Without those 4 things, success is not going to happen. No matter how good you are.
Looking at Sears and Mr. Lampert we know a few things. He keeps talking about the old Sears advantages, and trying to find a way to recapture them. He’s trying to plan for the past, not the future. Meanwhile, he isn’t looking for new customers by being a cutting edge competitor, instead he’s trying to hang onto old customers and Defend them from better competitors. Thirdly, he likes to "whack the chicken coop" by making lots of noise and firing people, but he’s not willing to Disrupt old processes, practices and behaviors in order to nullify the Status Quo. And Fourthly, he absolutely doesn’t have any White Space as he keeps trying to fiddle with the old Sears to improve it. Rather than create White Space he shuts it down in cost cutting actions while trying to "fix" a hopelessly out of date Success Formula.
Those who left good jobs to go to Sears for Mr. Lampert have not escalated their careers. And the new batch of managers he’s hired will fare no better. Sears under Mr. Lampert is not following The Phoenix Principle to turn itself around, but rather keeps trying to find some way that it can be cheaper, faster, better and thus Defend & Extend what worked 30 years ago.
If you want to make a career move, do not listen to the Siren’s song about how everything can be different if the right person is in the job. Circumstances make more difference than the person. We work in organizations that have powerful Lock-in to behaviors, structural systems and cost. Unless the primary pieces of successful change are there, no individual will make much difference. Yes, it’s good to want to get ahead. But make sure you don’t take a job where your head will be handed to you.
by Adam Hartung | Aug 21, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
What is success? We often think of it as accomplishing goals. If we set a goal, and achieve it, we succeeded. If however we repetitively don’t achieve goals that leads to failure. So, you would think that managers would do the things that would most likely insure reaching goals year after year, quarter after quarter and month after month. And because markets shift, that would mean doing things differently to deal with market shifts.
But if we look at Chicago-based United Airlines, as an example, we can see that is not how many leaders define success. Their definition of success is all about Defending & Extending an old Success Formula – even when the results of that Success Formula have sunk to dismal lows. Often leaders, and this does appear true at United Airlines, would rather fail, by missing goals over and over, than Disrupt and use White Space to change. As we know, United fell into bankruptcy (not the first time) earlier this decade blaming the events of 9/11/01. But everyone who’s followed United knows the company has never flourished, and has a long litany of missing its goals for revenues, revenue per passenger mile, and especially all measures of profit.
No business can succeed without the support of its customers and employees. Investors will not achieve a satisfactory rate of return when customers and/or employees are unhappy. Yet, let’s look at the actions United is taking to deal with its most recent hard times. It lengthened check-in lines by refusing to develop a streamlined method for gate access – preferring to maintain its status quo while security requirements grew substantially. It started charging to check a bag, even though carry-on bags are the biggest problem for security checks and boardig. It cut food on all domestic coach flights. And now it has cut food for most international flights in coach class (read article here.) With each step, United Airlines might as well get a bullhorn and shout through the terminal "we think you customers are irrelevant to us as an airline. We wish you would shut up and do what we tell you to do and quit complaining. We’d be a great company if it wasn’t for you stupid customers."
United Airlines’ unions have made round after round of concessions the last 25 years. All classes of employee, from pilot to gate agent to flight attendant to ground crew to mechanic have taken pay cuts. They have deferred compensation into pension plans, only to see the deferral wiped out by company losses. They have seen benefits slashed. And they have seen work rules tightened in order to pursue tighter enformcement of behavior intended to cut hours worked, overtime and even base pay. Meanwhile, the executives (and there’s been a lot of executives through the United revolving door) have paid themselves quite richly on both base pay and bonuses – and departing execs have received very rich golden parachutes. With each management decision they got out the old bullhorn and announced "hey, you employees should just shut up and be glad you have a job. We run this place, for better or worse, and you don’t have a say in what we do. You’re the reason we’re not a more successful company, you crummy employees, and its because of you that we as a management team look so incompetent."
Now, the employees have taken to wearing plastic bracelets that say "Glenn’s Gotta Go" referring to a dismissal of the CEO (read article here.) And management is taking the tack that these employees are out of line with this behavior. Management says employees should "suck it up" and keep their grievances quiet. Even though management has not done the employees any favors for over 20 years, they are upset these overworked, much abused and underpaid employees would offer up this quiet form of civil disobedience. But employees are finding themselves more aligned with customers than management these days – and their wrist bands are a show of unity with the customers that management is the group out of step with shifting market requirements.
At the end of the day, management is responsible for results. Current results. United could have hedged fuel costs, like Southwest, and never gotten into its current jam. Management could have acted at any time the last 30 years to work with Unions to make a better airline, rather than maintain long-term contentious negotiations keeping them from the benefits of employee ideas. United Management could have launched Ted with the permission to develop a new Success Formula rather than hamstringing the idea to nothing more than a name change on certain flights. Management could have done many things differently.
But over the years, despite different people in the managerial seats, United Airline leadership has chosen to remain steadfast to its Lock-ins. It has consistently chosen to Defend & Extend a lousy business model that’s never consistently made money. For United Airlines management, success has not been about meeting goals – it has been about extending the status quo. No matter who suffers amongst customers, employees or vendors. Despite what management is saying, these leaders would rather fail than change. Success isn’t nearly as important for them as we would assume.
by Adam Hartung | Aug 19, 2008 | Defend & Extend, General, In the Rapids, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
Last week BusinessWeek reported on how Dell was making a strong play to catch Apple’s iTunes in the digital music marketplace (read article here). On the surface, it sounds like a good set of tactics that might work. But it probably won’t.
Apple (see chart here) is a company filled with Disruption. In fact, Disruption is the lead in the Businessweek story. The reporter, Peter Burrows, discusses how a very disruptive Steve Jobs made it impossible for one of Apple’s engineering execuutives to remain at Apple – subsequently causing a lawsuit and payout by Apple. Typical for Mr. Jobs, he was ready to Disrupt rather than continue on a path he had lost faith in. So he made a hard turn to drop Tim Bucher. It is through this process of Disruption (painful as it is) and using White Space that Apple’s market value has increased by some 13x the last 5 years.
As a disruptive leader, heading a Disruptive organization, Mr. Jobs has Apple constantly creating White Space and doing new things. Apple has gone from the Swamp – practically the Whirlpool – back into the Rapids. It is sustaining its big hit products like iPod and iTunes with new innovations, while using White Space to jump into new markets like mobile telephony and wireless hand held computing. These Disruptions and White Space projects keep Apple working on the process of innovation to grow existing markets and enter new ones.
Dell (see chart here) is a very different company. Dell is still working hard to "leverage" its "core competency" in direct-to-customer sales. This approach has led Dell to attempt augmenting its "core" product lines of PCs and laptops with high definition televisions, and even its own mobile MP3 device. Both are long gone. Dell is still Locked-in to the culture, processes, IT systems, HR practices, decision-support approaches, vertical silos and knowledge sets that are focused on personal computing. Dell keeps trying to find ways to Defend & Extend its "core" in the hopes that late entry into new markets will allow the company to regain past rates of return. And it’s market value is down about 1/3 in the same timeframe.
Dell has added an acquisition (Zing) to its market approach, along with the engineering exec formerly fired by Mr. Jobs. But what Dell has not done is Disrupted itself. It has not admitted it must change its Success Formula to really be successful. And, it has not created White Space with permission to do whatever is neccessary to succeed – rather than operating within the confines of the old Success Formula and old Lock-ins. Without Disruption and Lock-in this project will be hamstrung by old assumptions, culture and structural restrictions which will stand in the way of creating a new Success Formula and market success. So even though the new Dell project sounds pretty good, it is probably won’t work because the project is still in an organization that first and foremost wants to sell more PCs – it wants to sell boxes in very, very high volume to businesses that can buy thousands.
You may ask if this isn’t possibly a replay of Apple versus Microsoft (see chart here)? And the answer is no. In both markets Apple took early leadership. But in the case of the Mac versus the PC Apple Locked-in on its hardware and software platform as a system sale and was unwilling to consider any other option. At that time Apple fixated on Defending & Extending the Mac. Meanwhile, Microsoft focused solely on software – and not only the operating system but the most critical and common applications (word processing, spreadsheet, presentation and database). By changing the competition to a "Windows + Intel" platform Microsoft was able to focus on software innovations which it could then take to market faster than Apple could react.
In the early 1980s, Microsoft was not saddled with a two decade Locked-in legacy like Dell, and Microsoft was not trying to Defend & Extend its DOS operating system when it launched Windows followed fairly quickly with Word, Excel, Powerpoint and Access. Meanwhile in 2008 Dell is a 25 year old company that has historically eschewed R&D and new product development, relying on vendors to do such work as it put all energies into supply chain management and direct-to-customer selling. Now in its effort to compete with Apple, Dell is trying to build its new solution inside this old fortress – which is designed to do something entirely different. Because Dell won’t Disrupt itself, admitting it needs to evolve, and won’t create White Space, it’s Lock-ins will be the hurdles that will stop progress. It’s this legacy – a very successful one producing above-average results for most of the 1980s and 1990s – that will hinder Dell’s success. One it can overcome – but shows no signs of taking the necessary actions.
by Adam Hartung | Aug 14, 2008 | Disruptions, General, Leadership, Lock-in, Openness
The Phoenix Principle applies not only to companies, but industries and even whole economies. There is no doubt countries Lock-in on a market approach, and then Defend & Extend it. And these Locked-in countries become victims of market shifts and new competitors who are not afraid to Disrupt and use White Space to change.
Just think historically for a moment. There was a time when the Dutch controlled more land than any other country. As leading explorers, their territories were the most vast. But they were unable to evolve a system of government which would allow them to Defend & Extend their territories, and they fell from the top perch. The Spanish became the next big economic engine, developing extensive colonies for their King, Queen and church. But, a Lock-in to how they would govern became rife with corruption and eventually they lost their leadership as their floating armada was destroyed. The British led the industrial revolution, and took over global economic leadership, but unable to evolve quickly enough from a monarchy to a more participative government they lost leadership to competitive countries who built systems of self-rule (such as the Americans.) This is not intended to be a chronology, but rather examples of economic Lock-in and inability to Disrupt and use White Space to maintain economic leadership.
We are now looking at what appears to be another major transition. In 2009 or 2010 China will become the #1 manufacturing country in the world, pushing America to #2. As the world has witnessed this week, watching the Olympics, the Chinese are making great strides in pushing forward – changing the face of business competition as they grow in almost all parts of the global economy. Today, the price of gasoline globally is being increased largely by exploding Chinese demand for fossil fuels to promote their economy – and current prices are something they are able to pay while still achieving their country goals for growth in jobs and economic prosperity. Meanwhile other economies, like the USA, are plunging into recession partly aided by high energy costs.
We can see that the Chinese have been good implementers of The Phoenix Principle. Let us not forget that within our lifetimes this country was a deep economic backwater under the no-growth leadership of Chairman Mao and his Gang of Four. Despite one of the world’s oldest cultures just 50 years ago China was not an important economic force. But:
- The Chinese demonstrated an ability to visualize a very different future. After Chairman Mao died the leaders developed scenarios for China that were built upon ideas for how they could lead. Remember that China had no foreign exchange, nor available assets (such as oil or timber) to sell. Yet, the leaders were able to create scenarios of China as a world power. Thus, when the Soviet Union failed the Chinese were primed and ready to stop spending money for tanks on their western front and invest in manufacturing and infrastructure for growth.
- The Chinese focused on competitors to learn how to succeed. And they looked not just at the Japanese and Americans – who were the leaders – but at all countries for how to build a strong, high growth economy. By looking at emerging nations they learned what worked, and where the problems layed, and they designed an approach that would allow them to unseat the Americans, Japanese and Europeans. They did not try to compete like Americans, but rather built their own competitive engine which was unique – and we now see almost beyond competition with U.S. manufacturers.
- The Chinese were quick to Disrupt. Old practices, some enforced with death sentences, were overturned to allow people to do new things. When necessary, entire cities were flooded to create better waterways and fresh water for industry. Homes were destroyed, and some historical landmarks, to make way for highways. The Chinese were willing to challenge their internal Lock-ins, and use Disruptions to create opportunites for doing new things.
- And they have been very willing to create and use White Space for developing a new Success Formula. It wasn’t long ago China retook possession of Hong Kong from the British. Thousands of Hong Kong Chinese fled to American, Canada, Australia and elsewhere fearing a loss of freedoms. But the Chinese turned Hong Kong into the White Space from which they could learn how to operate a capitalistic system that would work for China. As they learned, they utilized those learnings to open new industries and new cities which allow intense capitalisitic style competition in a country that still values central planning. White Space has allowed the Chinese to hone a new Success Formula which is now growing much, much faster than anything in the "developed" world.
The Chinese have emerged as fierce competitors. The market has shifted. Fiddling with exchange rates may help U.S. manufacturers, but it is just so much short-term financial machination. While America sits in a debt crisis threatening to shatter real estate values and strangle economic growth, the Chinese are rapidly becoming the world’s economic leader through manufacturing. For Americans to think they will ever recapture the manufacturing lead is nothing but fairy tale thinking. That game is over, and they won. Americans can hope for a return to the past, but hope won’t grow the economy.
America, and Europe, must realize the market has shifted. Rather than use tactics trying to Defend & Extend old Lock-ins, leaders must Disrupt. White Space must be used to define a new Success Formula. Here America has strength. One benefit of the American structure is how much White Space is created through entrepreneurship.
Now, more than ever, it is time to funnel resources to those White Space initiatives to develop a new American economy. America went from the #1 agricultural economy to the #1 industrial economy via its ability to look forward rather than backward, to Disrupt and to follow those on the front edge of the economy into new businesses. And that is what must happen today. The focus must be on building upon leadership in advanced electronics and telecommunications, nanotechnology and bio-engineering (3 examples – not exhaustive) to find the next economy – and build a Success Formula capable of regaining economic leadership. Or, it can slip further into the Swamp of slow-to-no-growth like those countries which are the heritage of most American leaders – Britain, France, Germany, Italy and Spain. All wonderful countries with a spectacular past.
by Adam Hartung | Aug 6, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle
If you don’t control your destiny, who does? Most Americans are especially proud of their independence, because it gives them the strong sense that their destiny is up to them. While everyone understands the role of luck and timing, those who also understand their strengths can find ways to maximize them. Anericans have the opportunity to make the most out of our circumstances. And that independence is also true for business. In America, home of capitalism if not the birthplace, any business has the ability to direct itself toward greater returns and success. And the larger you are, the greater your resources, the greater your ability to control your destiny and maximize your results.
So how is it that General Motors, the world’s largest auto company, would say that it’s destiny is not in the hands of its leaders? As the Board of Directors at GM reinforced its support in its CEO, I was shocked to read the following quote in today’s Chicago Tribune (read article here):
- "Most of the problems the company is suffering are not of their own making. There’s been radical changes in North American demand," said David Hel, an analyst at Burnham Securities Inc. in Sierra Vista, Ariz., said. "I don’t think making a change at the top is going to solve that."
Excuse me???? What was that? We’re to believe the largest auto company in the world, with all those assets, all that cash flow, all those employees, was without the ability to influence its own competitiveness and results? We’re to believe that no leader would have managed this absolutely dysmally performing company any better the last 5 years? The CEO, who over the last few years has watched the company lose market share, see it’s share price drop to a 54 year low (chart here), sold off many of the most valuable remaining assets (like GMAC) and overseen write-offs that exceed the entire market value of the firm is not responsible?? I do hope your investment firm receives enormously large fees for helping GM with its pension plan investments, or whatever it is you do for them, to make such a blatantly ridiculous comment. Because you just shot your personal credibility all to heck. l’m sure employees and investors could help identify a raft of better leaders than the ones who drove GM into its current dire straits. Mr. Waggoner may be well educated, well speaking, bright, cordial, tall, and good looking – but he’s done one heck of a terrible job as CEO at GM.
I guess following Mr. Hel’s confused thinking the leaders at Toyota, Honda, Nissan and Kia have no responsibility for the success of their companies. It’s all just a random set of variables that leads to success, or failure for an auto company?
Time for a reality check here. Of course the decisions made by leaders at GM were very different than the decisions made by Honda’s leaders. And the outcomes are radially different. What has befallen General Motors is a failure to recognize that markets keep growing, just in different ways. The demand for transportation has never been greater than it is today. Sure it may have shifted, from horses years ago to trains to automobiles to airplanes. And the kinds of autos people want to buy may have shifted around since the Model T was number 1. And the growth in auto sales may now be greater in China and India than the USA. But the demand for transportation is growing, not declining. So the market is growing – just not GM. Because GM quit trying to grow, and tried to Defend & Extend its practices and traditional markets.
GM leadership was willing to consider itself a "mature" company. Thus GM’s management expectations for growth were allowed to subside. Instead of measuring itself against total growth, managers became happy to talk about GM share and growth in selected segments. Thus GM could justify its below-market growth, and claim that it was an acceptably mature company. The leadership was OK with performing poorly because it abdicated its responsibility to growth – despite the impact on shareholders, employees, suppliers and customers. Management, and apparently the Board of Directors, is more happy to fail as GM than to become a better company – albeit one significantly different than the one sucking tail pipe fumes now.
Once any leadership team accepts that slower growth is acceptable, ultimate failure is a fait accompli – it will happen. Growth absolutely will slow. And eventually that will lead to enormous troubles. For any analyst or investor to claim that growth is out of the hands of management is syccophantic. As we know, despite the move to small cars in the 1970s, then big cars, and to higher quality cars, and then to higher mile-per-gallon cars year after year the offshore manufacturers have been growing share at the expense of the U.S. companies (except for the great success Chrysler had prior to its acquisition and innovation killing management changes by Daimler Benz). These offshore competitors did not relegate themselves to excuses about shifting customer tastes between segments as they came out with new models that covered the board – including pickups and SUVs – to keep their share profitably growing.
If you haven’t thrown in the towel on GM – you should definitely do so now. Clearly, the leadership team has given up on figuring out how to be successful. They are hoping to do no more than survive by doing what they’ve always done. And we know that won’t work. They may survive a while, but without growth the competitors will eventually eat up all their customers, resources and eventually them. By admitting they can’t believe a different leadership team could find a better way to compete, and grow, demise is a fait accompli.
by Adam Hartung | Aug 4, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
We all know we’re going to die. But we don’t usually think about it as we live each day. We pretty much run our lives the same until we are exposed to a new threat, like a particularly dangerous intersection or a tainted food, and then we change our behavior to deal with the threat. We know the average longevity for an American adult is around 75, so we fully expect to live that long and we don’t really think beyond that.
The same is true for most businesses. Yet, for about a decade we’ve known that the odds of a healthy public company surviving a mere decade is, at best 50/50. With such a short expected half-life, it should be surprising that pretty much all businesses do their planning as if they will go on forever. We apply optimism to our businesses the same way we do our lives. No CEO or other top executive will say "I imagine my company is in the half unlikely to make it another decade." Individually this makes sense, but collectively it is a disaster. Business leaders keep being surprised by the fragility of their Success Formulas as their businesses fall into the Whirlpool, wiping out shareholders and bondholders as well employee jobs.
Last week Chicago woke up to the painful, overnight demise of Bennigan’s (read story here). One of the oldest casual dining restaurant chains, Chicago was one of Bennigan’s top markets with 10% of its company stores located here. Also, Bennigan’s largest store was very visibly located on Michigan Avenue in the heart of the city. So Chicagoans were very surprised that at midnight on July 29 the owners called up store managers telling them to shutter the stores – the company is liquidating. Apparently the chain could not compete in a market of recession-softened demand, busted real estate values and higher food prices. So overnight, the business disappeared – leaving franchisees of 140 stores wondering what they heck they’re now supposed to do.
Bennigan’s, owned by Metromedia Restaurant Group, is a startling example of the myth of perpetuity. Despite being one of the very first casual dining concepts, increased competition was not hard to spot. Likewise, the dissolving of real estate values has been happening for months – like a slow pour of honey. And that recessions cause downdrafts in eating out has been known ever since restaurants have existed. And that food costs would increase was being predicted almost 3 years ago as fuel prices went up and showed no sign of a major downward reversal. It takes a lot of fuel to make and transport those quasi-prepared meals to restaurants – as well as a lot of energy to heat and cool the locations to customer expectations. None of these trends were hard to spot. But somehow, Benegan’s management did not plan for them.
As management Locks-in on its Success Formula it becomes blind to changes that could be very threatening – possibly business ending. As problems develop, seen in revenue or profit declines, the tendency is to say "we have to do more of this, do it faster, do it better, do it cheaper." When reality may be there is a need to take much more drastic action. But the desire to Defend & Extend becomes paramount among the optimists, who keep hoping for "things to return to better conditions." When, often, the current situation is more likely "the new reality." Or "the new normal." The past conditions are very unlikely to ever return.
Anyone expecting a return to widely available, extremely low cost credit had better think again about all those banks writing down billions of loans, and the near collapse of the mortgage industry as Freddie Mac and Fannie Mae stand on the brink of failure. And as auto leasing companies shut off all leasing products due to fear of lower residual values. Anyone thinking about a return to rapid U.S. job expansion had better take a look at the videos of hundreds of millions of workers in China, India and South America all desperate for a job at any wage. Anyone expecting lower taxes and a government bail-out had better take a look at the record-breaking deficit built up the last 8 years (when the budget was last balanced) and the expected upcoming costs for war (continued or ending), health care, and the aging/retiring population demand on social security.
What happened in the past was then, all that’s important is planning for the future. Without taking a very sobering look at what might happen, it’s easy to be Pollyanna. And that is how leadership teams fall into the half of businesses that don’t survive. It’s not lack of hard work. It’s an unwillingness to realize things change and we have to prepare for those changes. If we get stuck in D&E management, we keep doing what we always did despite declining returns. And eventually, you just can’t keep going any longer.
Failure rarely is as dramatic as it happened at Bennigan’s. Usually the wind up happens through an acquisition and slower shut down (like JPMorgan is about to complete with Bear Sterns), or through a longer process of management bleeding out the company assets (not unlike SBC’s takeover of AT&T). But the end point for Bear-Sterns and Bennigan’s were the same. They are no more. Any management team unwilling to accept the staggeringly pessimistic statistic that it has a 50% chance of failure in a decade is a likely candidate.
Keep that in mind GM, Ford, United Airlines, Delta and Citibank. We don’t like to think these sorts of iconic companies with long histories and past glory can disappear. Yet, past members of the Dow Jones Industrial Average included Woolworth’s, American Can, Johns-Manville, Esmark, Inco, Internationals Harvester and Nickel, Nash Motors, National Distillers and Swift. None of those DJIA companies thought they would ever leave the DJIA – much less disappear. Yet they did. If we run our business as if it can go on forever by doing more of the same we doom it to demise. Whether it’s fast like Bennigan’s, or more slowly.
by Adam Hartung | Aug 1, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Fear is a good motivator. But when the fear goes beyond that necessary for protection, it can become paranoia. While it’s not a word we like to think applies to us, in Defend & Extend organizations paranoia is fairly common. Defending the Success Formula, and it’s Lock-ins, becomes so paramount that anything which even looks like it might affect the Lock-in can cause extreme over-reaction.
Take the reaction Wal-Mart displayed when it started telling employees they needed to fear a Democratic win next fall (read article hear.) Wal-Mart certainly has its share of problems, but they won’t be fixed, or turned into a disaster, by whoever is elected in the next Presidential campaign. Yet, the leaders at Wal-Mart are so fearful of anything that would upset their Lock-ins that they are now telling their employees they had better vote Republican.
Wal-Mart’s credo is low cost. And somewhere along the way, this included paying its employees no more than it has to. The stories abound of Wal-Mart employees so underpaid they have to use food stamps or other government welfare subsidies to survive. And everyone is familiar with the armies of Wal-Mart employees lacking health care coverage. This Lock-in, to everything being low cost – including employees – caused Wal-Mart to develop a pathological fear of unions. A paranoia. And that has led to a fear of Democratic politicians.
Once unions were powerful in America. But you have to go back to the 1950s and 1960s. Then threats of union boycotts or strikes actually caused management to make decisions that were not balanced, but instead designed to avoid union wrath. But even at its height, non-government worker union participation never reached more than 50%. Now, union participation is only 8% – and that is down 50% since the mid-1980s. Unions are not a threat to any business leader today – including Wal-Mart.
Yet, as the article details, even minor union activity has caused dramatic over-reaction within Wal-Mart. When one store achieved union representation for its butchers Wal-Mart got rid of butchers by going to meat cut at the slaughter house. When a store in Canada had its store personnel unionize Wal-Mart closed the store. And now Wal-Mart is so afraid that unions might regain some strength they are trying to affect the votes – one of the truly independent actions all Americans have – of its employees.
A union would not bankrupt Wal-Mart. It might even make the company better! Yes, its cost might rise – but as we’ve seen low cost is not the only way to compete. The cost of a living wage with health care for all full-time Wal-Mart employees would not even cost retail prices to rise 2%. So it’s not like Wal-Mart loses its ability to be low-cost if employees had a decent wage and benefits. Moreover, if Wal-Mart had to pay better it just might have to rethink some parts of its Success Formula. And that just might help Wal-Mart adjust to changing market circumstances and become a far better competitor.
By trying to "stamp out" unions, and certainly deny their existence inside Wal-Mart, management is being paranoid. So driven to defend its Success Formula that it won’t consider options. Most Americans want their cohorts to have the basics covered. And while liking low prices, they are willing to pay for good products and good service fairly. And instead of seeing Wal-Mart as a company that abuses employees, unions could cause people to say "Wal-Mart is a great place to work. They treat people well. Let’s shop there."
D&E breeds paranoia. Protecting the Lock-ins to an extreme. And that’s the sign of a company in trouble. Because inevitably, all companies have to migrate to changing markets if they want to be profitable longer-term. The sooner management identifies paranoia, and kills it, the faster the company can react effectively to market shifts and improve its profitability. But don’t expect that to happen at Wal-Mart.
by Adam Hartung | Jul 31, 2008 | Disruptions, In the Swamp, Leadership, Lifecycle, Lock-in
I talk a lot about company Success Formulas. They are easy for us to see, and easy to discuss. But did you know that economies have Success Formulas as well? Countries, and the people who run them, have Success Formulas and Lock-in which can have a huge impact on our results.
China and India long have had Success Formulas based on limited trade, and reliance on central planning for everything they do. China focused most of its attention on its enormously long border with the Soviet Union, and it maintained its Lock-in to traditions centuries old as it protected itself from its most critical enemy to the west. After India found independence from England its leaders formed a sort of quasi-socialist government which constantly balanced trade and subsidies from the Soviet Union and the USA. Both countries, desperately poor, were more focused on protecting themselves from war with the nearby Soviets even if it meant widespread poverty – for which it asked the USA to help.
Then the Berlin wall crumbled, as did the Soviet Union. This sudden market shift challenged both countries to rethink what they needed to do. Quickly, both made changes in their policies which allowed them to open up White Space for doing more with the USA. Without a need to balance the US against the Soviets, it became in their best interests to find ways to be more pro-American. As a result, both quickly made advances to use capitalist principles for doing business with US and European companies (more US than Europe, by quite a bit however). Internally things didn’t change much in either country, as these White Space projects were really geared only on selling to America in order to gain badly needed foreign exchange which could be used for development as decided mostly by their central planning committees.
Today, despite the altered world order, the Chinese and Indian internal Success Formulas are largely unchanged. Think of the export zones in which all these offshore people work as "skunk works" projects within the country. In both countries, well over 90% of the population does not share in the wealth created by the offshore work. Poverty is still rampant, potable water scarce, and the population struggles for education and better circumstances. There was no "Disruption" within each country. Only a willingness to experiment in doing something different if it could improve its position by earning foreign exchange and increasing aid from the wealthy Americans. There was no Disruption, and largely no internal change in how either country felt economies should be planned.
Behind the business scene, largely not even known by most Americans, there have been ongoing negotiations about import tariffs and trade quotas between America and Europe – largely versus China and India. Organized under the banner of the World Trade Organization (WTO) these "Doha negotiations" have been going on for years (read about the Doha development negotiations here). These negotiations are where the official governments discuss things like subsidies and tariffs for agricultural products, and basic materials like steel. Its here where Asians yell at Americans for subsidizing farmers, which lowers grain costs, while these countries refuse to import American grain because they fear it will force their peasant farmers into starvation on their small, uneconomic farms. It’s here where the offshore players scream for market access to sell steel at their marginal cost, while Americans point out that their steel was made in grossly polluting plants, using labor barely paid above slave wages in conditions intolerable by any western standard.
This week, after 5 years of ongoing negotiations to allow for more trade growth (largely through more U.S. exports), the talks broke down. (read article here) Some say it’s "fair trade capitalism" versus "communism". But these labels don’t much help us understand the importance of this breakdown. As Tom Friedman pointed out in The World is Flat, we now operate in a global marketplace. Lots of people depend on those containers of goods moving over the ocean – or those terrabytes of digital information passing along the satellite connections and undersea cables. Everything from what we buy at the local store, to the price of rice, to the production of automobiles is affected by these negotiations. There is no doubt that our imports and their lack of imports has made a huge difference in the everything from the number of jobs in America to the value of the greenback. Because no country operates without some subsidies and tariffs, everyone has them. And right now, these agreements are highly valuable to the Chinese and Indians, while not so good for Americans.
The only way to understand how we can move forward is to understand the differences in the Success Formula for the American economy, and theirs. Americans long ago swallowed the bitter pill of agricultural reform. Today less than 5% of our population works in agriculture – compared to over 80% in China and India. Additionally, we have been willing to allow low-value work in things like textiles and metals production to go elsewhere (including Mexico and many other developing nations) while our workers moved into higher-value-added white collar jobs. The American Success Formula is to allow companies to fail, to allow market forces – brutal as they may be – to alter the what people do, and how much they are paid. So Americans see no problem with open borders – and even view trade as a form of detente foreign policy. Laissez Faire economics is largely acceptable.
But this is not true for the Chinese or Indians. If they allow food products to decline even 1%, there will be mass failures and no clear answer to where these near-subsistence farmers will find work. The governments fear mass starvation, because the central planners have no idea how they could parse out work to the remote, rural areas. If they had work. Because there is precious little manufacturing work – despite all the exporting done to the USA – given the size of their populations. And, if these central planners forced better working conditions in its plants they might lose sales to Korea, Thailand, or Bangledesh. It wasn’t long ago that shipowners who wanted to scrap their vessels didn’t bother with a dock, they just ran the ship ashore in Bangledesh where near starving people ran out when the tide left to cut it up with no safetry procedures at all (nor concern for collecting hazardous mateials they merely let go into the sea.) The Chinese and Indian negotiators are fixated on these countries that are even poorer than them! And their Success Formula is all about planning a better future for their country – without the swings of market-based systems.
Given these two very different Success Formulas, how could anyone expect negotiations to make a difference? Years ago the USA could easily give in, because it was rich, its population well fed and well employed, and its currency very strong. But now, the USA has much more at stake. Jobs are not as plentiful, huge government deficits have cut the value of the currency almost in half, and people are concerned about their future. The USA now has quite a bit to gain – and the Chinese and Indians a lot to lose. This change means we can expect other negotiations to find trouble reaching an accord – such as with the environment (read WSJ article here.)
In this environment, the only hope is for a significant Disruption in one or the other groups. Either the Chinese and Indians consider a significant switch away from central planning – toward market forces – and the inevitable pain this will cause, or the USA has to agree to far more central planning of its businesses and the detailed use of tariffs and other tools to protect its people – just as the Chinese and Indians do. Either action would be a major Disruption in what is considered permissible. But it is required. Until one group changes its Success Formula, this is a religious war unlikely to be resolved across a negotiating table.
The U.S. will take the hit for the talks failing – but that is unfair (Read FT article here). The Success Formulas are too far apart for meaningful change to happen. Until one party or the other Disrupts its economic approach, there can be no agreement. Which will change is yet to be seen – but given the mood in America today don’t be surprised if you see a lot more tariffs and other protective measures go into place – and pretty quickly.
by Adam Hartung | Jul 30, 2008 | In the Swamp, Leadership, Lock-in
The headline at Marketwatch.com this evening read "Starbucks Catches Steam" (link to frontpage at 7:30pm eastern on 7/30/08) The article (read article here) goes on to be very bullish sounding about Starbucks. "Shares turned higher" "up 4%" "reversing course". Uh huh. A quick look at the chart shows Starbucks has lost half its equity value in the last year (see chart here). So, a 4% uptick from the now lower value means its still down, let’s see, that would be 48%. Now I see why it’s time to rejoice!
I don’t agree with people who say that the stock market is good at valuing companies. In reality, investors tend to overvalue high growth, and overvalue potential turnarounds. Investors, generally, tend to be overly optimistic. So any time a company is down 50%, it’s worth being very careful before waving the victory flags and claiming the corner is turned.
There’s a comedian named Lewis Black who has recorded an entire comedy routine about how he knew he was seeing the end of the world when he walked out of a Starbucks, and immediately saw another Starbucks across the street. Lewis Black isn’t a business strategist, but he makes a valid point. If Starbucks is just a set of coffee emporiums, when do you reach saturation? At some point, there simply is no need to build any more. To continue growing, Starbucks would have to be more than just coffee emporiums.
The previous CEO recognized this, and undertook a wave of projects to grow the company. He pushed the brand into grocery aisles, licquor store aisles and even into restaurants and onto airplanes. He moved Starbucks into publishing music, and even becoming a recording agency. Starbucks produced a movie – which made money even if it wasn’t a smash hit. And as CEO he started expanding the stores internally to carry more products and more food – expanding why you would go to a Starbucks. There was a lot going to to try preparing for the "saturation day" (how’s that for the name of the next Will Smith move?).
But he got sacked. And on the high steed came riding in the "founding CEO" (although I don’t think he really was the very first CEO, he gets the credit). And his mission became – Back To Basics. He stopped all the White Space activity to "refocus" Starbucks on its "central mission" of being a coffee emporium. Oh. And let’s see, revenue declined. Uh huh. Now, he’s closing hundreds of stores and laying off thousands of employees, because revenue is down. And revenue is down because of the recession. It wouldn’t have anything to do with not pursuing additional revenue sources, would it? It wouldn’t have anything to do with being overly focused on doing one thing, would it?
So what’s really ahead for Starbucks? If you don’t think revenue will continue declining – I guess I’d ask "why not?" Face it, Starbucks may have created the coffee emporium genre as we now know it in America. But they have also spurred a lot of competitors that can make a pretty good cup of coffee. And these competitors have leased some great locations, and furnished them well, and trained employees to be friendly and helpful, and installed wireless internet service so we languish over our drinks and maybe have a second. All successful businesses breed competitors, who quickly copy what you do well. And these competitors cause price competition as they begin oversupplying the marketplace. Eventually, you are doomed to lower growth and lower profits — unless you find something else to do!! (Economists call this "the law of diminishing returns.)
It’s hard to see a bright future for Starbucks right now. Not because they originally did anything wrong. During rapid growth they Locked-in on a Success Formula and grew it fast and profitably. But the competitors squeezed in, and then the market shifted as customers started buying less costly product. So Starbucks needed to be more. To be a great company, Starbucks must avoid the foibles of Mrs. Fields’ Cookies (remember when that was all the rage?) by avoiding being a very focused competitor with a big ol’ bulls eye painted on it. And the CEO was trying. But this CEO – he’s likely to take Starbucks right where Mrs. Fields took her business. By killing all the White Space, he’s killing Starbucks.
So anybody who thinks Starbucks is possibly "turning the corner", remember that only 7% of businesses that hit a stall every grow consistently at a mere 2% ever again. And Starbucks is not doing the things likely to put it in that 7%. Making a great coffee will do just about as much for saving Starbucks as those big, soft, fattening cookies did to save Mrs. Fields after she opened a few hundred stores. It’s not about what you did last year – it’s about what you’re going to do next. And another flavor of coffee, well…….
