by Adam Hartung | Jul 24, 2008 | Defend & Extend, In the Rapids, In the Swamp, Leadership, Lock-in, Openness
Another big loss was announced at Ford (chart here) today (read article here). After announcing a $9billion loss, the CEO said he was looking to convert some truck plants to make hybrid cars. And the company is considering bringing some of its high-mileage European cars to the U.S. Let’s see, after announcing a quarterly loss that was 85% of the company’s entire market value, the CEO thinks maybe it’s time to change the product line-up and manufacturing capacity configuration.
How hard would hit have been over the last 8 years to expect the need for higher mileage autos to increase? Instead of looking at what historically made the most money (which were trucks and SUVs), and trying to milk those products for profit forever, can you think of any future scenario which would not have predicted the need to switch customers to different products? Only by focusing on the past – what used to make money – could a leadership team walk so far out on the gangplank.
Compare this with today’s announcement at Google (chart here) to launch a competitive on-line encyclopedia to Wikipedia (read article here). This would appear to be creating a "me to" product in a market already well served. Why should Google bother? Such a viewpoint would be looking backward, rather than at future scenarios.
How many new users will come to the internet over the next 10 years? How many people may want a different approach than used at Wikipedia? What are the odds that it is possible to have a product that is possibly better than Wikipedia? If you look at the future, and you recognize that (a) internet use is unlikely to slow for many, many years (b) products with lots of acceptance, and no competition, are easy targets because some people have to be underserved, and (c) competition always improves products — doesn’t it suddenly seem logical to offer this new product?
Scenarios should point out not only future risks, but future opportunities. Yes, Google is #1 in search and #1 in on-line ad placement. And growth in both those markets looks very good. But your future scenarios should be looking for additional markets as well. In this case, Google sees potential to use its capabilities in both search and ad placement to better the on-line encyclopedia product market. Thus, its a market opportunity which is very likely to do well given this future view.
We can’t wait on market confirmation to make plans. We have to develop scenarios, and take management action based upon them. If we do, we can identify and test markets early enough to be prepared when customers start to shift. If we don’t, we’ll be caught "flat footed" when they shift – and as Ford is demonstrating this can be an expensive, possibly deadly, position to be in.
by Adam Hartung | Jul 23, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Everyone knows newspaper ad revenues are down dramatically. But this trend didn’t happen overnight. Ad revenues started slumping way back in 2001. At the time most management blamed the recession. Then lack of recovery was blamed on a jobless recession. By 2004 it was clear that advertisers were increasingly looking to targeted advertising like the internet and cable TV, moving away from traditional print. By 2005 movie studios were telling media companies they never intended to use traditional advertising like they previously had, auto companies were shifting large portions of advertising to the web, and real estate companies (not yet into the doldrums they face today) were shifting more and more advertising to the internet instead of full page newspaper ads for which there was no evidence of value.
Simultaneously, by 2000 eBay had become America’s permanent garage sale, making the need to buy an expensive classified ad far less necessary. Not to mention the impact Vehix.com and Cars.com was having on used auto sales. Meanwhile Craigslist.com was demonstrating its ability to find buyers for apartment rentals, autos and all kinds of things. It was clear that classified ads were now facing competition like never before seen – and that competition was going to intensifiy, not lessen.
Newspapers reacted all through the decade by slashing staff and other costs. At Chicago’s Tribune Corporation management could see it had purchases the LA Times at a market top, and by 2004 the company had already made several rounds of cuts at all its properties. Into this declining market Sam Zell decided to buy Tribune Corporation using a little of his money and a lot of debt (OPM – or other people’s money).
Now, after a slew of additional cuts, Zell has told employees "it was unfair to hold him to previous forecasts." (see quote in Chicago Tribune article here). If you can’t hold the Chairman and CEO responsible for over-optimistic decisions leading the company to the brink of disaster – and causing cost slashes which jeapardize the product while leaving no money to invest in the emerging on-line media market – who do you hold responsible?
Every management team has the requirement to do scenario development. All businesses have to be managed to succeed in future markets against future competitors. To meet these challenges, they have to develop scenarios that assess all market forces – both good and bad. It may be OK to hope for the best, but for goodness sake isn’t it up to management to plan for the worst? But Sam Zell allowed himself to listen to outgoing management, the Tribune company sellers, and use historical revenues as the basis of his projections. As he said "his team predicted a 5 percent to 7 percent decline in 2008 revenue." Rather than look at the forces affecting The Chicago Tribune and other newspapers (as noted earlier), he simply took the current results and said "surely things won’t be worse than a 5 – 7 percent decline". WRONG! As they like to say in ads for mutual funds "past results are no indication of future performance." Or, maybe you could at least have the savvy to not believe everything you’re told by the salesman.
Chicago is one of America’s largest and greatest city. Its citizens deserve great news reporting. But the Chicago Sun-Times has been gutted by a previous owner who embezzled billions out of the company leaving it on the brink of failure. And now its largest newspaper, The Chicago Tribune, is getting smaller and containing less news as Mr. Zell shows his "toughness" by laying off thousands of employees and slashing the news and editorial staff. This has led to some of the best editors in the country walking out the revolving door installed in HR due to the declining quality of the product. But, Mr. Zell claims that when he loaded the company up with more debt than it could repay he should not be held responsible.
There was another option available to Tribune Company and Mr. Zell. The internet started to affect how people searched for and acquired information by the mid-1990s. Tribune reacted by doing some things right, such as its investment in Cars.com, CareerBuilder.com and Food Channel which bred FoodNetwork.com. But it never attempted to transition news to the internet. What the company could have done by the time it sold to Mr. Zell was move its investments into building the worlds best on-line environment. Dow Jones, for example, invested in Marketwatch.com which was moving fast to displace The Wall Street Journal. And the foresighted News Corporation moved heavily into not only cable television, but internet acquisitions such as MySpace (and now Marketwatch via its acquistion of Dow Jones).
Mr. Zell should have recognized that Tribune Company was not a big building he could hope to fill with new tenants and milk for cash. Overly optimistic assumptions are the result of rose-colored glasses, which no leader should wear when planning for the future. Tribune Company was largely a group of outdated properties facing far faster growing and more successful new competitors – with a few gems that needed much more investment. He was buying old freestanding Sears stores just when the competition was throwing up shopping malls. He needed to move fast not to leverage this property up and out of cash, but instead to invest into internet opportunities with which he could migrate the news and other information base within Chicago Tribune and LA Times. Mr. Zell and his management team needed to figure out how to deliver reader eyes to web sites, and thereby serve up an enticing audience for the internet ad buyers. Not hope for a planned recovery of print media advertising in the face of the internet tsunami.
Who are the losers because of Mr. Zell’s optimistic forecasts that he now wants to say aren’t his responsibility? Chicagoans to start wtih. We’re wondering in Chicago if Wrigley field will be bought by someone and renamed XYZ park – something Chicagoans dread. We’re now expecting the landmark, and historically important, Tribune Tower to be converted into condos. And we’re getting less and less news every day as the paper gets smaller and smaller – with no good replacement for the information people seek. The same thing is happening in LA, where business leaders are frantic over the value destruction wrought at their local paper under Tribune Company control. And of course there’s all those great researchers, writers and editors who instead of transitioning to new media are simply out of work. And who knows what will happen to the bond holders who trusted Mr. Zell to be far better at utilizing scenario planning to keep Tribune Company a viable and successful company.
by Adam Hartung | Jul 18, 2008 | Disruptions, In the Rapids, Leadership, Lifecycle, Openness
Yesterday IBM (chart here) announced it’s most recent quarterly results (read here). The good news was revenue climbed 13% and income from continuing operations rose 22%. This ability to stay in the Rapids is pretty amazing, given that a 10% growth at IBM means adding more than $10B per year. And despite being in myriad markets, the company produces about $260,000 revenue per employee.
A colleague said to me that he wasn’t surprised IBM had this nice growth. After all, they’re in high-tech. I had to tell him I was surprised at his naivete. IBM’s growth was not automatic, nor in any way assured, because of the general industry in which they compete.
Quite to the contrary, many high-tech companies struggle and fail. Remember Wang? DEC? Silicon Graphics? Compaq? Coopers&Lybrand consulting? "High Tech" is full of cutthroat competitors willing to drive you out of business in a heartbeat with suicide pricing and over-exuberant product claims. Don’t forget that IBM itself was on the brink of failure in 1993.
IBM, which walked away from the PC business after inventing it, became committed to mainframes – and to a lesser extent mini-computers – in the 1980s. This worked great until data centers started downsizing due to new techologies – and the floor fell out of revenues. With a change in it’s leader, and a lot of Disruptions inside IBM, the company lessened its dependence on hardware sales as it grew services sales in the latter 1990s. Since then, IBM has deployed an aggressive innovation program that promotes the development of new products and services across the panoply of high-tech. Now, in the face of terrible economic conditions IBM is demonstrating it can maintain growth, even though it is huge, by reaping the benefits from maintaining Disruptions and White Space in many technology, geographic and product markets.
Keeping your organization in the Rapids is not the result of where you’re located (like India or China), or your size (small versus big) or your age (young versus old) or the markets you sell to, or the technology you use, or how much you spend on R&D, or how much you outsource, or "general market conditions", etc., etc. Staying in the Rapids is the result of ongoing management attention to scenario planning, keeping your eyes on competitors, maintaining a willingness to Disrupt and keeping White Space alive and viable. And any organization can do those things – allowing you to grow even when competitors and customers feel the pinch of recession.
by Adam Hartung | Jul 17, 2008 | General, In the Rapids, Leadership, Lock-in
I regularly beat the stuffing out of organizations for Defending & Extending their Lock-in. Low growth and poor results have demonstrated for these companies that market shifts are pushing their Success Formula toward obsolescence. They need to Disrupt and use White Space if they are to survive and grow again.
There is another side to this. Some companies are in the Rapids, and they have a different set of requirements. Take for example IT services provider Infosys. Their quarter ended 30 June, 2008 saw revenues increase by 24.5% versus a year ago! The company also added over 7,000 employees during the quarter. Tata Consultancy Services (TCS – also an the IT services provider) for the same period saw revenues grow 21% as they added nearly 9,000 new employees. These companies are clearly in the Rapids, seeing revenues grow in double digits and they are profitable. They have a very different Lock-in problem.
When businesses are in the Rapids, their objective is to define the Lock-in which will guide improving results from the Success Formula. Without Lock-in, they cannot keep growing revenues and, even more importantly, improve on the Success Formula to grow profits and maintain above-average returns as new competitors enter. These businesses need to make sure they have a clear hierarchy that can guide the recruiting, hiring and new employee indoctrination process. They need clear processes for adding new large clients – Infosys added 49 clients in the latest quarter and TCS added 35. Without Locked-in processes to rapidly sell, onboard and deliver services to new clients they cannot maintain this rapid growth. Without clear IT structures, they cannot measure employee performance against client goals, and effectively implement billing and cash receipts. They need Locked-in decision-making processes that allow leaders to quickly review business issues and make quick decisions so the company can keep growing. And they need to develop experts inside the company who can oversee operations and be sure each silo maintains its performance.
When a business enters the Rapids Lock-in is GOOD! We forget about that because so often we are talking about problematic businesses. But when GM was growing fast, it needed to create Lock-in that helped it become the #1 auto company offering more styles and features than previous leader Ford. When Microsoft was growing fast it needed Lock-in to help it dominate the desktop market amongst fierce competitors threatening to fragment the PC software market. It was Wal-Mart’s Lock-in to supply chain leadership that allowed it to go from a small group of stores in backwater rural towns to the world’s largest retailer in just 2 decades. (Of course, all of them are now Challenged looking forward because eventually the let Lock-in overcome their need to change due to market shifts – but that’s a different story.)
When businesses don’t create Lock-in they can’t grow. They can’t compete effectively in a way that meets market expectations. They are chronically short capacity. They cannot onboard clients effectively, so potential buyers grow weary of the wait. They lose track of their record keeping and miss customer expectations – as well as struggle with cash management. They make erratic decisions that confuse customers, investors and employees, slowing the ability to maintain growth.
Today, Infosys and TCS are very profitable at the gross margin line – but not so on the bottom line. Their revenue per employee is a mere $51,000. Accenture produces revenue of $240,000 per employee! In the Rapids, these high growth companies that are Disrupting the marketplace need to manage their Lock-ins so they not only grow, but earn above average rates of return as well. Eventually, all Success Formulas hit the wall of diminishing returns. Market shifts allow competitors to strip out value from old Success Formulas. But first, before they stall, successful companies have to implement Lock-in to make their Success Formula valuable! Those that don’t just churn through lots of investor cash, employee turnover, beaten up suppliers and in the end fail.
In the Rapids, Lock-in is good! If you’re evaluating a growing company, you want to see that it has a clear Success Formula and knows how to Lock it in. Only after that has happened, and proof of above average returns are demonstrated, does it become critical to manage Lock-in for evergreen, long-lived results.
by Adam Hartung | Jul 16, 2008 | Defend & Extend, In the Swamp, Innovation, Leadership, Lifecycle, Lock-in
The headline in today’s Chicago Tribune trumpeted the headquarters move of MillerCoors to Chicago. In exchange for $20million in aid, about 300-400 headquarters jobs will move to Chicago. The article goes on to wax eloquently about how Chicago is a "winner" city because of its great quality of life (read article here). Unfortunately, the article is a whitewash of the economic reality in Chicago and Illinois. Chicago’s mayor and governor are trying to focus on symbols, like acquiring a new company headquarters, rather than look at the results. Because the reality is that Chicago and Illinois have been on a long-term job decline.
The brutal reality can be found by downloading the PDF located here. What you’ll see is that from 1990 through 2007 Illinois, and Chicago as by far its largest job hub, has trailed not only the nation in job creation, but even the rest of the midwest (Indiana, Iowa, Michigan [yes, even auto-dependent Michigan], Missouri and Wisconsin). Chart after chart details how every sector of employment has been significantly trailing the national growth rate – and even far behind the region. Chicago may be a great city to live in, but it’s not a great city to be employed – or look for a job. Especially if your talents are on the leading edge of growth businesses.
What matters in business is results. And competitively, Chicago and Illinois have not met the challenge for almost 2 decades. Year after year Chicago becomes more of a "fly over" for people working on both coasts. Even though the University of Illinois is one of the top 5 engineering schools on the planet, most graduates leave to work on a coast (think Marc Andreeson and Netscape and you’ve got he message). When innovators create a new product as a result of working at Kraft or Motorola, they have to go to a coast to find funding, employees to grow the business and talented service people that can aid their growth. Large companies in Chicago are shrinking as competition steals competitors to the coast, or offshore.
In the midwest it’s common for people to relate their life to a family farm which exists today, or is a mere one generation away. But just like these midwestern urbanites migrated to the largest midwestern city, Chicago, because there were no jobs in the rural hinterlands, we now see midwesterners are forced to migrate coastal in order to maintain employment or find funding for new ventures.
By focusing on something as trivial as a headquarters win the city and state do a disservice to its citizens. This symbol overlooks the need for a much higher growth rate. Housing did not crash in Chicago like it has in LA, but it never went up nearly as much either. With few jobs, there was less demand and the boom never set in like it did elsewhere. People in Chicago cannot hope to see their city flourish if it cannot win the competition for jobs by developing more opportunities. Yes Boeing moved its HQ to Chicago, but we all know the planes are made in Seattle, and that’s where the jobs are. MillerCoors may be in Chicago, but the beer is made in Milwaukee and Denver. Neither "win" comes close to offsetting the losses from the closing of BankOne and operations move to New York, or the closing of Ameritech and operations move to Texas (just 2 recent examples of massive job losses). Or the failure of Lucent and Motorola to maintain their health thus causing tens of thousands of jobs to move to both coasts and India.
Chicago and Illinois leaders still focus too much on maintaining old Lock-ins, trying to Defend & Extend what the city was when it was the manufacturing and transportation center of America 50 years ago. For example, Chicago is no longer the city of Capone and Dillinger. By denying gambling, Chicago’s hold as the conference center of America shifted to Las Vegas while tourists flocked to Merrillville, IN or Milwaukee, WI to enjoy an evening. Yet the paranoia about its past stops Chicago from doing the obvious and legalizing casinos like cities/states have done within 75 miles. Or take for example the refusal to build a domed stadium in Chicago where weather which is less than ideal. While everyone knows a domed stadium would help bring in major events from around the globe, the city refuses to consider one as it relishes in the glory of aged facilities like Soldier and Wrigley Field. The last all-star baseball game in Chicago was delayed 8 hours due to rain, and everyone watched and wondered if the White Sox would play in the snow to win the World Series. Great is their past, and beautiful is the architecture – but Locking-in to that past is now costing citizens tax revenue and jobs! {note to readers – yes I know the Sox play in the renamed Comiskey Park and not Wrigley – but why didn’t the city dome that when it was rebuilt?}
The situation in Chicago is not dire, but neither is it good. Unless the IT jobs, healthcare jobs, biotech jobs and other occupations upon which the planet’s future is based make their way to Chicago, the city will some day be as well known as Dodge City – but possibly about as popular (Dodge City has under 50,000 people and is so far off the beaten path I challenge you to identify its location within 150 miles – hint, it’s in Kansas, not Arizona or California.) To find the future which will keep Chicago vibrant its leaders must focus on scenarios for growth, and realize they must COMPETE with cities that offer many benefits. Then the mayor and his leadership team must Disrupt Lock-ins to tradition, and use White Space to discover a new Success Formula which can regain growth leadership. If the current mayor Daily wants to have a legacy which eclipses his father, he must reset the agenda for growth by focusing on jobs – not merely symbols.
by Adam Hartung | Jul 15, 2008 | Defend & Extend, In the Rapids, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Readers of this blog know my lifecycle references. We start out in the Wellspring of ideas. To be successful we have to find the Rapids of high growth. In the Rapids life is beautiful as we make money and everyone wants to give us more. When growth slows we hit the Flats – where we keep paddling like crazy trying to figure out what happened to the Rapids. But because we’ve slipped from the Rapids to the Flats, pretty quickly we drift into the Swamp where growth is really hard to come by. We end up spending all our energy fighting the ferociously competitive alligators and mosquitos, often forgetting our real objective. In the end something happens the business isn’t planning for, and like pulling the drain on a sink the Swamp becomes a final Whirlpool sucking the organization away.
The most important time for management to make the right decisions is in the Flats. It’s the Flats where leaders have to steer the company back into the Rapids, or else drift into the Swamp. So let’s compare General Motors and Honda.
GM saw it’s growth start slipping almost 30 years ago. Roger Smith tried to steer the company back into the Rapids by creating a stand-alone company called Saturn that would learn to act like a "Japanese" car company. He also bought Hughes Electronics and EDS to diversify GM into very high growth markets (electronics, avionics, aircraft and IT). But Smith was often maligned by analysts and fellow executives who wanted GM to remain a "car company." Eventually GM sold Hughes and EDS to raise money to shore up its declining auto business where it was mired in the Swamp. GM leadership even abandoned the idea of an independent Saturn, and eventually forced the White Space project to start using common components with other GM autos, common functions like procurement, common systems and even common dealers. Now Saturn is just anther GM nameplate.
Today, GM is starting to hear the sucking sound of the Whirlpool. The company is constantly trying to stave off rumors of an impending bankruptcy. Meanwhile, the company equity value today is less than it was 50 years ago – meaning an investor would have nothing to show for a lifetime of ownership except dividends. And today those were halted – a key indicator that GM is heading into the Whirlpool. Cost cuts now are center stage as the company closes capacity and is even whacking salaried employment 20%. Management keeps saying it has enough liquidity to survive 2008 – whoopee! – which is only another 6 months. So it is looking to shut down nameplates (like Hummer), more plants and sell as many remaining assets as possible. It’s hard to see how anything good will happen for GM’s investors, employees, suppliers or customers as the business keeps churning faster toward the Whirlpool of failure. (Read more about current actions being taken at GM here.) GM is claiming it could not predict the auto market changes being created by higher priced oil – even though this "crisis" has been emerging for 3 years and is unerringly similar to the market shift which happened during the oil price shock of the 1970s.
Meanwhile, Honda sales have grown 4.5% this year. Right, while we keep hearing about the total market declining, Honda sales are growing (read article here). Management at GM, and many analysts, like to portray this as luck. Hardly. Honda and GM compete in the same markets. They just took very different management actions.
Honda never tried to develop a plan to do one thing and dominate the market. Market domination was never its goal. Instead, growth in sales and value has remained #1. In it’s quest to grow, Honda did not merely remain an automobile company. Rather than eschewing other businesses as diversions, Honda successfully developed profitable growing businesses in everything from lawn mowers to lawn tractors to electic generators to boat motors to motorcycles to quadrunners to snowmobiles to snowblowers to robots and jet airplanes – and cars. Of course, in cars they make small cars, luxury cars, all-purpose vehicles and even a full size pick-up. They sell products directly from Honda to end users in some markets, they sell through dealers in other markets to distributors who wholesale products to retailers in other markets and even to large mega-retailers like Home Depot in other markets. No single distribution system. And they sell products in almost every country on earth – including being the #1 motorcycle supplier in India with it’s Hero-Honda joint venture. (Unlike GM which has long maintained an overt focus on North America blinding its opportunities elsewhere.)
As markets shift, Honda is preparing for those shifts. It doesn’t let "focus" make it overly dependent on any one market – or any one sub-market within a single market. In motorcycles, for example, it offers everything from a small scooter for the urbanite to dirt bikes for leisure use to cross-over bikes that can be used on trails and roads to small motorcycles for short-riding to large motorcycles for long riding to crotch rockets for testosterone driven young men to huge, oversized Gold Wing bikes for 50 year old highway touring riders. It does the same in autos, where it offers everything from a hybrid to the high-mileage traditional Civic small car to multi-person mini-vans to full size pickups and even luxury cars under the Acura brand. While GM is trying to be big, Honda has mastered the art of growing and making money by constantly bringing out new products in new markets and learning from those experiences so it can migrate its Success Formula.
Far too many management teams think their job is to "focus" and be #1 in some defined market. Of course, all those definitions are arbitrary, and being #1 doesn’t mean anything if you can’t make money. GM has been huge, but it has been unable to generate enough profit to replace its capital for decades. Now Honda, who is #1 in some markets, but not in most, is showing that by being agile and nimble, by avoiding Lock-in to old-fashioned notions of market share, it can be more competitive. As individual markets struggle, from product markets to geographic markets, Honda keeps using its White Space to bring new technologies and products to customers. It evolves its older businesses toward what works, selling big trucks when people want them where they want them and small motorcycles where demand for them is growing. It’s this ability to look to the future rather than the past, keep a sharp eye on competitors and always be at the front of new products, maintain Disruption to get into new markets and keep White Space alive so new Success Formulas develop which allows Honda’s leaders to keep the company steering toward the Rapids rather than finding itself being driven right into the Whirlpool of disaster like GM
by Adam Hartung | Jul 11, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
Yesterday I blogged about reading telltales. Catching small bits of information that can help you predict a company’s behavior and longevity. But sometimes we don’t need a telltale – because the signs are as obvious as a gale force wind. That happened yesterday in my email inbox, when I received a letter from the heads of the major airlines telling me to write my legislator’s to implement and enforce greater regulation on oil traders (read about the letter and see a copy of the text here).
I’ve long been a detractor of the leaders at United, American, Delta, US Airways, Northwest, Continental and the other "major" airlines. These companies were founded by former military officers who created airlines in a regulated environment. Subsequent management has never varied far from the original Success Formula, nor the Lock-ins, choosing to believe they will somehow make money if they just do more, better, faster, cheaper. In reality, the only person who created an airline that made money was an attorney, Herb Kelleher, by founding Southwest.
Now their Success Formulas are on the brink of collapse. So they are pointing the finger at someone else. Simply put, these leaders have never been willing to Disrupt their ineffective Success Formulas and use White Space to try doing anything else. They have remained Locked-in to the hub-and-spoke systems that are highly inefficient and thus reliant on low fuel prices. They have never challenged their complex pricing formulas, nor their antagonistic relationships with employees, nor their indifference toward customers. Even when they decided to open alternative businesses (Song, Ted, Eagle) they remained Locked in to their historical strategies and tactics, requiring these services give out frequent flier miles on the programs, use the existing gates, work with existing employee work rules and maintain the historical reservation systems. These leaders never tried to do anything really different. Despite strikes, government interventions and even bankruptcies they have maintained commitment to their Lock-ins and been unwilling to implement White Space.
They of course could have done many things differently. They could have migrated to a point-to-point airline. They could have improved employee relations. They could have allowed subsidiaries to use different technologies (different planes, different reservation systems) and try different practices (like Southwest’s extensive use of fuel hedging which has kept it profitable during this fuel price spike). But that would have required some Disruptions and establishing real White Space with permission to do new things. Which never happened.
What can we now expect? One or more of these airlines will fail. This letter from the CEOs is a signal as strong as a gale force wind that they have no idea how to deal with their company problems. Lacking any viable solution, they want the government to regulate their suppliers (something they’ve tried for years with their employee unions by the way) so costs will be controlled for them. This letter is an admission they expect to fail unless someone else saves them. Of course they aren’t taking responsibility for being in this position – but they are willing to admit failure is just around the corner and likely without help from a higher power.
What will be the impact on us? A major airline failure (say United) will be a national security issue. Several cities will become isolated islands unable to physically connect with the rest of the country. 100 years ago if the railroad bypassed your town you had to move the town – and many did. What will happen to cities that no longer have air service? How about the thousands of people that use these airlines for international travel? How many Americans will be stranded abroad? How many will be unable to reach facilities in remote countries? Without internal transportation system bogged down, we would be a sitting duck for terrorists wishing to create havoc with people stuck in locations they don’t want to be.
As these airlines fail, are we ready to outsource air traffic? Like we’ve outsourced the production of steel and other products to foreign companies? Are we ready for Lufthansa to step in and take over United’s routes (and some assets) between Chicago and New York, LA, San Francisco and the other thousand cities United services? Or Swiss Air? Or Virgin? If we use foreign carriers for domestic travel, what happens to our safety systems on what has historically required domestic companies for national security?
It’s not hard to recognize the kind of Lock-in to outdated solutions this letter signed by a dozen CEOs indicates. It’s not hard to see that failure is a likely outcome. When Lee Iacocca told Congress "Guarantee my loans or all these Chrysler employees will be unemployed" he made it clear that his company would fail without help. These CEOs are saying the same thing. And it’s really unfortunate, because Southwest has never been secretive about any part of its Success Formula, and it makes money to this very day. So for the major airlines, failure is obviously more acceptable than change. And everyone will lose with that kind of thinking dominating the executive suite.
by Adam Hartung | Jul 8, 2008 | Defend & Extend, General, Leadership, Quotes
Ed Bronfman, Jr. is a scion of the family that used its ownership of Seagrams, and U.S. liquor prohibition, to build a fortune in Canada. Eventually he made a very large investment in Warner Music and appointed himself CEO. Unfortunately, his investment has not turned out as well as he would have liked due to market shifts in how people buy music. Here’s his quote (source of quote here):
"We expected our business would remain blissfully unaffected even as the world of interactivity, constant connection and file sharing was exploding. And of course we were wrong. How were we wrong? By standing still or moving at a glacial pace we inadvertently went to war wtih consumers by denying them what they wanted and could otherwise find – and as a result, of course, consumers won."
Lock-in caused Warner Music to be complacent – and ignore customers that switched to competitors. When markets shift, standing still (doing the same thing – or Defending & Extending your old Success Formula) can cause you to become competitively less viable.
Here’s an even better quote from Bill Gates, founder of Microsoft (source of quote here):
"Your most unhappy customers are your greatest source of learning."
Listening to your biggest, and your best, customers is important, but you won’t learn much about the market. They like your Success Formula and share your Lock-ins. It’s the customers who complain that are telling you about changes in the marketplace. They are telling you they will shift if they can find an alternative. And those who outright become disloyal, who leave, are really able to tell you about market shifts and changes in competition that threaten your returns. You might want to take your best customer golfing to keep her happy, but you should invest your resources in understanding the customers that complain, threaten to leave, cut their business or completely leave. They can give you the market information you need to plan for a future with higher returns.
by Adam Hartung | Jul 7, 2008 | Defend & Extend, In the Swamp, Leadership, Lock-in
We are all told to be "glass half full" kinds of folks. We are surrounded by messages that things won’t be all that bad, and when bad they will get better ("the storm is always darkest just before the dawn"). Unfortunately, when market shifts happen it’s the optimistic ones who ignore the signals, don’t fully prepare for a changed market and thereby come under the greatest risk of failure.
Take for example General Motors (see chart to 50 year low valuations here). GM has been around so long it is inconceivable to most Americans – and probably all of GM management – that GM could fail. I mean, this was the world’s largest auto company, and still is one of the largest. By any historical measure, GM should be able to weather a downturn and survive. But when markets shift, history can become irrelevant. All that matters is competing in the shifted, altered future. And, is GM ready?
What’s so different about the future? Well, we all know gasoline is a whole lot more expensive. The result? Demand for driving in the USA is declining. That means autos will last longer so people will need to buy fewer autos less often. Beyond that simple fact, consider how many autos Americans own. (Following facts courtesy of David Rosenberg at Merrill Lynch and his market memo – see article here.) In most of the developed world the average family owns at most 1 car. But in the USA the average family owns 2.2 cars – more than twice the world average. There are 40% more licensed vehicles in the USA than there are licensed drivers!! So if Americans start driving less, and figure out they don’t need to replace all the cars currently licensed, you get an exponential negative affect on U.S. auto demand. And since GM is almost completely reliant on U.S. demand – where it competes with practically everyone else on the globe – what will happen to GM if American miles driven declines 10% – and if the total demand for new cars starts to decline (not increase) at say a meager 5% per year???? Or 15% per year? Now you can see how it is possible that either GM or Ford may not survive the next shakeout in auto manufacturing (read more on Merrill Lynch downgrade of GM here).
We’re seeing a market shift not just in preferences, but in the overall economy that affects the auto industry and every competitor. Who will survive? That’s hard to say. Expect lots of government interference as well as free-market competition to create a very unpleasant marketplace. But in the end, the most likely winning survivor will be a company that is not strictly focused on automobiles. A competitor that is involved in growing markets, like mass transit light rail cars or robotics or another alternative marketplace will be able to meet market needs while maintaining overall company growth. That competitor will be able to continue raising capital and maintain wherewithal much better than a single -market competitor like GM or Ford stuck in declining annual sales volume and negative returns.
After selling asset upon asset (remember the big sale of GMAC 2 years ago?) GM has run out of assets to sell for subsidizing its auto business. Now it needs to quickly raise $15B to $18B to survive this downturn (read more here). Would you give GM management your life savings? Those two companies will be slashing costs with layoffs, plant shutdowns, and brand closings (read latest GM speculation on Marketwatch here.) But they will always be behind the curve, cutting costs fast but not fast enough to make a profit. Always promising a profit at some future time (like now promising profits in 2010 – do you believe it will happen?).
While GM and Ford will increasingly be unable to raise new capital (and what is raised will be at extra-ordinarily high cost), and unable to develop new products, competitors with more diversified businesses will be able to better meet market needs. So we can expect better results from Toyota, Honda and Tata than from GM, Ford, Chrysler (or even most European manufacturers.)
Roger Smith tried to diversify GM in the early 1980s by buying EDS, then Hughes and then investing in an all new White Space company named Saturn. But GM management sold off those assets for profits in order to subsidize it’s Locked-in auto manufacturing – while forcing Saturn into the GM mold (just compare a Pontiac Solstice to a Saturn Sky and you’ll see just how unique Saturn now is) . How will they now raise desperately needed capital to design more fuel-efficient, high quality, attractive autos? Besides the government, with a vested interest in saving jobs to avoid an economic depression, who would invest in GM or Ford rather than Toyota, Honda or someone else with better return on assets?
The Red Cross used to teach first aid, in the days before paramedics were common and smaller towns depended upon volunteers to treat accidents and emergencies as first responders. The Red Cross training motto was "Hope for the best, Plan for the Worst." Being optimistic is a nice mentality. But competing long-term means preparing for market shifts by focusing on the future. Using scenarios that lay out options which may seem highly problematic given current operations or conditions. Competitors that wait for the market Challenges to emerge, to show themselves clearly, are already too late to be effective against those competitors who build plans based upon potential shifts. Leave optimism at home when planning, it breeds contempt for market shifts. Instead, bring along outsiders who are likely to help you see future scenarios that you might otherwise choose to ignore.
GM management has had 30 years to create a different kind of company. One less reliant on U.S. automobile sales – and more reactive to shifting market needs. But optimism allowed management to keep Defending & Extending what it always did. Optimism allowed the company to believe people would forever want the high-margin large light trucks/SUVs they were making. It would have been better to be more pessimistic – and prepared.
by Adam Hartung | Jul 3, 2008 | In the Swamp, Leadership, Lifecycle, Lock-in, Quotes
We all get so used to running our businesses that it is very easy to miss a significant market shift. We may well be in the Rapids of growth and then within a very short time fall into the Swamp of stagnant revenue and lower margins. Because we are so good at doing what we always did, our biases keep us thinking we will succeed while we ignore important signs of market shifts. By the time we react, it can be too late.
Take music recording and sales. For years this was a simple business. EMI, RCA, Sony, etc. simply signed up a lot of artists who wanted contracts. The music company spread its risk in a form of venture capital play by signing lots of bands and then needing only a few to succeed. The artists had no way to make an album and get it distributed other than to sign a contract, often at very low initial returns, with a major studio. It was a business that made it very easy for the large recording companies to make good money.
So we should not be surprised that when MP3 technology came along the major recording companies ignored it. They blithely allowed Apple to set up iTunes and sell iPods while they kept right on pushing the same contracts to artists and making CDs. What they ignored was that MP3 technology made it possible for consumers to bypass albums completely, dramatically impacting sales, and likewise artists could now bypass the recording studio by making their own songs and albums available directly to consumers across the web. Even though this future was not hard to visualize, and plan for, the recording studios kept planning for past markets and ignored desperately needed changes given easily expected future market conditions.
Get the following statistics (all of the following information comes from Paul Grein at Chart Watch):
"The paid digital download medium scarcely existed five years ago and now it’s the biggest growth area in the music business. (It may be the only growth area in the music business.) Billboard reports that album sales in the first half of 2008 totaled 204.6 million, down slightly from 229.8 million in the first half of 2007. Digital track sales for the same period totaled 542.7 million, up substantially from 417.3 million….Just three albums topped 1 million copies in sales (CDs and digital downloads combined) in the first six months of 2008, the lowest total since Nielsen/SoundScan set up shop in 1991. Six albums sold 1 million copies in the first six months of 2007. Fully 16 albums hit the million mark in the first half of 2006. (The business hit its peak in 2001 when a whopping 37 albums reached the 1 million mark in the first 26 weeks of the year.)"
When markets shift, trying to maintain Lock-ins in the hope of making money is like pushing on a rope. Lots of work with poor results. When new technologies or market practices come available, we have to focus on new competitors to understand how they make money. Likely, they will change the market in a way that diminishes the returns from old Success Formulas while making new Success Formulas more profitable. Customers won’t tell you about new solutions, because they are buying your solution – right up until they switch and aren’t customers any more. Focusing on customers only helps you understand and marginally improve your Locked-in old Success Formula. You have to look at the new competitors to see what is happening in the market. New competitors can show you that given market shifts, it’s better to pull the rope than push it.
In today’s global and connected economy markets can shift a lot faster than they did in previous eras. Resources and customers can shift quickly. Old Success Formulas can become obsolete (unable to make above average returns) before we even have time to react. If we don’t maintain a powerful focus on competitors, and generate scenarios about the future regardless of current market conditions, we will almost always be late to the changes. And that can be deadly to sales and returns. Just ask the people trying to generate profits by making and selling CDs today.
