by Adam Hartung | Jul 2, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
This week Bill Gates officially retired completely from Microsoft (article here), and we also learned the company will no longer ship Microsoft XP (article here). At first blush these two press items seem unrelated, but in fact they should give any investor, or customer, of Microsoft real pause.
Microsoft has long dominated desktop computing. From operating systems the company branched out to personal applications, and has held top market share with most of its successful products. Microsoft was a wonderful example of a company that found a high growth market (PC sales), figured out a Success Formula to grow with the market and make money, and then Locked-in on the behaviors and processes which helped it make money. During the Rapids of growth, Microsoft was a model of doing the right things. To the point it was sued for becoming a monopoly due to its high market share.
But sales of PC aren’t growing like they used to. Instead of non-portable desktops or bulky and often heavy laptops consumers of all types are switching platforms. Increasingly everything from mobile phones to PDAs or MP3s are replacing the old platforms – especially as internet connectivity is more easily accessible on these alternative devices. New applications are being used that make it possible for people to do what they want to do (like exchange words or numbers) without the overhead of a big application like Word or Excel. Additionally, sales of Macintosh have re-emerged along with much greater use of Linux in many servers and even some PCs hurting sales of Microsoft products (see OS share chart here). I’m not saying that Microsoft-based PCs aren’t widely available and used, but they aren’t the growth platform they once were. The market in which Microsoft has competed has begun shifting – moving from desktops/laptops to other devices and solutions – and Microsoft is still stuck Defending & Extending its old Success Formula rather than developing the new markets like it did the old.
Even though Microsoft has continued to do what it always did – and do it well – its growth has slowed. Not because of being a poorly run company. Rather, because it is so Locked-in to continuing its past. Microsoft has dominated PCs, but we can now look to the future and see that PCs will be replaced by alternatives in many applications. Thus, Microsoft has moved into the Flats and is increasingly finding itself flailing away in the Swamp of low growth. Instead of being an exciting company, like Google, Microsoft is the company swatting at aligators and mosquitos biting away at its historic industry dominance.
The last time Microsoft faced this sort of Challenge was when the internet emerged. Stuck thinking of the PC as a truly "personal" machine Microsoft had never been a leader in networking machines for information exchange (networking was dominated by Appletalk, Banyan and Novell for many years.) But Mr. Gates was able to see the future risks, grab Microsoft’s R&D and product development budgets, then push the company towards future market needs. Mr. Gates was the company oracle who could redirect the apparatus toward a more connected internet world. He personally led the effort to license browser technology from Spyglass and create Internet Explorer – then bundle it into every sale – so Microsoft could maintain its market position.
By reviewing the past we can see that Microsoft as a company, under the operating leadership of Mr. Ballmer, has long been an organization constantly focused on optimizing products and defending product positions. The ability to identify and redirect resources toward a changing future was held by Mr. Gates. Only Mr. Gates could Disrupt Microsoft and set up White Space for new products. Instead of building an ongoing capability to develop future scenarios, focus on competitors, Disrupt itself internally and use White Space to remain evergreen, Microsoft has been a very Locked-in company that Defends & Extends while relying on its founder to occasionally "reset" direction.
So now Mr. Gates is gone. And the company is so Locked-in to its practices that it is completely ignoring everyone, from customers to competitors, as it simply refuses to ship a product the market wants (XP) – in its effort to force people to buy the product it wants to sell (Vista). This is less about upset customers than it demonstrates the kind of Lock-in which allows competitors to grow. How many potential customers will now buy a different platform from RIM and simply not buy a PC? How many will now really look hard at buying a Linux-based machine? By ignoring competitors, Microsoft is giving them opportunities to succeed.
Microsoft has a huge cash hoard. And PC sales are slowed, but not dead. So the company won’t go bankrupt any time soon. But we can expect a continuation of the kind of meaningless thrashing around the Swamp of low growth we’ve seen lately. Purchasing a tiny share of Facebook rather than Disrupting and using White Space to really understand social networking applications. Or ongoing unsuccessful pitches to buy companies in growth markets – like Yahoo! in internet ads – that fail because Microsoft brings nothing more than money and a whole boatload of negative, stifling management practices.
According to old managment theory, we should decide Microsoft is now "mature." And it is supposedly time for this market monster, which has used billions of external capital dollars to create its dominant market position, to begin paying back to investors by raising its dividend. But what we all know is that in computer technology markets shift fast. Companies that pay out their cash hoard quickly lose cash generation as customers shift to new competitors. The payout evaporates and faster than expected employees lose jobs as sales dwindle. Just look at how fast Wang and Lanier disappeared when PCs replaced word processing systems – or DEC disappeared when PCs replaced high-end CAD/CAM machines.
Microsoft without Mr. Gates is exactly will be unable to plan from the future backward. A company short on "vision" and long on execution that is happy enough to use its market position to attempt forcing customers to use products they don’t want (read article here), and thereby create greater opportunity for competitors. It’s easy to scoff at smaller competitors when a company is huge, but the kind of behavior Microsoft is now exhibiting quickly leads to trouble. Investors are already well aware that Microsoft has lost its competitive edge, as the company valuation has stubbornly remained stagnant for years (see 5 year chart here). Meanwhile, the only person able to Disrupt Microsoft and set up White Space to change the Success Formula is now gone.
Without Disruption and White Space, it is far too easy to predict what the future holds for Microsoft, its employees and investors. Microsoft is no "safe haven" for the "widows and orphans" fund. Rather, its better to put your investment dollars somewhere with growth – probably at Microsoft’s Locked-in expense.
by Adam Hartung | Jun 30, 2008 | Defend & Extend, Disruptions, In the Swamp, Leadership, Lock-in
We have a lot of signs that we are in, or on the edge of, a seriously long and painful recession. According to Merrill Lynch today (read report here) the S&P 500 was down 8.7% in June, down 18.3% from the October, 2007 peak. GM is at a 53 year low, and swap spreads price in (for both it and Ford) a 70% probability of bankruptcy in 5 years – 30% in one year. Home prices nationally are down 20%, and there is no visibility when the decline will stop. All the major banks are at multi-year lows due to the crisis in mortgage-backed securities. For the first time ever, the Conference Board survey showed more people expect their incomes to decline than there are people who expect an income increase in the next 6 months. Oil and gasoline prices are at record highs. The dollar is at multi-year lows compared to other currencies and fears of inflation are keeping bonds from increasing in price.
Otherwise, everything’s great!
So, what are your plans? Do more, better, faster and cheaper? Often, the first thought is to cut resources. Cut back and "wait it out." Hope that you can survive the recession, and live to compete again "when things return to normal." But that approach is very likely to be your end. You may not survive the recession. If it lasts longer than anticipated, or is deeper than anticipated, you could well run out of resources and that’s that! But, even if you do survive, recessions do not end by "things returning to normal." Recessions end when the economy changes creating more growth. After all, recessions are about periods of negative growth – about economic stalls – and they end when something comes onto the landscape allowing growth to return.
It is during recessions that new products have their greatest likelihood of success. Examples:
- in the 1974 recession Japanese auto manufacturers made their great launch in the USA as they positioned their smaller cars as a good replacement for quality-short, high cost American made cars. GM, Chrysler and Ford never fully recovered and have lost market share ever since.
- in the 1991 recession many data center budgets were cut. When budgets returned computer usage switched to PCs – leaving mainframe and mid-range manufacturers in decline. This change eventually wiping out DEC and Wang – and caused IBM to convert into a services company.
- in the 2001 recession companies and individuals stopped magazine and newspaper subscriptions. As we moved into the mid-2000s people turned to the web for news and now many traditional publishers are in deep financial trouble.
Many companies retrench competitively during a recession. They try to Defend & Extend their old positions while waiting for the good old days to return. They blame the recession on external events (like oil prices or government actions) and think that the end of the recession will put them back in the same competitive position they were in before. They try to maintain the business while waiting for better days. But that’s not how the world works. While they are maintaining, other competitors are gaining ground!
The economy does not return to growth magically. It returns based upon new, more productive products entering the marketplace. During recessions is when customers are incented to try new technologies and products to see how they perform. They switch to products that may have less capability, but are less costly, and then realize they perform well enough to keep using them. Simultaneously, the greater use of these new products allows them to develop into better products, eclipsing older products and technologies. What might have been a "worse" product at the recession’s outset, but cheaper, becomes better and displaces the former product by recession end. Think about hybrid or fuel cell cars today. Or web conferencing.
Great companies do not try doing more of the same, but cutting costs, during a recession. Weaknesses which were starting to show up become full-blown breakdowns in a recession. Customers hurt by the recession no longer will pay for the high cost of the product or service and start searching for alternatives. They don’t stick on the same product, but become adopters of alternative platforms. When the recession ends, they are converted and never go back to the old technologies and products, allowing old competitors to fall into the whirlpool.
As you enter this recession, what are you doing to Disrupt your Success Formula? How are you attacking Lock-ins? What White Space do you have to develop new solutions that can pull you out of the sales funk? It may feel uncomfortable at a time of struggling sales to do new things – but now is when it is most critical to move beyond Lock-ins. Those products which looked less capable, but offered 80% of the traditional product at half the cost are the ones most valuable in a recession. Those customers who you could ignore during rapid growth due to their limited loyalty are the ones at the front edge of alternatives who can be most insightful about what it takes to succeed in the future. Competitors that were leaders in old technologies can be undercut with new products or services that provide new solutions while saving money – making them vulnerable while you bring new products to market.
During recessions "Creative Destruction" is high. Becoming a better, stronger company does not mean cutting costs and surviving. Coming out of a recession stronger requires developing a focus on the future – one unencumbered by your old Lock-ins and Defend & Extend practices. Then figuring out how to undercut competitors by using new solutions for which they are unable to react. Disrupt your thinking about what works, attack Lock-ins and become committed to testing new solutions. And set up White Space to figure out the technologies, products and services which will allow you to grow again.
Recessions are not pleasant. But Phoenix Principle companies can use them to better position themselves for future growth. And in the process slingshot past long-standing competitors who are less willing to Disrupt and use White Space.
by Adam Hartung | Jun 27, 2008 | Defend & Extend, General, Leadership, Lock-in
We all say we compete to win. But really, many of us just compete to compete. Winning is a lot less important than following "the rules." But in much of life, the rules are designed to favor the current winner. To win, you have to find a way to compete differently.
Athletes have set rules to play by. And when they violate those rules, fouls are called. We like to think real world competition is the same. But there are actually a lot less rules in most worldly competitions – it’s not nearly as cut and dried as a sport. As a result there are lots of opportunities to change how you compete, in effect doing different or new things. And savvy competitors, Phoenix competitors, realize that is the easiest, fastest and best way to win. They don’t fixate on doing things the way everyone else does it. Instead they look for a new way to compete that can unseat the entrenched way of behaving.
Over the last 18 months Americans watched this be applied in the Democratic presidential nomination process. Senator Hillary Clinton entered the competition as the clear front-runner. She had access to all the party elders, all the influencers and all the money raisers. She had all the traditional advantages of not only name recognition and awareness, but having the party apparatus primed to support her. Given this advantage, she was clearly going to be hard to unseat. She had the traditional Democratic party machine ready to work for her in big states like California, Massachusetts and New York. And all the traditional competitors that tried to beat her in the nominating process by competing in the traditional way were eliminated.
But Senator Barack Obama followed a typical Phoenix Principle campaign – and beat Senator Clinton. He eschewed trying to work the traditional tools of competition, and instead developed a different approach. He didn’t try to do "more, better, faster, cheaper" of the leader. He instead used typical Phoenix Principle approach that allowed him to win – even though it upset the classical competitor to no end.
- He focused on the future, not the past. Rather than talking about how great things were in some previous era – such as when Democrats last held the Presidency – he focused on a scenario of the future. His scenarios demonstrated a connection with trends in the USA and globally. Constantly focusing on the future, he pushed voters to think about how to achieve future goals – rather than how to return to traditional ways of competing. He didn’t talk about how to get from today to the future, he talked about designing a future then developing a backward plan to reach that future.
- He focused on his competitors rather than his customers. He did what they could not, or would not, given their primary constituency. While conventional wisdom said to focus on older people because they vote in higher percentages, he realized that voting group was Locked-in to traditional candidates and he focused on the overlooked younger voters. He promoted voter registration and being their advocate. He spent little time with old-line union bosses, because unions represent a far less powerful constituency than in the time of Franklin Roosevelt – or even Jimmy Carter. While the traditional competitors focused on traditional financing tools, such as reaching out to lobbyist groups and PACs, he focused his fundraising on the internet where competitors were less willing to depend. They were used to trading influence for money – and unsure that traditional donors would appreciate them raising large sums nontraditionally thus weakening their need to aid the donors. He focused less on his customers – the traditional Democratic voter – and instead focused on competitors to find their weaknesses and exploit them.
- He was Disruptive. He talked about doing things differently. His primary message was "change." This meant different things to different people, but at no time did he stop promoting "change." He talked endlessly about doing things differently – about Disrupting "Washington", lobbyists, corporate America, health care insurers, oil companies. He never showed fear of Disruption, but instead embraced it as a way to develop a new, better future.
- He used White Space. Conventional wisdom said "fight tooth and nail to win primaries in the big states." Instead, he exploited the caucus system used in many states to win. His compaign used unconventional techniques to exploit weaknesses in the "mega-message" approach of traditional candidates. He never tired of finding new, unique places to tell his message – making tremendous use of the internet including YouTube! and other social networking sites. He did not try to identify with traditional campaign methods, but instead used unconventional as often as possible. And he talked about bringing White Space projects to Washington – by creating dialogue with enemies currently ignored, and opening doors to change communication between fractured American constituencies.
Although Senator Obama’s compaign was a long shot, it exploited The Phoenix Principle and created an enormous upset. A very junior candidate – in both age and political experience – he set out to win by doing what had to be done rather than doing what everyone always did. Rather than being cowered by the huge name recognition, political clout and funding available to Senator Clinton, former Senator Edwards and other candidates he used their Lock-in to his advantage. He could predict what they would do, and as was pointed out several times on television coverage his campaign leaders uneerily projected his competitors’ performance in every single primary more than a year in advance! By understanding his competitors so well, by recognizing their Lock-ins, and then using Phoenix Principle practices he came from far behind to win.
And it can work for you too. Focus on the future, not the past. Focus on competitors, not customers to gain insight and advantage. Be Disruptive. Use White Space to develop new approaches to competition. That’s competing to win.
by Adam Hartung | Jun 25, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
Ever heard the phrase "the last company left making buggy whips made a fortune"? Don’t believe it. Ask the person with such a claim to name the company. Better yet, ask that person to name one company that made high profits by being the "last man standing" in their business – any business.
On Monday United announced it is laying off 12% of its pilots, 950. Of course, pilots are the tip of the iceberg. Every pilot drives many more flight attendants, mechanics, gate agents and other employees so we can expect a multiplier effect across other jobs as this action trickles down. Simultaneously, Continental has announced job cots, Delta is whacking employees using early retirement deals and American has said it is finalizing details for its planned cutbacks (read article discussing these reductions here.)
United had to move fast, because if it doesn’t act quickly enough it’s cash reserves will fall, placing it in default on its debt – and triggering a Chapter 11 filing. In other words, United is skating on the edge of extinction. But an industry guru was quoted in the above article saying "There is an inherent demand out there…. as long as you can stay in the game you’ll be fine."
This is ridiculous. The largest participants in the America’s airline industry have built businesses that cannot be profitable. In the best times, when demand was growing like crazy and fuel was cheap they could barely squeak out a profit. They have never made enough money to recover their capital investment in aircraft. Their hub-and-spoke system is simply too inefficient, ignores problems created by America’s constantly fickle weather and too costly. It was a grand theory, but it was not profitable. Couple that with bad workforce practices and total disdain for customers and you have a business model that was doomed before it began. That it lasted this long is only a testament to tenacity and unwillingness to find alternatives. (Read more about how airlines themselves predict service will decline FURTHER in Chicago Tribune article "You are now free to take a flying leap" here.)
But in reality, the entire industry isn’t unprofitable. Look at Southwest. That carrier did nothing like United or American, flying point to point, no milage programs, no pre-assigned seating, etc., . So Southwest has the highest domestic carrier customer satisfaction ratings and the highest profits. It is possible to make money as an airline, you just have to use a different Success Formula. The winner won’t be the "last man standing" as if some competitor simply outlasts all the others and is left with the spoils of war. Rather, the winner will be the competitor that figures out how to provide the service in a manner that makes customers happy and turns a profit for investors. And increasingly we can see the long-term winner won’t be one of the U.S. "majors."
Take a quick look at Virgin America. After years of the "majors" using legal fights to stop this new airline from opening, it has made its debut. And nothing like Southwest or the incumbents. It flies point to point, and it focuses on profitable routes with lots of business service rather than just being big. Although it prices low, not trying to be a "business class" airline with high fares. And it has a global reach. You can fly Virgin around the world whereas the big U.S. airlines depend on you flying one of their "partners" for some of the trip.
Virgin Airlines started in England during a horrible flying downturn and when British Airways dominated the market. No one gave it a chance because it did nothing like the traditional airlines. And Cinderalla ended up the prettiest girl at the ball. Now its leaders are doing the same as they enter the U.S. market. They Disrupted traditional thinking about how to be an Ameican airline, and developed a unique approach. Simultaneously, leadership has maintained a wary eye on how to make money while mitigating risks – this is no "race to be huge." Of course, its leader is one of the more Disruptive leaders in modern times, Sir Richard Branson, who turned his former music mail order distribution company into a varied empire of multiple profitable business across industries and markets. (Read more about the Virgin America launch in Time Magazine here.)
Of course, U.S. airline deregulation did not create a "free market." You don’t see Air Canada, Lufthansa or Singapore Airlines fly between any U.S. cities. As previously mentioned, the big U.S. airlines have fought from the 1970s to keep out these other competitors. All of them make money, and are known for more reliable service and far higher customer satisfaction. If we see United or American or Delta crumble into Chapter 11, can we expect regulators to continue protecting the local industry from offshore competitors? Would that be in our best interest? Virgin’s launch is an indication that these regulators are as tired of bad service as fliers. How will the remaining "majors" survive when they have to compete with airlines that have built profitable Success Formulas in other markets they can rapidly export to U.S. customes?
Business competition is not a game of "Last Man Standing." There are all kinds of variations competitors can employ to avoid the bloody "fight-to-the-death" battle of foolish Goliaths. As a result, multiple competitors displace the fallen gladiators, but do so more effectively and more profitably. In the end, markets transition to new competition based on new services and products. Don’t expect a protected American or Continental airline to be handed the U.S. market to exploit. Instead, begin preparing for market upheaval as these behemoths falter and fail – and new competitors are allowed to enter, changing how we think about flying. For most customers, it can’t happen fast enough.
by Adam Hartung | Jun 23, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in, Quotes
Do you have any doubt that the viability of traditional newspapers is at risk? Every newspaper in America is printing fewer pages today than a year ago (and most fewer than 2 years ago). Young people (meaning under 35 – if that’s really young) never got hooked on newspapers, and older readers are abandoning subscriptions, causing advertisers to abandon newspaper advertising – leaving the newspapers with big revenue shortfalls. As ad spending on the internet keeps growing at 100%/year, and Google explodes with revenue and higher valuations as a result, is there any doubt that the typical morning newspaper will have to undergo fundamental restructuring?
Readers of this blog probably don’t have much doubt. But read this quote from the CEO of a major Chicago newspaper – the Sun Times Media Group. "The fallout of this forced downsizing of the nation’s newsrooms is not being replaced elsewhere in our society, nor is it likely to be. Hence, with our most important asset, the newsroom, we will continue to have little competition. When the economy rebounds 12 to 18 months from now, as we believe it will, the newspapers will not only survive but somehow and in some form thrive again." (Read quote in Chicago Tribune article here.)
Give me a break. Talk about putting your head in the sand. Mr. Freidham is really saying "Hey, I’m Locked-in to what I’ve always done and I don’t want to change. Just give me some time, and probably more money, and I’m sure somehow my old Success Formula will make money again. Trust me." Effectively, he’s saying investors should ignore all market information and simply hope, literally, that somehow they will again make money.
That’s probably what the CEOs of Montgomery Wards, Polaroid, Fannie Mae, Brach’s Candy and Wicke’s Furniture were saying a few months before Chapter 11 wiped away their company existence.
Meanwhile, the Huffington Post is opening an office in Chicago. Now, traditionalists might not care about this. But truthfully Ms. Huffington and a few of her 40-odd employees represent a new kind of competitor that is far less expensive, and makes a pretty good, competitive product. Rather than newspaper journalists from the New York Times or Washington Post, who told us about Vietnam 40 years ago, we have Ms. Huffington and her cadre on television almost nightly. Especially when it comes to politics, they are considered closer to the news sources than many leading newspapers, and their reporting is considerably more timely. If you want to know John McCain or Barack Obama’s next move on a vice presidential selection keep your browser on Huffington Post rather than waiting for what the Sun Times will print tomorrow. The Huffington Post may not yet be the L.A. Times, but at a fraction of the cost they are rapidly making improvement, growing readership and advertisers, and making money in the process.
All the major newspapers could have opened web sites and become the Huffington Post. Marketwatch.com, had no advantage over the Wall Street Journal. But the newspaper leaders didn’t try to embrace the web and find a new Success Formula. Instead of opening web bureaus and giving them lots of cash to figure out how to be the next CNNMoney.com they under-invested in the web environment. They tried to make the web sites just some sort of mirror of the newspaper – without knowing how to get ad revenues for the effort. And to this day, the major newspapers are still not internally Disrupting and opening White Space to redefine themselves on the web. Successful web sites are not anything like newspapers – yet they distribute news rather effectively.
I like to read a newspaper. But I don’t read every word. I like the paper because I can scan it. If I like the headline, I grab a few words. If I like the article, I go online and find the article to read later digitally. So why don’t newspapers just print the headlines, an article abstract and on-line addresses? That’s just one idea out of probably a hundred to change how newspapers operate. Why don’t they try them? Because they don’t know how to make the on-line business profitable! No major newspaper today sells on-line ads at the same time as print ads – and they don’t know how to sell on-line advertising effectively. The publishers never Disrupted their operations, realized there is real risk in avoiding change, nor created White Space in which to learn. Now the market shift to on-line is so far advanced they are without the resources and time to learn.
Newspapers need to take action, and fast. Misplaced optimism about the future is simply dreaming – yearning for the past to return. There are things newspapers do well, and digging up stories is one of them. But in a declining print readership market, they’ll lose that capability if they don’t quickly learn how to profitably monetize it. With the Sun Times near bankruptcy due to years of mismanagement and fraud, and now Tribune Corporation sailing toward the brink due to its incredible debt load, it’s possible Chicago readers and advertisers could be without an effective local news source in just a few years! It would behoove these companies to realize the newspaper of old will never return, and pour their resources into discovering a new way to compete – Pronto! Or we won’t have anybody left doing the hard work of journalism and it will be the consumers of news that suffer most.
by Adam Hartung | Jun 20, 2008 | Defend & Extend, General, Leadership, Lock-in
I was at an executive event last night where the moderator asked the audience "will this current U.S. economic downturn last 12-18 months, or more like 36 months and possibly longer?" By show of hands, clearly 90% expected a short downturn. When he asked why, the prevailing opinion was "because these things just don’t last much longer, and the press always makes things sound worse than they are." When he pursued the audience for more depth, for specifics about where the new jobs would be, where the new revenues would come from no one offered anything beyond a weaker dollar surely helping exports – which he admitted still dramatically trailed imports.
This audience had not really asked itself just what could go wrong. If we want to position our businesses for success, it’s best we ask ourselves "What if…"
Many of the airline gurus, those who have long supported industry consolidation and hub-and-spoke systems, are now saying that higher jet fuel will cause at least one major airline to disappear. That’s right, not the same old "go bankrupt, but keep operating" syndrome that we’ve seen at Continental, United, etc. over the years. They are saying one day one of these huge airlines will say "we’re out of cash – investors have lost confidence and will no longer give us money in exchange for future promises to pay – we’ve not met expectations too often – so tomorrow we are grounding our entire fleet – we’re laying off all of our pilots, flight attendents, gate agents and mechanics – tens of thousands of employees will need to file for unemployment – all of our gates will revert back to the airports – we’re done."
Now, you may think this scenario sounds improbable. But, what if……. What will happen? Airplane tickets will triple in price. As many as 200 smaller cities in the USA will lose all flight service. Airports short of payments will be unable to make municipal bond payments. What will be the impact on your business? Are you prepared, or if this happens will you "wing it"? Could you suddenly lose contact with your customers? Your vendors? How will your revenues be affected?
Or, let’s consider the auto industry. When I was young I remember when GM had almost 50% market share in the United States. Now, it has 21%. We are so used to the slow loss of share, the perpetual bad news from GM, the last 25 years of hearing how GM is struggling with its cost and providing rebates or no interest financing to sell cars, that we’ve quit listening. But yesterday, as its market value declined back to what the company was worth 25 years ago, the GM spokesperson responded to questions about the future by saying "We continue to believe we have adequate liquidity for 2008." (read article with quote here.) Get that ringing piece of confidence – they have enough cash to survive for another 6 months! That’s the best they can say?
We are so used to hearing the bad news, we keep thinking that’s the norm. But in reality, GM for the last 25 years has been selling assets to keep the car company alive. They sold EDS, Hughes, their parts business (Delphi), and their financing arm (GMAC). They’ve sold assets – like a person selling first a lung, then a kidney – to get the cash to feed the poor returns from selling cars. Now, they are running out of assets. And they are running out of cash.
Today we read that Ford, which had a combined loss of $15.6 billion in 2006 and 2007 will not turn a yearly profit in 2008 or 2009. It’s dealer lots are flooded with trucks the dealers can’t sell at profitable prices. So the leaders have turned to 91 year old Kirk Kerkorian for specialized financing such as a preferred equity to keep the company afloat. Don’t be too encouraged, Mr. Kerkorian made a run to take over GM in 2006 but was out of the deal with a fast profit for himself – and no benefit to investors or employees – in 2007. This is all about a fast buck for Kerkorian and a Hail Mary attempt to keep Ford alive by its Chairman and CEO (read article here.)
What if sometime in the next 18 months we read "Due to a collapse in investor confidence, GM (or Ford) unfortunately must announce it is filing bankruptcy today. Lacking sufficient cash, we will be idling 80% of our plants and workforce effective Friday. Our dealers should expect a reduction in output of 90%, and possibly no new car models for the next 4 years as we look for a way to reorganize the company into a much smaller but more competitive entity." What will this do to your business? As 50,000 employees go on unemployment, as unfunded pensions are exposed and the retirees see themselves fall back exclusively on Social Security, as suppliers begin declaring bankruptcy like dominos, what will happen to your business? To your customers?
We all tend to look at the future as an extension of the past. We expect things to be pretty much the same – sort of plus or minus 5%. But what if that’s not what happens?
For decades the U.S. Federal reserve held as 90% of its assets U.S. government bonds. While bailing out banks the last 6 months that percentage has declined to less than 60% – meaning that the "full faith and credit of the United States" as printed on the currency is now 40% backed by mortgage instruments or bank instruments tied to mortgages that are considerably more speculative than a U.S. bond. If you think the banking system can’t fail – like it did in the 1930s – just keep that little fact in mind. What if the dominos don’t stop falling at the banks, and the Fed can’t stop the bleeding, and the currency speculators are right and we lose our national liquidity? Could we lose the ability to borrow money for our busineses – like happened in the 1930s? What if…..
Are you considering all the possiblities? Are you preparing for the bad, as well as the good? What scenario are you planning for? The one that looks like the past, or one that might be different?
by Adam Hartung | Jun 19, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Everybody knows FedEx (see chart here). Pioneers in air delivery, before the days of email we all used Fedex to send documents quickly. For years the name was synonymous with overnight delivery. But, competitors UPS and USPS figured out what FedEx did well domestically, and began offering better service at lower rates. Internationally, DHL improved and eclipsed FedEx services as well. By 2007, FedEx was a once great brand locked into tough competition in a business that was very economically sensitive – and where FedEx had no clear advantage.
A lot of people missed it when FedEx bought Kinko’s. Another great brand, Kinko’s invented the copy center business. Those of us who grew up with carbon paper remember when Kinko’s stores made it possible for everyone to get copies cheap and fast. But, again, lots of people figured out how Kinko’s did it – and pretty quickly Staples, Office Max, Office Depot and many other competitors were offering copies just as fast and cheaper.
Both companies became desperately Locked-in to their Success Formulas. Both needed to change in order to become more competitive. They needed to eclipse competitors by finding new markets and new solutions they could use to grow. Instead, FedEx bought Kinko’s. And both kept doing the same thing. By and large, no one noticed.
Now the 3 (FedEx) plus its acquisition (1 for Kinko’s) sums to 3.5. Both are struggling to compete, trying to do more of the same better, faster and cheaper but to no avail. Now FedEx is announcing it is declaring a quarterly loss – of course blaming rising fuel cost. The fact that they didn’t ever figure out a new Success Fomula that was less fuel dependent is being ignored. In fact FedEx is taking a nearly $900million write off on the Kinko’s acquisition! (read article here) Instead of "synergy" where the combination creates its own benefits, we have value destruction.
And what is FedEx going to do? Why, change the name of Kinko’s to FedEx Offices. Somehow, by destroying the Kinko’s name they will gain some sort of advertising synergy? Maybe that 3.5 will become 3.25 soon.
FedEx needs to develop a new Success Formula. The acquisition of Kinko’s offered the opportunity to figure out something new. But instead, the "operational execution" culture at FedEx caused them to push both companies to simply further attempt maximizing existing Lock-In without much change. There were no Disruptions in FedEx saying "hey, we have to things new and differently to create growth" – nor were there any Disruptions in Kinko’s. Nor was any White Space created to develop a new Success Formula. So both companies kept focused on doing what they always did. Now, both are in growth stalls – and the future is bleak. An improved economy will not turn around FedEx – it will just help all these competitors do better while FedEx continues to struggle – and within a few years we can expect more store closings and weaker service.
by Adam Hartung | Jun 16, 2008 | Defend & Extend, Disruptions, General, In the Swamp, Innovation, Leadership, Lock-in
Here we sit with nearly $150/barrel crude oil. In the USA gasoline is over $4/gallon, and diesel fuel is nearly $5.00/gallon. For the first time since the 1970s, adjusted for inflation we have new highs for petroleum fuels. But we can’t seem to break our reliance on petroleum. We all know that petroleum demand gives a lot of power to leaders in unsettling countries – where peace is an uncommon word and decision-making bears no relationship to U.S. or European processes. And we know that long-term the oil will run out. And we know that we all would benefit, maybe even the climate would benefit, if we used other "renewable" energy sources. But we don’t. Why not – are we all collectively "stupid."?
Quite to the contrary, we all are acting very rationally. In the 1970s oil went from $2/barrel to $30/barrel. That caused such havoc it sent the U.S. economy into a tailspin. But the major supplier of oil, OPEC, quickly got the message and began pumping more oil. It wasn’t long into the 1980s before oil restabilized at $15-$20/barrel. The U.S. businesspeople breathed a collective sigh of relief, and went on about business without much change.
How brilliant of the suppliers. When the price became so high that Americans truly started investing in alternative fuel sources they quickly lowered the price. They made petroleum competitive enough that alternative technologies, which were less effective, economically unviable. Now we hear they are looking at the world with exactly the same analysis (go to WGN TV web site here for 30 second clip.) They have kept raising price until we are at the edge of making substantial investments in alternative energy – such as reactivating our nuclear program for electicity production – and now they plan to control supply to maintain price.
We are not foolish people, we are reacting economically correctly given current market conditions. We may hate higher energy cost, but we will pay it until there is a more economic alternative. And today the alternatives, from E85 gasoline to hydryogen cars to electric cars simply aren’t as effective and are costly. These alternatives probably would have far better performance given money and time to work on them – but who wants a "less good" solution at the same or higher price?
This is the way it is for all new technologies. They are less good until they find markets where they can be developed into a more competitive solution. These new solutions are what Clayton Christensen called "Disruptive technologies" in his excellent books The Innovator’s Dilemma and The Innovator’s Solution. OPEC’s leaders are pricing to make sure that oil remains the best economic solution for as long as possible – so they raise price but not too much.
The only way to change our reliance on petroleum is to develop a replacement. But who will pay? Who will pay for the less good solution? It would be an unwise consumer to invest in an electric car when it costs more and lasts a shorter time. Or in a hydrogen car when there are no refueling stations. Or for a building developer to invest in solar panels when it drives up the total cost of rent for his tenants.
Baring intervention, we will keep using petroleum until the supply declines to the point that there is no choice but to develop an alternative. When the petroleum becomes so rare that the cost goes so high that the other solutions become relatively cheaper. That could take many more decades. And could entail more wars and other very costly societal impacts.
The only way out of this connundrum is to use either penalties for the fossil fuel (such as taxes) or to provide subsidies to the less economical solution. And these penalties/subsidies have to be implemented by the government. But in a society, like the U.S., that is Locked-in to concepts of "free markets" and "no taxes" and "no subsidies" these programs are not attractive to politicians who must stand for re-election. What politician wants to be the one who voted to raise the gasoline tax $.50/gallon? Who wants to be accused of "pork barrel politics" for providing a subsidy of $3,000 for buying an electric car (especially if made in Japan or Korea)? Or giving a real estate developer a $200million grant to install solar panels? Or paying a farmer $50million and then giving a company $1billion to build a windmill farm?
As long as we remain Locked-in to our assumptions about the benefits of free markets, low taxes and no subsidies we will continue to march down the road of continued fossil fuel dependence. Economically, it will always be cheaper to sustain petroleum than develop a new solution. The only way we can overcome this will be to Disrupt our approach to energy. Future behavior is highly predictable when we have current industry executives, who want to sustain petroleum as long as possible, setting our energy policy. They will always make the case for drilling more holes, opening new mines and building new refining facilities. That, on the margin, is currently the most economic solution. Only by Disrupting our approach to energy – then creating White Space for new solutions to develop – can we ever change. We have to create the projects to test these new solutions. To learn and make advancements in order for the new technology to become economically more effective. And that can only happen in places which are not being managed by people that benefit by sustaining the status quo.
99% of the world’s population is paying money, today, to less than 1% for petroleum. This is a vast transfer of wealth. From not only the developed markets in Japan, USA and Europe, but China and India as well. This is making those who lead the middle east and selected dictator-controlled countries in Africa and South America incredibly rich. And none of that money is being invested in an alternative to fossil fuels. If we are ever to change, it requires we address our underlying assumptions about trade and lassez faire economics – New solutions require Americans disrupt their beliefs in doing what is always most economical today – and create White Space where we can develop new solutions that will someday surpass the oil on which we are all so dependent – and tired of complaining about.
All new solutions have a cost to develop. There is an early days when they are less economical than existing solutions. They are either subsidized in the early days, or they don’t happen. At least not until the old solution becomes prohibitively expensive. We subsidize commercial ventures all the time – such as the 20 consecutive years of losses which were subsidized by investors in Federal Express. Or the consistent reinvestment made by investors in unprofitable airlines. Or the losses sustained in the early days of Amazon and eBay. But America’s current Lock-in to old-fashioned economic notions about pricing, taxes and government subsidies means that little will be done to address reliance on petroleum. We could maintain the status quo for another 50 years. And that is unfortunate. Because now is a good time to recognize the Challenge, Disrupt our thinking, and implement White Space projects that could change our energy policy dramatically in just a single decade. But only if we are willing to address our old Lock-ins to an outdated economic Success Formula.
by Adam Hartung | Jun 12, 2008 | Disruptions, General, Innovation, Lifecycle, Openness
Yesterday the news services all reported that America’s National Center for Health Statistics now has determined the average person born this year will live to over 78 years old (read article here.) White women will live to 81, and white men to 76, while black women to 77 and black men to 70. Did you haar about this on the television, radio or see in the newspaper? What are you going to do about it?
We’ve known across our liftetimes that people are living longer. Substantially longer. So, hearing this sort of information becomes like the weather – we see it but we don’t really pay any attention. Unless there is a pending calamity (such as a thunderstorm) we pretty much ignore the information. But this really has some big implications. And for businesspeople, failing to plan for those implications could be deadly.
The most obvious implication is retirement. President Franklin Roosevelt declared the retirement age would be 65 when he established Social Security. Where did 65 come from? It was the life expectancy at the time. In other words, the program wouldn’t be too costly because at least half of Americans weren’t expected to survive to ever get a check. That’s no longer true. So can we continue to expect retirement at 65? If not, what does that mean for your business? When was the last time you hired someone knew who was over 55? If she can work until 75, is a 20 year potential loyalty too short? Maybe the company that seeks out people over 55 to hire will have an advantage? Will these older workers be more dedicated, harder working, less distracted by children at home and school, quicker to complete tasks due to more experience, make fewer mistakes due to better judgement, require fewer benefits (like child care or education subsidies), be more punctual and possibly even work for less pay?
Oh yes, but there’s the cost of health care. We all know health care costs are going up. Of course, 20 years ago people with strokes, heart attacks and cancer died. Now we know not only how to save their lives, but keep them alive for a very long time with medication, rehabilitation services and assisted living. Of course there’s a cost to this. How will we pay for this? Will health care jobs become less valuable? Will we import health care workers? Will we export health care work to foreign countries – asking people to go to India on vacation and replace a hip while there (medical tourism is one of India’s fastest growing businesses)? Will we change our lews and care standards so that health care is more automated and cheaper but with an allowable error rate? Who will benefit from changes in health care?
We used to accept health insurance companies saying that once you had one of these illnesses your insurance forever after would be extremely expensive – if you could obtain coverage at all. But should employers accept this? We now know cancer, heart attack and stroke survivors live decades without recurrences – so does it make sense to charge more for insuring these folks. If we keep adding up more and more people who are survivors of illness will we end up with the government the "insurer of last resort"? If we want to employ these people but we don’t because of heath care costs can we expect governmental intervention? Will we begin charging penalties for smoking, drinking, poor exercise habits? Will we lose our civil liberties as we strive to lower health care costs (no one thinks its a bad thing that we force everyone to wear a seat belt today – a clear loss of the civil liberty to choose whether to wear one)? What insurance practices will be necessary to compete? What insurance practices should employers seek out?
How about immigration? As we live longer the average age is going up as well. Where will the younger people come from to do all the manual work the retirees don’t do? Should we expect an impact on immigration reform that might involve allowing more workers into the country to offset the aging? Will that lead to an increase in demand for education and skills training? Will it change our use of English as the only language? Will it change the foods sold in grocery stores? Demand for housing, and the type of housing desired?
What about television programming? Will it remain totally focused on younger people in the "coveted advertiser age groups" below 54? Will it make sense to run movies at 7:00pm rather than 11:30 or midnight? What about retail stores, should they make changes for an older average population? Do huge shopping malls make sense if people are less interested in spending the day roaming this indoor paladium?
Average life expectancy is just a simple projection, made by the government every year. Easy to ignore while we run our business every day. But it has significant implications on many businesses – implications that could have an impact in as little as 5 years. Add onto that other easy projections – like urgan sprawl is causing water use to increase, and growing economies in China and India means exponential growth in demand for fuel, and increasing education in foreign countries means the standard of living is going up faster outside the U.S. than inside – and what do these mean for your business in 5 years? If you’re a homebuilder, should you be in the USA or India? If you run a college should you be opening a new campus in the U.S. or China? If you’re in health care, should your next hospital be in Chicago, or Thailand? If you’re a recruiter, should you be putting your management through foreign language school? If you make TV programs, should you expand your studio in Burbank, or open one in Bollywood? You don’t need a crystal ball. It’s not about having a highly accurate forecast. It’s just, are you really planning for a future that will most likely be different than the past? If you’re not, you’re sure putting a lot of faith in luck.
by Adam Hartung | Jun 11, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
How do you start your planning sessions? Do you talk about historical sales and profit results? Discuss large current customers? Discuss market segments and share? If you do these things, you’re planning from the past rather than planning for the future. These activities define where you are today, and where you’ve been. But how are these important when planning? Isn’t the objective to develop a plan to sell and be profitable in the future – not the past?
Unfortunately, all too many companies use this approach of planning from the past – and it gets them into trouble. For example, Motorola (see chart here). When in despair the Board hired a new CEO in 2004 – and he immediately focused the company on the future, getting a rash of new products out the door in a hurry. Including the successful Razr. But then, they began planning from the past. How could they sell more Razrs? How could they increase Razr share? These efforts led to widespread price discounting. The company sold more Razrs, but it ended up in terrrible shape because it didn’t launch enough new products for a rapidly evolving market.
So now Motorola is behind in "smart phones" (read article here.) This amazes me, because 3 years ago I had the chance to interview a just-left middle executive from Motorola’s handset division. He showed me a beautiful, elegant smart phone that was functional and ready to roll out. He had championed the design and launching the phone. But, Motorola didn’t launch it, and even let him go, because they "didn’t see the marketplace" for smart phones. "People want phones with text today" is what he told me, "and the top brass at Motorola are focused on selling just that." Planning from the past. It wasn’t hard in 2005 to recognize that RIM was growing fast, and all kinds of people would want email access, internet access and other applications from a single device. A little scenario planning and Motorola would have seen that they were perfectly positioned to lead the market. Instead, they kept selling the old product and ended up late to market with new ones — having only 1 smart phone on the market today.
Ford (see chart here) did the same thing. Pick-ups and SUVs were big sellers and very profitable. So Ford kept trying to sell more. And they marketed hard the "beasty" Mustang in ads showcasing the Ford-family chairman. But was it really hard 3 years ago to predict that $2.50/gallon gas would slow sales of these products? Was it hard to predict that growing petroleum demand in India and China would keep oil prices high? There was no scenario planning about what people wanted in the future – only planning for how to sell more of what they had long been selling. So now we find out (read article here) that when Kirk Kerkorian offered to buy 20 million shares of Ford existing investors tendered 1 billion (50x the allotment). Investors have lost confidence in a company that was unwilling to plan for future needs – and now says it will take another 3 years to "retool" for current market requirements.
Doing more better, faster and cheaper is what we all do every day. But when we plan, we must move beyond those activities. We have to develop scenarios for the future in order to see the impact of staying on the current course. For Motorola and Ford, staying the course has hurt them badly. They succeeded well doing more of the same, become category share leaders, technology leaders, and product leaders in what they were doing well several years ago. But the markets shifted. Mobile phone customers moved to more functionality and higher design requirements – things that were not hard to see in scenario development. Auto customers wanted better gas milage. Planning for the future – using scenarios – would have helped both companies overcome Lock-in to old practices that got them into trouble which may sink their businesses. There’s a lot of risk to planning from the past in today’s highly dynamic global markets.
