by Adam Hartung | Jun 9, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
In the search for better business performance there is a management doctrine that says "measure what you want to improve, and focus on the measurement." If you chart the metric, you’ll get better results is the theory. But while measuring things tends to alter outcomes, there have been many examples of how hard it can be to measure the RIGHT thing in order to get the desired outcome.
Many years ago the U.S. federal Government Accounting Office (GAO) was concerned about how much was being paid to programmers working for "beltway bandit" consulting firms. These firms were paid by the hour for programmers, and new development could take hundreds of thousands of hours of programming time. So the GAO decided to measure the lines of code per worker per hour – and even set a standard of 35 lines/hour/programmer. What was the result? Incredibly long programs. Some so long they would abort the computer before compiling and the program wouldn’t even run. What a computer needs isn’t more code – it’s more efficient code. "Good" code. Good code gets more done with fewer computer cycles, less memory and less disc space – all really important to mainframe applications like the government was buying. By measuring lines of code the GAO made outcomes worse, not better.
Now Tribune Company is doing the same thing. The company is going to measure the "content output" per writer to determine productivity (read article here.) So what would you expect? Maybe longer stories? Doesn’t this remind you of high school when teachers said "give me 1,000 words" rather than making you write something intelligent? Do the length of articles determine the value of journalism?
Tribune Company is in a mess. Like I predicted back when the Sam Zell deal to take over the company was created, the market shift in newspaper readers – and thus advertisers – was not going to reverse. Leveraging Tribune with a ton of extra debt would hasten its demise, as the newspaper-centric company would have to cut costs even more drastically than it had in the past – and would have no resources to define a new solution for delivering news and ads to customers. But Mr. Zell and his lenders looked the other way and dove into this project full of real estate developer bravado that he could do what know one else in America had done – turn around a declining subscriptions and ad revenue.
Now, with no reversal of declines in sight, Mr. Zell is looking to whack cost. And he’s looking to do it by improving the number of words written per reporter. Really. This reminds me of the "books by the pound" banners I used to see in strip malls. Only when I went in the stores the books were nothing anyone wanted to read – and were best used as fire tinder (mostly out of date textbooks and obscure overruns of academic works.) Do I want my reporting "by the pound"?
Companies deep in the Swamp, and falling into the Whirlpool, look for anything to try and save themselves. At a time when new ideas are desperately needed, the ideas generated are usually geared toward some sort of draconian notion of cost savings – like in this instance somehow quadrupling the output of words per writer. Or, as this article even discusses, counting how many pages the paper will be and using page counts to determine the "value" a reader receives! Really! Like in the internet age we all care about how thick a book is – or newspaper. We want the important news, we want it accurately, and we want it fast. What we don’t want is a bunch of stuff we won’t read and that gets in the way. There are 4 page bi-monthly newsletters that cost $1,000/year – demonstrating it’s the value within what we read – not the quantity- which determines what we will pay.
A few years ago Reuters news syndication found itself facing financial ruin. But it got creative. The company shut down all operations in England and USA (a major Disruption) and put all of their copy editors in Bangalore (creating White Space.) Today, 100% of the releases you find on the web or in print from Reuters come from Bangalore. Reuters built an entirely new Success Formula with entirely different costs for old and entirely new internet customers. Today, Reuters is smaller but doing nicely. And that’s what companies in the Swamp, facing the Whirlpool, have to do. Completely Disrupt operations and open White Space far removed and with permission to find a new Success Formula.
Tribune Company cannot survive as it formerly existed. Today, it’s doubtful the sum of the parts are worth the debt. The company has to transition to a "new media" world where the internet is everywhere and information is medium free. No one cares if it’s print, TV, radio or internet. Information is now seemless – something Mr. Zell still doesn’t understand. And he can count words or pages all he likes – but he won’t save Tribune company by trying to whack costs within the traditional Success Formula.
by Adam Hartung | Jun 5, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
"United to park dozens of jets" (Chicago Tribune article here). "Janesville facing future without GM" (Chicago Tribune article here) [note: Janesville, WI is a 63,000 person town in southern Wisconsin employing 2,200 in a local GM truck plant]. In both instances, company management is simply lopping off its use of assets – shuttering assets on its books – because it has no profitable use for them. Imagine that, owning dozens of airplanes or complete manufacturing plants and having no profitable use for them. Not even selling them, just not using them.
Regarding United "ground dozens of its ..aircraft..as part of a sweeping round of cuts intended to help the carrier conserve cash and survive as a stand-alone company in daunting times." When journalists talking about conserving cash to survive, it tells you this is a company on the brink of failure. Imagine you’re in the desert, running out of water, no one knows where you are, and you decide to just sit and not move so you can conserve your energy and remaining water. What will the end be? Baring a miracle, you’ve decided to die on the sands.
Regarding GM "Wagoner, the chief executive of General Motors Corp., made the announcement in Delaware: Janesville and three other plants will be gone because of a dramatic market shift from large trucks to fuel-efficient cars." Now, exactly to whom was this "dramatic market shift" a surprise – and even dramatic? Fuel prices have been going up for 5 years, and hybrid cars have been the hottest ticket for 3, and the decline in large truck/SUV sales has been happening since gasoline hit $2.50/gallon. What exactly has become recently "dramatic"? How about expected? Predictable? Planned for? Obvious?
Air India, Singapore Airlines, and Lufthansa are just 3 airlines that are expanding flight capacity profitably. Toyota, Honda and Kia are all growing capacity. Explosive growth is occurring at Tata Motors. The demand for travel and cars hasn’t declined – but you’d think so if you listened to executives from United and GM. Their Lock-in to doing what they’ve always done has caused them to miss market shifts that were as predictable as – the calendar. They blame market shifts. They should blame themselves. The headlines say it all.
by Adam Hartung | Jun 3, 2008 | Defend & Extend, General, Innovation, Leadership, Lock-in
Lately, there’s been lots of press about mergers. With the economy listing, reports are rife that retailers need to merge to survive. Airlines need to merge to survive. And now we read beer brewers need to merge to survive (read article in Chicago Tribune here). Is this true? Do these businesses have to merge to survive?
Most mergers are based on the simple idea of "economy of scale." This is a very Industrial Revolution idea that the company with the biggest manufacturing plant has the lowest cost – and thus wins! Advocates claim that you keep buying competitors so you build more volume in order to spread out marketing, advertising, administrative (accounting and legal for example) costs over more volume – because these costs don’t need to rise as fast as volume (in their estimation). Similarly, within manufacturing or operations there will be costs that don’t rise as fast as volume, and thus the biggest volume competitor should end up with the lowest per-unit cost. And this supposedly leads to victory because the low cost competitor always wins. As though product differentiation, service differentiation and other factors are irrelevant.
In the case of beer, we’re now expected to believe that unless a company has the most beer volume GLOBALLY they can’t afford to stay in business – so poor Budweiser (see chart here) with its multi-million case annual production is such a small fry it’s going to become toast. Do you really believe that? Will combining Budweiser with a Belgian and Chinese brewer suddently, somehow, make Budweiser a more profitable brand? Just because its parent has more global market share?
Well, we all know we know longer compete in an industrial economy. Today, economies of scale advantages are pretty rare. Competitors can get 99% of scale advantages at pretty low volume by sharing resources – from ad buys to distribution centers to trucks and manufacturing plants. Furthermore, there are lots of people out there wanting to invest in "hard assets" so finding money to expand facilities is very cheap – leading to the lowest capacity utilization for fixed assets in American history! Plants aren’t busting with volume as they expand. Quite the contrary plants are regularly being closed to consolidate capacity into other locations! Economies of scale are a proven concept – but having them as a competitive advantage is another point entirely. We now compete in an information economy where the rules are entirely different than before.
So why all this merger mania? Firstly, because so many people believe in economy of scale advantages (which worked really well in the 1960s and 1970s) they keep believeing in them even though they no longer exist. And because merging is something a CEO can drive from his own office. If he runs a company wtih $100 revenue, and he buys another with $100 revenue, he now controls more people, more plants, more costs, more revenues – and by gosh hasn’t he done competitively well? He’s taken over the competition, and made his company bigger and doesn’t that mean competitive success? Given how we hero-worship the CEOs of large companies, and provide more hero attributes the largest of these, we demonstrate regularly that we think of a merger buyer as the "winner" and the merged company as a "loser." But is that true when the only growing beer brands are the craft beers and they are considerably more profitable than the traditional part of the business? Isn’t it time to focus on a different way to compete if we want profitable growth?
Does merger activity produce better products, lower prices, better customer satisfaction, lower cost, more jobs, better communities and higher returns for investors? Oh my, but this are tough questions. Virtally all academic studies of mergers have shown the opposite. The merger reduces product innovation and new product launches, creates higher prices (in fact that’s the objective of airline mergers), lower customer satisfaction, create little change in per unit cost (it goes up more often than down), fewer jobs as layoffs dominate, and investors of the "winning" company receive nothing for the effort.
We have to move beyond out-of-date ideas like "economy of scale advantages" if we’re going to break out of the no-growth, no-jobs economy dominating the U.S. since 2000. We need to use Disruptions to drive new ideas, and implement White Space to test them.
Illinois Tool Works (see chart here) has demonstrated that companies can be very successful with mergers. Acquisitions aren’t inherently bad. But they are if they are done for the wrong reason – like economy of scale advantages. Instead, ITW uses mergers need to make better products, improve customer satisfaction, develop more new products and launch them leading to better revenue growth and better cost/price performance leading to higher profits for investors. Mergers can be very valuable to successful strategy – but they have to be well designed, thought through and managed for those results – not merely assumed to produce lower cost because volume is being consolidated.
by Adam Hartung | Jun 3, 2008 | Defend & Extend, General, Innovation, Leadership, Lock-in
Lately, there’s been lots of press about mergers. With the economy listing, reports are rife that retailers need to merge to survive. Airlines need to merge to survive. And now we read beer brewers need to merge to survive (read article in Chicago Tribune here). Is this true? Do these businesses have to merge to survive?
Most mergers are based on the simple idea of "economy of scale." This is a very Industrial Revolution idea that the company with the biggest manufacturing plant has the lowest cost – and thus wins! Advocates claim that you keep buying competitors so you build more volume in order to spread out marketing, advertising, administrative (accounting and legal for example) costs over more volume – because these costs don’t need to rise as fast as volume (in their estimation). Similarly, within manufacturing or operations there will be costs that don’t rise as fast as volume, and thus the biggest volume competitor should end up with the lowest per-unit cost. And this supposedly leads to victory because the low cost competitor always wins. As though product differentiation, service differentiation and other factors are irrelevant.
In the case of beer, we’re now expected to believe that unless a company has the most beer volume GLOBALLY they can’t afford to stay in business – so poor Budweiser (see chart here) with its multi-million case annual production is such a small fry it’s going to become toast. Do you really believe that? Will combining Budweiser with a Belgian and Chinese brewer suddently, somehow, make Budweiser a more profitable brand? Just because its parent has more global market share?
Well, we all know we know longer compete in an industrial economy. Today, economies of scale advantages are pretty rare. Competitors can get 99% of scale advantages at pretty low volume by sharing resources – from ad buys to distribution centers to trucks and manufacturing plants. Furthermore, there are lots of people out there wanting to invest in "hard assets" so finding money to expand facilities is very cheap – leading to the lowest capacity utilization for fixed assets in American history! Plants aren’t busting with volume as they expand. Quite the contrary plants are regularly being closed to consolidate capacity into other locations! Economies of scale are a proven concept – but having them as a competitive advantage is another point entirely. We now compete in an information economy where the rules are entirely different than before.
So why all this merger mania? Firstly, because so many people believe in economy of scale advantages (which worked really well in the 1960s and 1970s) they keep believeing in them even though they no longer exist. And because merging is something a CEO can drive from his own office. If he runs a company wtih $100 revenue, and he buys another with $100 revenue, he now controls more people, more plants, more costs, more revenues – and by gosh hasn’t he done competitively well? He’s taken over the competition, and made his company bigger and doesn’t that mean competitive success? Given how we hero-worship the CEOs of large companies, and provide more hero attributes the largest of these, we demonstrate regularly that we think of a merger buyer as the "winner" and the merged company as a "loser." But is that true when the only growing beer brands are the craft beers and they are considerably more profitable than the traditional part of the business? Isn’t it time to focus on a different way to compete if we want profitable growth?
Does merger activity produce better products, lower prices, better customer satisfaction, lower cost, more jobs, better communities and higher returns for investors? Oh my, but this are tough questions. Virtally all academic studies of mergers have shown the opposite. The merger reduces product innovation and new product launches, creates higher prices (in fact that’s the objective of airline mergers), lower customer satisfaction, create little change in per unit cost (it goes up more often than down), fewer jobs as layoffs dominate, and investors of the "winning" company receive nothing for the effort.
We have to move beyond out-of-date ideas like "economy of scale advantages" if we’re going to break out of the no-growth, no-jobs economy dominating the U.S. since 2000. We need to use Disruptions to drive new ideas, and implement White Space to test them.
Illinois Tool Works (see chart here) has demonstrated that companies can be very successful with mergers. Acquisitions aren’t inherently bad. But they are if they are done for the wrong reason – like economy of scale advantages. Instead, ITW uses mergers need to make better products, improve customer satisfaction, develop more new products and launch them leading to better revenue growth and better cost/price performance leading to higher profits for investors. Mergers can be very valuable to successful strategy – but they have to be well designed, thought through and managed for those results – not merely assumed to produce lower cost because volume is being consolidated.
by Adam Hartung | Jun 2, 2008 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
We usually say we know when someone is dead. But in today’s modern world, we’ve found out that often there are people who are alive now, but we know will not survive more than a few hours or days. We see trees that have rotten roots – but look alive for another season or two before so little sap rises that no more leaves sport in spring. The arborist tells us that we might as well cut it down, before it falls in a big wind causing avoidable damage, but we keep hoping the tree will revive next year. The reality is that we tend to be very optimistic about the future even when we have no reason to be so. We want to believe things will get better right up to the very, very end.
Businesses operate that way as well. When their Success Formulas become obsolete we see signs of root rot in their lower customer satisfaction ratings, poorer performance against industry metrics, lower market share, weak reactions to competitors (especially new ones), higher prices and declining margins. But management is always saying things will get better. Even if there is no reason to believe this.
That can now be said for United Airlines. United has always been one of the "major" airlines (as if Southwest wasn’t major – but that’s not the purpose of this entry.) But as the Chicago Tribune headlined on Sunday "United up against a new reality for airlines" (read article here.) United spent 3 years in bankruptcy after the events of 9/11/01, and promised it had turned the corner when it came out of bankruptcy. But now the company is in deep trouble again with rising costs, declining ridership and no plan for how it will try to survive this very bad economy for airline travel. Customers are being hammered by rising plane ticket prices, new charges for baggage checking and the worst on-time performance ever. The employees are struggling as the company keeps trying to cut pay even more, despite the fact that no flight attendant could live on United’s new hire pay.
United developed root (or should I say route) rot a decade ago. The hub and spoke system designed during derugulation in the 1970s has proven to use lots more fuel, extend flight times for customers making layovers, and take more employees and gates (which have charges) than a point-to-point system. Likewise, a commitment to customizing aircraft for routes has led to a heterogenous and complex set of equipment that is costly to fly and maintain. Amazingly complex pricing has led customers to look at other airlines first when seeking tickets, recognizing that United’s list prices are unrealistic but the customer has no idea how to find a decent price at United when it is incredibly easy at Southwest. And rather than develop a more flexible workforce in its union contracts, United settled for arguing over pay rates leading to an unhappy workforce more focused on its bad pay than happy customers.
United had a chance to fix its problems when it launched its "low cost subsidiary" named Ted. But this wasn’t White Space to try anything new. Ted had to follow all the old United rules. Customers soon learned Ted wasn’t a bargain, it was just the south end of the UniTED mule. Then again, when the government shut down the airlines for a week in 2001 United had the opportunity to propose serious changes to its operations including route changes, renegotiating contracts with unions and vendors and simplifying its rate structure. But instead United focused on re-opening exactly as it had operated before. Which soon led to bankruptcy.
Lately we’ve heard that United needs to merge with another airline to succeed. Even the top brass at United have started to realize that simply getting bigger will not make United more successful. It could even make matters far worse. Higher fueld prices are just the last dagger into the United Success Formula causing the company to face potential failure. But the big problem is that United didn’t admit its problems, its Lock-ins to a failed Success Formula, a decade ago. Now, with the problems piling up fast, its not clear United can be saved. Despite its size, United may well go the way of Pan Am, Eastern, Braniff, Republic, Air Midwest and other failed airlines. There will remain optimists to the bitter end, but reality isn’t hard to see. United is in the Whirlpool and it’s going to take a miracle to pull the company out of it now.
by Adam Hartung | May 30, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
It was Ross Perot who made the phrase "you’ll hear a great big sucking sound" famous when he said them during his Presidential debate with Messrs. Bush and Clinton – referring to the impact he felt NAFTA would have on employment as jobs transferred from the USA to Mexico.
I’ve borrowed it today to refer to the situation at Sears (see chart here.) Hard to believe that it’s only been 3 1/2 years since Ed Lampert used his control of KMart to purchase Sears. Today the combined company is valued the same as it was then – but it’s on a fast track lower. Since the acquisition, it’s all been sucking sound around the Chicago suburbs where Sears is headquartered. Now, the most recent headline from The Chicago Tribune (read article here) says it all "A giant continues to unravel."
The amazing thing was that anyone ever believed this acqisition was going to be good for anyone. KMart had gone bankrupt, and Mr. Lampert used real estate sales (many to Sears!) during the best real estate market in 80 years to fund his takeover of the company. Somehow, people translated that experience into a big win for the struggling, dying Sears chain. Sears had been getting trounced on all sides for over a decade when Lampert took over. And neither management at Sears, nor Mr. Lampert, had any idea what they were going to do to reverse fortunes.
Smart money initially talked that Mr. Lampert would quickly repackage the Sears real estate into trusts and unload them onto the super-hot real estate investors. But he didn’t. Instead, he said he would turn around the company’s profitability. But his plan to do that was effectively doing more of what KMart and Sears had always done, only with less advertising, less marketing, less spending on merchandising, lower pay for employees, fewer open stores and more limited product lines. Uh huh.
Very quickly Mr. Lampert’s cuts produced better margins. Sales declines happened, but not as fast as the cost cuts, producing a very short-term uptick in profits and cash flow. If you sell down inventory while lowering costs you generate cash. So then the smart money then said he was turning Sears into a vast private equity firm that would milk Sears oh so adroitly of its value and invest the money in extremely high return projects – after all Mr. Lampert previously made a fortune as a hedge fund manager. But, the world was awash in liquidity and there were more hedge funds and private equity firms than deals, so the profit of such projects was declining precipitously (even Warren Buffet complained about the prices money managers were paying to do deals as he sat on his cash hoard). Meanwhile, it was Lampert’s hedge fund that had bought KMart which then bought Sears – so in practicality it was Sears that was to make the hedge fund money – not be a hedge fund. Uh huh.
Now, everyone is wondering how anyone can win at Sears. Real estate markets stink. Retailing stinks. Sears revenue per store, and number of stores, has declined for 5 years along with cash flow and profits. Sears has finally made its way from the Swamp to the Whirlpool – and thus "the great big sucking sound" that is what you hear when the last water finally swirls into the drain.
There were lots of optimistic folks all along this journey for Sears. Jim Cramer of Mad Money television fame pumped and pumped his love of Mr. Lampert. To this day the article above quotes a money manager who has recently bought 500,000 Sears shares expecting a brilliant Lampert play (although he has no idea what it will be.) We love to be optimistic. But this game is over. Companies remain in the Swamp, fighting alligators and mosquitos while making no money for investors, creating no new jobs for employees and providing no new opportunities for suppliers, only so long as they have ample resources to fund the messy swamp fights. But due to low returns, and the ongoing sale of assets to preserve the losing battle, there is no way the business can ever return to success. Woolworth’s, S.S. Kresge and Montgomery Wards are just 3 retailers that learned this the hard way. Optimism feels great, but it is unwarranted as the business heads toward its inevitable demise.
When companies are in the Swamp they are just paddling around waiting for the event that opens the drain and sucks them into the Whirlpool. They never know what that event will be – in fact almost no one does. But inevitably some event occurs which simply requires more resources than the business has and in very short order – it’s sucked away. In Sears case I’m sure Mr. Lampert will blame President Bush, Congress and the Federal Reserve for a consumer-led recession which he could not have been expected to predict 3 years ago. He’ll say his problems are their fault. Uh huh.
But in reality, Mr. Lampert could have used Disruptions and White Space to turn around Sears. He just didn’t. He left management’s old Success Formulas, believing in the power of the Sears brands (Kenmore, Craftsman, etc.) and the store locations to save the company. Uh huh. And on top of that he had ultimate faith in his own Success Formula – his financial machination skills to bleed the company of cash or forever bamboozle investors with multiple complex deals – something no one has ever done successfully. Both of these Success Formulas were out of date, and would not work. And since Mr. Lampert did not believe in Disrupting them, and creating White Space to do radically new things, this venture never had any hope.
And it still doesn’t. If your optimistic about Sears open your window and listen – I think you’ll hear a great big sucking sound coming from the mall anchored by a Sears store down the street.
by Adam Hartung | May 28, 2008 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Most businesses plan by using two very simple processes. First, managers try to extend the past into the future. Planners build a track record of data on everything from sales and market share to prices and economic variables, and then they extend that into the future. Works well if nothing changes. To consider if something might change, to fine-tune the plan, managers take out a crystal ball and guess about the future. The result? Businesses end up planning for a future that is pretty much like the past.
Then stuff happens. And the business finds itself in the middle of competitive situations they didn’t plan for, and don’t understand. Usually at that point the executives say "no one could have expected this" and make excuses for their poor performance. Not very for the investors who see their share price drop – or employees that lose bonuses, pay raises, benefits or jobs – or vendors that lose orders.
This is exactly how Ford is acting (see chart here). Ford is now saying it won’t turn a profit until 2010! After years of substandard performance, and hiring an extremely highly paid new CEO, the company is still losing money, sales continue declining and no brightness is offered for the future. And the company is blaming this all on what they claim is the unpredictable increase in the price of oil and gasoline (read article here). Full of excuses, Ford is saying that it simply could not predict the decline in large truck sales and growth in small car sales and they could not have shifted production quickly enough to meet market need. So they are going to lay off more workers, take more losses, and put the company in increasing peril of complete failure as they wait for the marketplace to turn around.
Yet, if we look at Toyota, Honda, Kia and many other auto companies they do not have this problem. Is it due to them being small-car only? Of course not. Look at the Honda Ridgeline, a full size truck, as well as the complete line-up of luxury cars offered by these offshore competitors. Somehow, for the last 35 years, these companies seem to have always been able to make the cars customers want when they want them, thus growing revenues, market share and profits.
Rather than simply extend the past, there is a better way to plan. Use scenarios. If every year business leaders sat down and thought up 10 future scenarios, they could plan for them. Would it have been unrealistic, and without merit, for the top brass at Ford in 2006 to have said, "What if the price of oil doesn’t fall or flatten, but instead keeps going up? What if it goes to $90? $100? $150? $200?" And would it have been unrealistic for them to ask "what happens if Tata Motors of India starts exporting their $2,000 auto into Europe and Asia?" Now, I didn’t say these things would happen. But what would the impact be if they did? And what would Ford be able to do if leaders seriously considered these options in advance?
Businesses need to stop trying to plan using past extensions and crystal balls. Instead, they need to create scenarios about the future. Then really explore the impact. These scenarios can open avenues to consider better plans. Plans that don’t require the past perpetuate (or return). Better options can be developed that cover multiple scenarios. And then each year, growth and profits can continue as the organization adjusts to real world conditions and tactics can be utilized based upon the scenarios discussed.
It’s too bad Ford doesn’t try this. If it did, the company might be able to walk away from the brink of disaster and start developing a set of plans that can make it more competitive. And we wouldn’t be waiting to see if 2010 brings small profits, or bankruptcy.
by Adam Hartung | May 22, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Unfortunately, most of the time Defend & Extend behaviors don’t work. They don’t improve revenues, cash flow, profits or returns for employees, suppliers and investors. A case in point are the large U.S. domestic airlines. (This blog is focused on American, United, Delta – the hub-and-spoke "majors" – and specifically is not about Southwest and other point-to-point carriers that are doing far better with growth and profits.)
Today we’re learning that American Airlines is going to charge some fliers $15 for their first checked bag (read article here.) Locked-in to old practices, even this is more of the same airline behavior. In reality, not everyone is charged for checking, there is a complex set of circumstances that determines who pays and who doesn’t. Just like airline fares, this fee is almost incomprehensibly complex for the typical customer – another typical airline practice (unbelievable, incomprehensible complexity driven by over-analysis of data and over-segmentation when addressing a problem.) Even worse, at a time when we should be encouraging everyone to check their bags (and giving these bags very comprehensive screening) so we can smooth boarding and ease onboard congestion the airline institutes a practice that will create more problems than solution.
Why do this? Because the airlines are desperate for revenue and are turning to fees (read article here). As the cost of flying increases due to the largest cost component, jet fuel, skyrocketing their answer is to institute fees on bags, etc. Wouldn’t the obvious answer be to raise price? When your costs go up by a doubling, wouldn’t you simply say you have to charge more? That may be easy for us to say, but not to the airlines.
The airline leaders aren’t stupid (even though it may appear that way to us travelers sometimes). Instead they are Locked-in to the point they have limited their options for solutions to a very few – which may not save them. When deregulated the airlines had many options. But they very quickly Locked-in on a Success Formula – even before it was proven to make money or satisfy customers.
- They decided to use a hub-and-spoke system to move passengers rather than a more efficient point-to-point system. This was based on the notion of low variable costs (such as fuel) allowing for efficiency losses to be overcome by volume. This put all of the airlines into an intense volume-seeking game.
- They invested enormously into aircraft. In excess of demand, they purchased aircraft in order to drive volume. Very expensive aircraft that are high FIXED COSTS which then increased the demand for more volume.
- They invested heavily in airport gates, trying to get "mini-monopolies" in cities by having the most gates. This again was a high fixed cost investment requiring them to seek volume.
- They built very deep hierarchies modeled on the military. Most early airline executives, and pilots, had military backgrounds so they built their commercial operations on the Locked-in organizational systems they knew. These large and deep hierarchies again became expensive and semi-fixed costs driving the need for more volume.
- They created antagonistic relationships with unions, based on industrial-era views of how to manage employees. They treated employees like nearly fixed costs by relying on conflict-based union relationships, rather than creating a more variable cost approach being developed in most service industries.
- They relied on amazingly complex analytics (literally, the most sophisticated math available) to try finding ways to get people to purchase empty seats. This led to phenomenally complex pricing schemes which trained customers that they should shop, shop and shop to find the lowest price – because there may well be seats for $100 available when the "list" price is $1,000. Causing the complexity to only worsen.
- In the rush for volume, they relied on price as the primary competitive factor. Customer Service was ignored as the airlines Locked-in on price, price, price to try filling airplanes.
- There was no White Space to try anything new. When they launched "discount carriers" (Ted, Song, etc.) they made these subsidiaries use the same planes, gates, reservation systems, etc. as the parent, with the only change being lower pay for employees and less food for customers.
Amazingly, most of these Lock-ins were designed by extremely highly priced management consultants who used industrial-era manufacturing concepts to create the newly deregulated airlines’ business models. These consultants believed that they could treat the airline like a manufacturer, with each plane a machine on the line that needed to be utilized and the hubs as distribution systems. Neat concept, only within months it was clear this approach made no money in an information-intensive services business. It created enormous fixed costs, but negative cash flow and no profits. the airlines had to constantly go back to investors for more equity, and became enormously profitable customers for debt lenders.
With each passing year the airlines Lock-in produced no better results. Some airlines, like Eastern, Braniff, National and Republic went bankrupt. Yet, these "majors" kept doing more of the same, hoping if they just got fast enough, cheap enough and created enough volume somehow they would succeed. Only, the more they did the worse things got!
Now the leaders of these airlines are facing an entire industry bankruptcy (read article here.) Literally, we’re talking about all of the top 5 airlines running out of cash and failing in less than one year. This would be a national disaster – even a national security disaster. Yet, because of Lock-in these leaders see no options beyond hoping to save their airlines with tricks like charging for checked bags. Uhm, "get real" comes to mind. Baggage fees will not fix the horrible results of these airlines who have "been there, done that" as regards bankruptcy more than once. In the past, they cut employee pay some more, refused to pay several debts in full, and wiped out shareholders finding a way to stay alive. But this time, with their #1 cost (jet fuel) so high and showing no sign of coming down soon, they could well walk off the proverbial cliff of disaster with no solution.
D&E behavior has never worked for the airline industry. Not since the first days of deregulation. Yes, many more Americans fly than ever before. But for the airlines themselves (and their employees, suppliers, investors and customers), their Success Formula has been an unmitigated disaster. And this is far too often the result of Lock-in and D&E behavior. D&E causes businesses to do more of the same until they eventually fail.
by Adam Hartung | May 19, 2008 | Defend & Extend, In the Rapids, Innovation, Leadership, Lifecycle
I attack Defend & Extend Management a lot. Too often, managers try to succeed by just doing more of the same – often faster or cheaper. But when markets have shifted, that can produce ever declining performance instead of improvement. Then why is D&E management so popular, and so frequently taught in business school?
When a business is in the Rapids, because it is participating in a growing market, then D&E Management can produce very good results. GM in the heyday of auto sales made huge money being the largest manufacturer – and Dupont was the same during the zenith of chemicals (remember when Dustin Hoffman was given one word of advice post-college – "Plastics" – that was a good time for DuPont). More recently, first Wang then DEC did tremendously well during the growth of mini-computers. And Dell was an enormous benefactor of the growth in PC sales.
Today, Google (see chart here) is riding high practicing D&E Management. The market for searches is continuing to grow. And we’re still in the early days for internet ad placement. Google is doing well merely by doing more (read AP article about Google here.) When the market is growing at 20%/quarter, management is incredibly busy just trying to hire people, get them on staff, get them directed and keep up with customer demands. Market growth keeps Google growing and making money – and management is encouraged by analysts, and investors, to keep doing more of what it has always done. D&E Management is working – producing results.
And this will continue until the market shifts. Companies that catch these growth waves can do well for many years – sometimes decades. Recall the examples above. Dell rode high for 20 years before growth stalled – along with PC sales and tremendous increase in competitiveness of competitors. And the best leadership teams realize they can’t predict when this stall will happen. They just know it will. The cause will always be something unexpected, and thus a shock to the existing Success Formula results. So the best leadership teams in high growth markets practice D&E, and at the same time create and invest in White Space.
The best time to prepare for a market to slow its growth, or become victim of a Clayton Christensen style disruptive technology shift, is when things are going great. When growth is creating plenty of cash, and investors are throwing money at you. During this time, it’s really smart to Disrupt yourself from time to time and set up White Space projects that can focus on alternative Success Formulas. This prepares the foundation for long-term growth, rather than the boom-and-bust scenario of, say, DEC.
Cisco Systems (see chart here) is a case in point. When most internet companies were getting destroyed at the end of the 1990s Cisco relied upon the foundation for continued growth developed by investing in plenty of projects that weren’t the current fast growers during previous years. Rather than just trying to D&E what had worked (and it was working really well to sell network devices to telecom companies) Cisco had already started looking for other competitive products in other markets. As a result, the cliff fall off that lambasted Sun Microsystems, and 3Com, had a far less impact on Cisco. Cisco’s ongoing Disruptions, by constantly trying to obsolete its own products, with a never-stopping focus on looking at future scenarios, helped the company prepare for the dot.com crash. Now Cisco is as strong as ever and continuing to make tremendous returns in a very different competitive marketplace.
Google is doing great. It’s Success Formula has been Locked-in and its is creating tremendous results. And this scenario is likely to continue for years. In the Rapids, life is fun at Google. D&E Management is making money. But keep your eyes open for a market shift. Without White Space, Google could quickly be the next DEC.
by Adam Hartung | May 15, 2008 | Disruptions, In the Rapids, Innovation, Leadership, Lifecycle, Openness
General Electric (see chart here) announced today it is looking at ways to sell its appliance business (see article here). Great move! Too many companies hold onto a business for all the wrong reasons, and refuse to take action to keep themselves in the Rapids.
GE needs to Disrupt. The old CEO, Jack Welch, was famous for taking Disruptions. That’s how he got the nickname Neutron Jack. Keeping his eyes on the future, he kept GE focused on new opportunities and he used White Space to develop new Success Formulas. And while he had the top job GE performed admirably, growing multi-fold. If a business didn’t meet goals, Mr. Welch sold the business and invested his management talent and money in better opportunities.
Now GE finds itself nearing the Flats. Last quarter saw a profit decline. Two in a row, and the company falls into Growth Stall from which it has only a 7% chance of returning to consistent growth exceeding 2%. So that blip in a century-old record was a very big deal. And the good news is that the current CEO seems not to be ignoring it. He looked around, and found one of the long-legacy businesses of GE with little innovation and limited growth. While competitors were re-introducing front-loading washers, low energy and low water washers, and scads of various innovations in large appliances his team was #1 in share but far from #1 in market leadership. Management was happy to blame poor performance on the bad U.S. economy, and the stagnation in U.S. new home sales, planning on a recovery some time in the future. So sell it! That’s what Mr. Welch would have done, and that’s what Mr. Immelt is now doing. There are always opportunities for innovators in all markets, and keeping around Locked-in management teams that think they are doing OK because their markets turn south only breeds ongoing poor results.
Yes, GE was in appliances for 100 years. But so what? Today appliances are only 4% of this $178billion revenue behemoth. And GE needs to maintain its growth goal of 10%. The CEO can’t accept excuses. Millions of houses are being built in India and China and South America – and with enough innovation current homeowners will replace old appliances. Insufficient growth is a management issue – not a market issue. Markets are how you define them, and if your defined market isn’t growing go into another one! GE needs to stay in the growth Rapids, and having been around a long time is no reason to coddle a management team that doesn’t know how to maintain growth. GE is in a lot of businesses, and it has gotten out of a lot of businesses, and it can get into a lot of new businesses. Congratulations to the top executives for not letting history put the company at risk of going into the Flats and then the Swamp of low returns.
Too many leaders are unwilling to Disrupt. They let ties to Lock-ins keep them trying to "fix" a business. Doing more of the same, trying to be faster or cheaper, when what’s needed is a new Success Formula. GE is showing us that if you keep your eyes on the future, and hold tight to meeting your growth goals, you can’t afford to let Status Quo Police keep you focused on Lock-ins. You can’t try to succeed by merely Defending & Extending what you always did. You have to be willing to Disrupt and do entirely new things. You have to Take Action before it’s too late. Good job GE.
