by Adam Hartung | Apr 16, 2007 | General, In the Swamp, Lock-in
Those blog readers from the U.S. could not miss the media bruhaha this week over Don Imus. He was fired for saying some outrageous things on the radio.
Don Imus is a self-proclaimed "shock jock". Don made a living for over a decade by saying outrageous things to public listeners of his radio show. He made a fortune, well over $1,000,000 per year personally and multiples of that for his producers and syndicators.
So, what happened? He created a Success Formula all around being outrageous. And the more outrageous he was, the more it appeared people listened, and the more advertisers wanted his show, and the more money he and his network (CBS) made. Don Imus spent 10 years building this Success Formula, and Locking it in. He was succeeding with this outrageousness, and his producers succeeded, and CBS succeeded and all the affiliate stations that aired his show succeeded. So, they kept promoting outrageous behavior. And, as more people listened, even very well known, very famous, very successful people appeared on his show. They leveraged Don Imus’ success to give them access to more people and increase their awareness and success. That’s what a Success Formula is all about. People succeed by doing more of what they always did. And they Lock it in.
But then, the market shifted. Not clearly. Not obviously. Not with an announcement on the front page of the New York Times. But public sentiment shifted about "shock radio." We could see the signs. Howard Stern and his producer (Clear Channel Communications) were severely fined by the FCC for things he said. The pressure became so great Howard was forced to go from public radio (called terrestrial radio now) to pay radio (called satellite radio.) And we could see that there were increasing negative articles appearing about off-color comments by everyone from Stern colorful characters like Rush Limbaugh. But Don Imus and his producers ignored the signs of this market shift and continued to push their Success Formula.
Then, last week, it all came down. Mr. Imus said something that got under the skin of too many people. In a week, his sponsors (advertisers that paid for him to be on radio) refused to support him any longer. His revenue dried up, and he was fired from his show.
Why did this happen? Because he (and his producer and his station CBS) were so Locked-in to the Success Formula, which was working, that they ignored the signals of market shifts. They kept right on going until they fell off the proverbial cliff. That’s what happens to Locked-in businesses. Too often, they work that Success Formula right up until it fails. Rarely do we see an example that is so dramatic and quick. But now, we have a very good example of the risk of following your Success Formula and ignoring market Challenges and shifts.
by Adam Hartung | Apr 11, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Today Citigroup announced it intends to dramatically overhaul operations (see stock chart here). The company will cut 17,000 jobs as it strives to remove $1.2B in expenses. Citigroup says it is doing this in order to grow. Huh?
Setting the stage: Citigroup is the country’s largest financial institution. Until the last few years when oil prices drove up profit for oil companies, Citigroup was the most profitable company in the world. But the last few years it’s profit growth has not kept pace with competitors such as J.P. Morgan and Bank of America (see full article here). Several stock analysts have charged Citigroup with not keeping up its competitiveness, despite pioneering much of what is most successful in the industry today. Expenses have risen at a 9% clip, which has been faster than revenue at 6%. Quotes from Jim Huquet at money manager at Great Companies reflect the consensus view, "They are moving in the wrong direction, and probably going to end up trailing chief rivals…Our concern is that the company really doesn’t have a good sense of where it’s heading..they need someone in charge with a bigger vision…[asset management] is a very profitable.. it provides ocmplexities to management…key rivals have been able to work through those issues…They talk about cost-cutting and stratetgic planning as if they’re coming up with some huge revelations…well-managed businesses do that just like breathing…managing costs and growing revenue aren’t luxuries."
The key player is Chief Executive Charles Prince. Mr. Prince is a a lawyer, and when he was appointed many people thought his background appropriate for dealing with compliance issues that became very important after 9/11/01 and passage of both the Patriot Act and Sarbanes-Oxley. But now, Citigroup is facing a serious Market Challenge. Its competitors have begun copying several of its successful businesses and products, and applying their own innovations to operate those businesses more profitably. Citigroup needs to adjust to these changing industry forces that have impinged its profits. Citigroup needs to revitalize the innovation that has been a cornerstone of its long-term success.
What did Mr. Prince and Citigroup do? Like I said above, announced a 17,000 person layoff. That’s about 5% of the workforce (across the board, of course.) Citigroup will ship a lot of this work offshore – with Poland an apparent beneficiary (see article here.) They also intend to centralize purchasing supplies and services. Now remember, Citigroup isn’t making physical product where purchasing is central to manufacturing. We’re literally talking about buying paperclips, staplers and computer programmers. Nonetheless, centralization is a core plank of the plan as they hope to move global purchasing from 65% of spending to 80% by year-end and 100% by end of 2009. Let’s see, this is the CEO of a DJIA company taking on a significant market Challenge by focusing on how the company buys supplies!?! The COO said "That’s the kind of philosophical change we’re looking at enforcing throughout the company." (see full article here.)
Today, financial services is a digital business. The work is all bits and bytes for traders and lenders, and digital documents for borrowers and lenders. So, naturally, Citigroup is cutting $375million in technology this year and about $550million additionally each year through 2009. The company is closing 40 Smith Barney offices and, according to the COO "closing down facilities where we have excess space, closing down some small businesses that we have been in for a long time….Because of the way we were structured internationally, there was a lot of duplication between global product capabilities and capabilities at a sector level and then in a regio an dthen in a country..we were able to take out a lot of those duplicate capabilities." I’m reminded of Ralph Waldo Emerson’s famous line "needless consistency is the hobgoblin of small minds."
Citigroup has not hit a growth stall, but it has been impacted by rising competition. The company is at an important junction. It needs to deal with serious marketplace Challenges being wrought by well-funded, smart and large competitors. And, it is taking action to Lock-in its old Success Formula! Rather than dealing with the market Challenge the top brass is focusing on The Problem (the earnings). Instead of addressing the lack of performance in White Space projects, they are cutting costs and killing off these projects. Citigroup isn’t using innovation to deal with the market and get back on track – the leadership is slashing costs to short-term beef up profits and in the process Locking-in even further the Success Formula which has recently seen weaker results. They aren’t stepping up to maintain their position as global leader, but instead falling back into Defend & Extend management in hopes they can recapture old profit rates.
Of course, this plan completely ignores the competition. While Citigroup is busy with cost cuts, BofA and JPM will keep marching forward with their customer acquisition and new product programs. BofA and JPM will continue to push to lower their costs, greatly nullifying the supposed benefits of Citigroup’s efforts. In fact Joseph Dickerson of Atlantic Equities believes BofA is likely to hire many of the Citigroup ousted folks to staff its rapidly growing European expansion! While Citigroup is looking in the rear view mirror and trying to catch past results by whacking away at its old Success Formula, Jamie Dimon at JPM is whacking away at their customer base while matching their cost model – and then some.
Turning to Defend & Extend Management practices is absolutely the wrong thing for Citigroup to do. The company isn’t in dire straits. It’s not facing bankruptcy or being attacked like GM. But Citigroup did take its eye of the marketplace while focusing on the compliance matters (by the way, everyone in the industry had to step up to the same compliance issues Citigroup faced). This has allowed a re-invention gap to develop. Instead of turning back to the marketplace with White Space projects, many of which already exist, to rebuild the Success Formula for better results the CEO and COO are turning inward, and slashing costs to Defend & Extend the problematic business. After this enormous write-off we may see a few quarters of improved results (or maybe not), but long-term this is definitely not a good move for shareholders, bondholders and employees.
by Adam Hartung | Apr 8, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
March auto results came out last week. (See article here)
Toyota sold 12% more than a year ago. Honda’s U.S. sales rose 11%. Nissan’s rose 8%. Hyundai and Kia also posted increases. GM sales fell 4%. Ford sales fell 9%. Chrysler sales fell 5%.
What’s interesting is the comments made by the U.S. manufacturers. GM said sales were off because of "planned reductions in sales to rental fleets." Ford said they also suffered from declining rental fleet sales, but they are dependent upon big-vehicle (SUV and truck) sales and the F-Series saw a 15 percent sales decline. And, of course, last year saw record sales for these vehicles so this month should be ignored. They also seemed to miss that sales of Toyota’s full-size truck sales quadrupled (that’s 4x) in the month.
Defend & Extend management reacts to problems by pretending the problems don’t exist, or saying that there’s an explanation indicating the problem isn’t real. Avoiding the problem is a common reaction to problems for D&E managers.
GM, Ford and Chrysler are loaded with D&E managers more intent upon prolonging the Success Fomulas than dealing with the market Challenges. Meanwhile, Toyota, Honda, Nissan, Hyundai and Kia are selling more cars. When a Success Formula no longer produces positive results it needs to change. But Defend & Extend managers are unwilling to admit it. And until they do, it makes competing much easier for the small market players.
by Adam Hartung | Apr 8, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
There are lots of ways to Lock-in a Success Formula, and one of the best is compensation. If the Board of Directors, or management, wants to make sure that Defend & Extend management flourishes, all it has to do is compensate people to do what they’ve always done.
We’ve seen this tactic executed well at the Tribune Company (see chart here). As I’ve blogged recently, Tribune has done nothing for shareholders for years (check the chart if you have any doubt). And now it’s moving forward on a leveraged buy-out that’s sure to leave it no cash for any new initiatives, despite incredibly fierce market Challenges from new internet players. As was recently stated by the soon-to-be Chairman Sam Zell, he doesn’t even care of if cash flow goes up, he just doesn’t want it to go down (see full quote here.) Well, he can hope for that unlikely outcome – but it’s not the point of this blog.
Rather, this blog is about the compensation for the senior team at the Tribune. According to the Chicago Tribune newspaper (see article here), top management is being rewarded very healthily for this deal. The Chairman is getting not only his $1M salary, but a bonus almost 5x his previous. And, he’s getting big guarantees of future pay and bonus for 3 years. Most of the management team will, in fact, get huge severance payments no matter how the future turns out for the business.
Tribune Chairman FitzSimmons is a lawyer by training. So what did his personal Success Formula tell him to do when the market shifted and the internet started driving down revenues and profits? Instead of trying to fix the business, he opted to sell it! For a lawyer, a legal solution seems lots better than a business one. And, to make sure he got everyone on board to do a deal, he tied compensation to creating one. As the article points out, for the last year his bonus was largely tied to increasing cash flow – not to finding new revenue sources, or finding new advertisers, or developing a strategy to compete. No, it was tied to generating cash. So, he and his team kept up the pressure to CUT COSTS. And through that, he pumped up the cash flow in order to make an acquisition more palatable and find a buyer. The compensation wasn’t tied to dealing with market needs, but rather to Defending & Extending the broken Success Formula, and finding a buyer to take it over.
Now we can look to the future. The vey top management of Tribune will share in approximately $650million of bonuses if the company can pay off the $13billion of debt the company will hold post-transaction (see article here). Once again, compensation wll drive the Lock-in to doing nothing new, and instead continue the cost cutting to D&E the failing Success Formula.
Suppliers, shareholders, bondholders and the consumers of newspapers in Chicago, L.A. and elsewhere will all suffer as the Tribune continues to be raided for more cash to dig out of this new debt avalanche. But the people who made the decisions are getting hefty sums. And it just goes to show the power of compensation as Lock-in. No risk was taken of possibly saving the business – only cutting costs from a horribly broken Success Formula. Good luck Mr. Zell. And to all of us who have depended on the Tribune Company.
by Adam Hartung | Apr 4, 2007 | Disruptions, General, In the Swamp, Leadership, Lock-in
The Chicago Tribune on-line published an interview with new owner Sam Zell. You can see full article here, but parts are worth repeating:
Q: How do you get your information? Do you read newspapers? Do you read online?
Zell: I’ve never read online. I don’t have a Blackberry. I read five newspapers a day, Chicago Tribune, Wall Street Journal, New York Times, LA Times, Financial Times. And I read everything. I read Forbes, Fortune, Business Week.
The new leader of a business who’s very viability is threatened by a new technology does not use it. And we’re to expect he’s prepared for the Market Challenge facing Tribune?
Q: Is it OK for a (top) manager to say, ‘I don’t want to do what you want me to do?’
Zell: No. He has the opportunity. He has the job. Whatever the terms of the job are, he has to live by them. All I can tell you is that, I am your boss and I tell you to do something that is not unethical, but is in line with some big corporate program or directive or philosophy, you’ve got a choice. You can play or you can go work for somebody else…Everybody’s entitled to an opinion. But once you’ve chosen to work with somebody and the lines of the story are clear, I don’t know how you could operate a business if you lay out a strategic plan and then have 20,000 people opt out.
Does this sound like a leader prepared to use White Space in order to find a solution to the thorny market Challenges which have led the Tribune into a 5 year slide?
Q: In the newspaper business, raising revenue means either raising advertising rates or raising circulation or a combination of both. At first blush, which of those makes more sense. How do you do that?
Zell: This is for sure an amateur guess at this point. But I would think the biggest single issue is circulation and circulation penetration. And I think the issue is what if, how do we do this, what’s our cpm? And how can we lower that cpm to make us more competitive with other forms of media. Those are the kinds of questions that I think are relevant. I think the answer is probably we have to find ways to increase circulation and to increase penetration.
Let’s see, the biggest issue is circulation, and that is down because more people, especially young people, are getting news from places other than newspapes (especially the web). And the new leader doesn’t use the web, or even a Blackberry. So how’s he planning to increase circulation? Does he think Tribune has been ignoring this problem the last 5 years? Is he aware of some "silver bullet" for newspaper circulation problems that isn’t known to people at Chicago Tribune, Los Angeles Times, New York Times, Washington Post, et.al.?
Q: But the ESOP isn’t going to have a seat on the board. Why not?
Zell: The idea was that two of the independents would be run by the ESOP. But in the end, it was all about alignment of interests, and nothing else matters. I’m putting $315 million into this deal, cash.
Sounds pretty clear who’s in charge here. The 65 year old guy that reads 5 newspapers a day (how many people do that? how many under 40?) and doesn’t use the web. And he’s not exactly open to ideas from the employees, who ostensibly own the company but have no representation.
Sam Zell has hooked his wagon to the Tribune management team that has not addressed the market Challenges for the last several years. He is comfortably blind to these Challenges. He’s going to use $7.2billion of other people’s money (bond holders) to try and get a return on his $315million. As a real estate magnate, such use of leverage fits his personal Success Formula. But the Tribune is not just a building on Michigan Avenue. Customers and revenues are falling, and there’s not a limited amount of news availability – like there is land.
Defend & Extend Management is planned at Tribune Company. And that means more cost cuts and further erosion in the business. Where’s Steve Case (former CEO of AOL) when you most need him? At least he knows how to use the internet.
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by Adam Hartung | Apr 2, 2007 | Disruptions, In the Swamp, In the Whirlpool, Leadership, Lifecycle
Imagine this: you’re in an industry that hasn’t changed much in 100 years. For the last 5 years the number of customers has been declining, as have revenues. Your long-time users are aging and younger potential users say they have little interest in your product. User interviews regularly say your business is out of date. And new technology exists which completely obsoletes your product. Would you find the answer to your dilemma in loading your company up with a HUGE amount of debt while selling off your most profitable assets?
That is of course the situation at the Tribune Company (see chart here), owner of The Chicago Tribune, The Los Angeles Times, the Chicago Cubs and 25 television stations. If you ever wanted to know when a company moves from the Swamp into the Whirlpool, this is the time for the Tribune. The Tribune Company has been horribly Locked-in to a failing Success Formula with declining results for years. Now it is going to make any alternatives impossible by cranking up the debt load while selling the Cubs and other assets that are profitable and have potential for future growth. Instead of using White Space to find a new Success Formula, which would require more understanding and success on the web, the Tribune is moving to Defend & Extend it’s dying newspaper business! (See article on company sale here.)
The Tribune’s newspaper business is in decline as readers abandon traditional print news for the web, and advertisers are following the subscribers. So not only is the company selling off the Cubs and its investments in growing targeted television, but it is adding $7Billion of new debt (and yes, it’s keeping all the old debt) in order to buy back all the outstanding equity. Yes, they are ADDING debt almost equal to the entire oustanding market value of the company ($8billion). Shades of Michael Milkin and the Junk Bond craze! What paper equity remains will be in an ESOP. But for $320million (that 4% of the new debt added) billionaire Sam Zell gets a warrant to own 40% of the equity should this ever work out. That $320M is less than 1% of the $39billion Sam just recently got for selling his REIT business – so you could say for him this represents a relatively small portfolio investment in a long shot. If Tribune survives, his $.32B becomes worth $3.2B – or 10x return (see MarketWatch article here).
And of course all of this is for a valuation that is only half what the business was worth in 2000, and only 60% of its value as recently as 2004. But that of course reflects the market Challenges which face the Tribune going forward. Challenges completely ignored in this crazy financing scheme.
Meanwhile, the employees of the Tribune now get to spend all their energy looking for yet MORE cost cuts – after 5 years of cost cutting – in order to service this staggering debt load. Just what you need in a situation where you missed the new technology boat. They now have no resources for creating and managing any White Space to find a new Success Formula. Amidst these financial machinations, the newspapers have turned over the publisher at the LATimes and several leading editors in just the last year (see latest article on editor resigning in protest here) demonstrating the disarray inside the business.
The forecast here is not hard to make. I live in Chicago and read the Chicago Tribune. It, as well as The LA Times and other Tribune-owned newspapers have a great history and many Pulitzer Prizes to their credit. But that was the past. If you are an investor, or an employee, or thinking about being a bondholder in this new enterprise I would be looking for a far better future than is promised at Tribune Company.
by Adam Hartung | Mar 27, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
One of the greatest brands in all of marketing is Harley Davidson. One claim to fame is that Harley images are the #1 most tattooed logo in the world. Now, that takes a dedicated customer – or even a non-customer! But Harley is in some trouble, and in fact deeper trouble than many folks realize.
Harley’s latest rise came after being repurchased by family of the founders from the conglomerate AMF in the 1970s. These leaders refocused Harley on its roots as an "outlaw biker" brand, and Harley recaptured the position as the #1 manufacturer of large motorcycles. Today it’s not only the "outlaw" buying and riding a Harley, but in fact people from many walks of life who want the "motorcycle experience." Harley’s problem today is that it has positioned itself so strongly with its big "V-Twin" (referring to the type of engine used) bikes that its appeal is almost exclusively with buyers who are old enough to remember seeing the movie Easy Rider. Every year that’s a shrinking number. It shows in the average age of a new Harley buyer. From about 42 ten years ago, the average age is now 47. These are the people who both seek recapturing the image of "outlaw" and can afford $28,000 for a new motorcycle (about 3 times the price of similar motorcycles made by Honda, Suzuki and Kawasaki.)
Today’s younger motorcycle riders have been able to avoid Harley’s in droves. They are much more captured by what some people call "crotch rocket" motorcycles. Built off the racing style frames used in high speed racing, these motorcycles are far faster off the line than a Harley, often have higher top speeds, usually require less maintenance and start as low as $6,000 – with the top racers costing only $14,000. Ripping off an old Oldsmobile ad phrase (a brand now retired at GM), my sons look at a big V-Twin and say "Yep, that’s my dad’s motorcycle".
Harley tried to address this problem about 6 years ago by launching what it called the V-Rod. This was a totally new design, using an engine made by Porsche. It was intended to bring in the younger rider. But dealers took one look at the bike and said "It’s not a Harley." They didn’t like the style, and they didn’t like the lower price. They wanted to keep selling the big, old-style bikes with the big, fat profit margins. So they turned thumbs-down on the V-Rod, and Harley let them. And their chance to reverse the trend of a dying off customer base was lost (does this remind you at all of Apple walking away from the Newton – the first successful PDA – because it wasn’t a Mac back in the late 1990s?).
Now Harley’s suffering from a recent strike (see article here). But the word around Milwaukee (Chicago’s neighbor) is that Harley took the strike because it had more bikes in inventory than needed. And some analysts are predicting that tighter credit will hurt Harley sales (see Marketwatch Herb Grennberg blog here.) Harley’s market capitalization is down about 20% in 2007. As more folks realize that the brand is at risk of soon dying off (literally), the risk is that its value will fall further. Like I said, my sons (college and high school) want jackets that say Honda – not Harley.
Locking in on a Success Formula can produce spectacular results. Harley Davidson demonstrated just how long and how powerfully a good Success Formula can operate. Harley, its suppliers, its dealers and its customers have had a tremendous 30 year run, with equity value going up 60x just since 1987. But, like all markets, the market for motorcycles is changing. And Harley is at great risk of once again lapsing into declining sales. The company’s sales of bikes have stalled, and already dealerships achieve between 40% and 60% of revenue through paraphernalia (t-shirts, jackets, and other logo gear). Harley management forgot to Disrupt when they launched the V-Rod, and they let the organization push away their breakout product for the future. Since then, there has been no White Space producing innovation at Harley. The company is horribly Locked-in to its old market position, and the fuse is lit on what is going to eventually be a very unpleasant surprise when the brand starts retrenching.
by Adam Hartung | Mar 24, 2007 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lock-in, Openness
Readers of this blog know I’ve been a real fan of Motorola. I’ve waxed eloquently about the Disruptions implemented by the new CEO when he came to the company in 2004. And likewise I’ve been an endorser of the multiple White Space projects he implemented (see previous blogs on Motorola for details.) But this week, lots went the wrong direction at Motorola.
Motorola reported that it would have a loss for the first quarter of 2007 (see article here.) That means the clock is now ticking on what might be a growth stall. As previously written here, companies that hit growth stalls have only a 7% chance of really ever growing again. Motorola stalled badly in the late 1990s and early 2000s, and they were rebounding when this loss hit. The risks are great here – and there should be no doubt about it. If the company posts another down quarter next, the odds are getting slim on success.
What went wrong at MOT (see chart here)? Firstly, White Space must be managed toward success. While the company implemented a lot of White Space, and the impact showed in a dramatic turnaround from the situation in 1999, management did not hold White Space accountable for results. White Space is not an excuse to let results falter. Rather, management should have been aware of the precarious predicament in the large mobile phone business and PUSHING White Space to produce rapid results. As recently as this week, the very week that the bad results were reported, Motorola was expected to be announcing plans to buy PALM in yet another expansion of White Space to grow the company. But this looks much less likely now, because leadership opened White Space but did not manage it effectively.
Secondly, Ed Zander failed to Disrupt himself while Disrupting Motorola. When arriving at Motorola he moved fast to Disrupt. Of course, Disruption was "normal" at Sun Micrososystems where he used to work. Chronic Disruptions were part of the Success Formula at Sun, and became part of his Success Formula. But Sun got into big trouble when it became overly committed to a single market in network servers. Unfortunately, Motorola was allowed to be too committed to a dependence on mobile phones. What we now see is that while Mr. Zander was OK with Disrupting and opening White Space, he did not actually Disrupt his personal Success Formula and change the way he believed a business should be managed.
Once confronted with the threat posed by Mr. Icahn, Mr. Zander approved a quick $4.5billion stock buyback. And now he’s agreed to an even larger $7.5 billion buyback (see article here) – representing 75% of Motorola’s cash reserves. And he’s put in place a President and COO from inside the company – a sign of creating distance from the Disruptions and White Space he implemented (see article here) .
These are not good signs. I’ve had high hopes for the White Space at Motorola. If we recognize where the company was just 3 years ago, it has traveled a very successful road. The question now will be does leadership have the will to continue its road of Disruption and White Space to create a more successful Motorola? Will it follow through on the acquisition of PALM, given the current Challenges? If it does, and management holds the White Space leaders to business demands for results, Motorola can become again a great company. If it keeps following its recent trends – retrenching to Defending and Extending its mobile phone business and acting to protect management – then recent gains will be quickly unwound.
by Adam Hartung | Mar 19, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
In the early 1980’s Roger Smith took on the market Challenges facing General Motors. (see chart here) In bold strokes, he expanded GM beyond its old Success Formula including the acquisition of a high tech information company (EDS), a high tech electronics company (Hughes Electronics) and creating an entirely new auto company built on a clean sheet of paper (Saturn). These actions created the opportunity for GM to escape its past and become something entirely new.
But Roger Smith did not change the Lock-ins at GM. He did not Disrupt the organization and attack Lock-ins based on old biases related to what many employees thought GM should be. He did not change the company’s decision processes, its core metrics, its information architecture, its dependence upon a common prototypical GM manager, its relationship with labor nor its hoarding of knowledge in isolated silos. As a result, the White Space projectes survived only a few years after his retirement. EDS and Hughes are once again stand-alone companies, and Saturn has been "integrated" into GM causing it to lose its cache and much of its early loyal fan base.
As a result, GM today is much like it was in the 1970s – and much to our chagrin. (a look at the referenced chart will show that the company today is worth what it was in 1971). The company is a perennial low-player on the return-on-capital pole. It’s market share has steadily lost ground in the traditional auto market to imports. And P&L losses have mounted to the point that in 2005 and 2006 some questioned the very survivability of GM.
Similarly, a decade ago Jack Greenberg took on the market Challenges facing McDonald’s (see chart here). In the early 1990s he began acquiring Boston Market, Chipotle Mexican Grill, Donato’s Pizza as well as equity interests in Fazoli’s and Pret-a-Manger. Some of these were breakout performers, not only doing well in restaurant sales but even in the frozen food case at the grocer (particularly Boston Market). But Jack Greenberg did not Disrupt McDonald’s, nor did he attack its Lock-ins. Then he retired.
In January, 2007 executives at McDonald’s told the leadership of Boston Market they intend to sell the company (see full article here.) Once completed, this will completely reverse the White Space projects previously implemented. McDonald’s will once again be a "focused" franchisor and operator of hamburger establishments. The company is pinning its future hopes on yet another hamburger – the $3.99 Angus Third Pounder (see full article here). The old Success Formula – sell sandwiches -is once again dominating all activity at McDonald’s.
In the short-term, management is bragging about how its back-to-basics "Plan to Win" campaign has improved profits at McDonald’s. In reality, management has captured huge gains from the earlier diversification moves, in operating profits and in one-time gains from selling the businesses, which have all been booked to the bottom line in support of Defending & Extending the old McDonald’s Success Formaula.
But long-term, we know what to expect. This is the GM story, only with ketchup on it. Within a few years McDonald’s will be back again to fending off predators in its "core market." McDonald’s is in fact late with this latest burger, coming over 2 years after Burger King launched its Angus Steak Burger and after more than 8 variations of such products have been launched at Hardee’s and Carl’s Jr. since 2003. And the company is still vulnerable to the kinds of Challenges which sent them spiraling downward 6 years ago – potentially a renewed Mad Cow illness, or another attack on trans-fats or other health concerns, or franchisees complaining about no growth, or simply from the in-kind competitors it recently sold off grabbing a larger share of market.
We can’t predict the issue that will next stumble Big Mac. But we can be sure that the old Success Formula has already proven it has hit diminishing returns – and the future for McDonald’s looks a lot like GM’s. And that should scare a lot of people.
by Adam Hartung | Mar 15, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
No sooner had I posted the last blog on Ford than the company announced its sale of Aston-Martin. My goodness, the ravages of Lock-in are moving swiftly at Ford! (see chart here)
Ford is in deep trouble. The company has announced billions of dolars in losses, and it has had to arrange billions of dollars in financing to cover costs of its "turn-around plan." Ford expects to burn through $17billion during turnaround. What is the turn-around plan? It is to build multiple models worldwide on the same platform. Let’s see, how new is this idea? Oh yeah, that’s been the plan at Ford and GM for the last 2 decades! That’s not a turnaround plan – that’s a disastrously broken Success Formula that hasn’t made any money! (see full article here)
Aston Martin is a much smaller business than the Ford brand. It sells only 7,000 cars. But, let’s see, from total cars sold of 46 in 1992 that represents a growth of 152X (or 15,200% or almost 40%/year for 15 consecutive years). (see article here) While the Ford brand is losing billions, Aston Martin is profitable. What is Ford doing here? Selling a business that works – to support one that clearly doesn’t? As an analogy, isn’t this a bit like selling your child (or at least their labor) in order to purchase some medicine for terminally ill grandpa? We’d never do the latter, so why do the former?
The new Ford CEO said "The sale of Aston Martin supports the key objectives of the company, to restructure to operate profitably at lower volumes and changed model mix and to speed the development of new products." (see full article here) If he wants to accomplish the goals of profits at lower volumes, changing the model and creating new products he should be trying to emulate Aston Martin – learn from it – not sell it. Aston Martin is doing things much more right than Ford is.
Dave Healy, an analyst at Burnham Securities stated "Aston Martin was a prestige item that was a management distraction." (see article here) A distraction? The only way you can take that point of view is if you’re so locked into saving the old Ford Success Formula that you’re willing to do anything, even sell your only and most profitable business, to get 5% of the cash you’ll need in that vain turnaround endeavor.
Aston Martin has been a great success. Growth has been good, profits exist, and the brand has a positive reputation. The company has been a successful White Space intitiative. What Ford needs to do is get more of Ford (including money-losing Jaguar and other brands) to migrate toward the new Success Formula at Aston Martin. Management needs to migrate forward, but instead it is selling what works to try and regain the glory of the past. Ford management is not willing to admit that its Success Formula is seriously broken, and uncompetitive against much more formidable and successful competitors such as Toyota, Honda and Kia. Too bad. Without learning from White Space Ford has practically no hope of surviving this latest competitive onslaught.
