by Adam Hartung | Jul 16, 2006 | Defend & Extend, General, Lock-in, Quotes
On July 12, McDonald’s announced it was cancelling its Hot ‘n Spicy McChicken sandwich. "It’s not that it didn’t do well. It just didn’t do well enough," according to McDonald’s spokesperson Bill Whitman (see Chicago Tribune article). After 18 months of development, the product was pulled after just 6 months on the market.
On July 13, Wendy’s announced it was going to test market a new fiery, red-hot chicken sandwich even hotter than its Spicy Chicken sandwich – which it has been selling for decade. "We have defended our Spicy Chicken successfully against competitive intrusion…now we see an opportunity to build on this effort…giving our customers additional options," said Wendy’s Chief Marketing Officer Ian Rowden (see article here).
Could it be that McDonald’s customers just don’t like spicy sandwiches? Unlikely in the notoriously fickle fast food marektplace. Practically every competitor (except McDonald’s) has a spicy product line today as the sales of chili peppers has doubled in just the last 4 years. What’s at play here is good old Lock-in, once again. We’d like to think that as the #1 fast food company McDonald’s would listen to customers and bring the very best talent to rolling out a product widely desired. But, more likely, all new products in McDonald’s are vetted over and over until the challenge becomes distinguishing it from what is already on the menu!
The more adaptable Wendy’s has demonstrated its ability to one-up McDonald’s for years. Wendy’s brought us fast food chili, the baked potato with fixins’ bar, the fast-food salad bar, and Frosty’s. By using disruptions to find new products, Wendy’s keeps the edge over McDonald’s in practically all categories but absolute size.
Wendy’s keeps growing its stores and customers, while McDonald’s remains almost flat on both counts. By overcoming Lock-in, Wendy’s keeps doing what McDonald’s can’t – and that’s where Wendy’s creates competitive value.
by Adam Hartung | Jul 8, 2006 | Disruptions, General, In the Swamp, Leadership, Lifecycle
General Motors has seen its stock value grow almost 40% in the last 3 months. Why? Many analysts and investors believe that GM management has been Disrupted, and is moving into White Space for new solutions to its problems.
Is it for real? Well, first the Disruption. Kirk Kerkorian bought almost 10% of GM and then put his representative on the Board. As outsiders, they have been screaming for change in how management leads the company. And it has started making a difference, as GM has started doing several things differently.
GM has changed some of its approaches to workers. Its recent employee buyout was 30,000 oversubscribed indicating a successful tactic for both the company and labor. And, GM is working with Delphi (its largest parts supplier) and the union to create a unique solution to the bankrupt company’s problems. Lastly, GM leadership is now entering talks with Renault and Nissan to possibly create a new merged company.
Successful White Space requires (1) permission to discover new solutions outside the historical Lock-in. This seems to be happening in some of these fledgling projects. Successful White Space also requires (2) committed resources in advance to develop the new Success Formula. That we have not yet seen. While there is progress being made to sell GMAC and raise additional cash, we haven’t yet seen the commitment to actually invest in White Space and create a more competitive future. Until we see management internally Disrupt itself, following Mr. Kerkorian’s lead, we won’t likely see real investment or commitment to creating a new Success Formula.
If the outcome of negotiations with unions, and other companies, is just more cost reduction in support of the old Success Formula then Mr. Kerkorian’s Disruptions will be for nought. Combining GM, Renault and Nissan just to achieve additional "scale" will do no more to create value than combining KMart and Sears. What’s required is the creation of a new company that is more attuned to customers, designs cars better, gets them to market faster and creates more profit on smaller unit volume. And that will require lots of White Space projects with wide permission to change and extensive resources.
by Adam Hartung | Jun 28, 2006 | Disruptions, In the Swamp, Innovation, Leadership, Lock-in
Readers of this BLOG know I have been no fan of Roger Deromedi and Kraft. So, you probably think I’m delighted with his ouster this week by Altria (effective parent of Kraft). Actually, I’m unconvinced whether it will matter.
There is no doubt that Kraft was locked-into a Defend & Extend strategy which was producing declining results. The stock price had declined 30% since 2002, and the CEO had no plans for growth. Deromedi laid off 14,000 people and closed 40 factories in 2.5 years. His plans could be summed up in his own quote "strong execution of our strategies will deliver improved results in 2006 and beyond." Just like it had done in 2004 and 2005 – right. Obsessing about execution is one critical telltale signal of a failing, locked-in strategy. There was no plan for growth, sooner or later, as he kept selling brands and investing more money in no-growth categories like cheese. The Chairman of Kraft, currently the CEO of Altria, finally realized that there was no interest in an independent no-growth Kraft, so he’d better make some changes or the spin-out of Kraft was never going to be completed.
But, what’s needed at Kraft is a Disruption to the Lock-in, and replacing the CEO is more of a Disturbance than a Disruption. Changing the CEO doesn’t inherently change anything beyond the sign on the door. And the new CEO, for all the praise now heaped upon her, is a 20-year returning veteran of Kraft. She spent barely 1 year running Frito-Lay, so despite her $2.5million compensation, she wasn’t there long enough for us to know what difference she made, or might have made.
We do know that she left the job running Kraft North America, which was a $30B revenue business to later run Frito-Lay, only a $10B business. That indicates she was no fan of Deromedi when she split, nor most likely of his then co-CEO Betsy Holden. Nonetheless, her career was a pretty straightforward development up the management ranks of what has long been a low-innovation enterprise. But is she ready to create some growth engines inside this behemoth? Does she know how?
Top marketing gurus around Chicago have weighed in, calling for the first steps to include changing the culture toward product innovation from brand extensions, and using portfolio planning to milk some brands for cash while investing in growth with other brands and a refocusing on innovation and new product launches.
What is required, as I said earlier, is a Disruption. Kraft must stop viewing itself as being self-satisfied, and realize there are external Challenges to its brands and its business. Older Americans are changing their diets to live longer, and younger Americans no longer look to these old brands when thinking of meals. A great past does not assure a great future – just look at Brach’s candy company (bankrupt), ConAgra or Sara Lee (themselves drastically downsizing). The new CEOs first step must be to avoid reassuring the people of Kraft, and rather to hlep them see that these Challenges are placing Kraft – soon to be an independent company – at risk of having a viable future. There is no growth in Kraft, and without it the company is doomed to a very unhappy competitive reality.
And she must Disrupt Kraft. The mechanisms which keep Kraft acting like Kraft. She needs to attack Kraft’s critical metrics, its hiring practices, its centralized decision-making processes, its arrogant approach to retailers and end-users, its focus on "do no harm" brand tactics, its rewarding of "farmers" and punishment of "explorers" in the workforce, its deep hierarchy that vets out ideas which don’t look like guaranteed wins (and thus little more than extensions of old businesses), and its obsession with cost reductions. Of course, not all of these should be attacked at once. But, she must attack them. She must identify the Status Quo Police and reduce their numbers while gutting their influence – be they in finance, HR, or marketing. She must create a pattern interrupt in Kraft; she must Disrupt the old Success Formula.
And, she must put in place White Space. Something completely lacking at Kraft. We need to see her create project teams which have explicit permission to behave differently, outside the old Lock-ins. And she must show us that she is dedicating resources, in advance, to these teams so they have the wherewithal to actually create new Success Formulas for the company.
We must keep our eyes on Kraft. When Mr. Zander joined the cross-town company Motorola he too faced a seriously Locked-in organization. Yet, within only 6 months he effectively Disrupted Motorola and put in place White Space projects that almost immediately began changing the fortunes of the company. Let’s hope Ms. Rosenfeld does the same – so Kraft can once again take its place among the leading consumer goods companies of the world.
by Adam Hartung | Jun 23, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
As readers of this BLOG, you know that I find McDonald’s a risky company that is horribly Locked-in to its old Success Formula. So, I wasn’t surprised when I recently read about McDonald’s latest plan to grow.
McDonald’s is planning to pump up sales by opening a series of drive-through units in China (see Chicago Tribune article.) Sounds like a decent idea you say? Well, let’s see, only 10% of all food in China is eaten out (and 90% of that comes from full service restaurants.) People in China don’t view their cars as eating places, and they still prefer to sit together and eat. The largest western food chain in China is KFC (remember that the next time someone says Asian bird flu is a detraction to their sales), with about 3x the number of units McDonald’s has.
But McDonald’s is ready to predict great success. Why? Well, firstly 74% of people in the U.S. get their McDonald’s from a drive-through, so surely the Chinese will do the same thing – right? (Lock-in #1, people want drive-throughs). Secondly, they have found a company willing to be their partner, the state-owned gasoline retailer, so that insures success – right? (Lock-in #2, McDonald’s is a franchising company so it loves partners that will roll out units for it.) McDonald’s has to be appealing to the skyrocketing Chinese middle class, who are buying cars like won-ton noodles, right? (Lock-in #3, the McDonald’s brand is appealing to middle-class consumers globally.)
McDonald’s has passed on a number of growth opportunities. Remember the hot growing Chipotle’s chain that McDonald’s shipped out the door? Remember the McCafe concept that was to challenge Starbucks but that can’t get beyond 30 units opened? The fact is that McDonald’s will only attempt growth ventures which fit inside its Lock-in. Will the Chinese venture work? The odds look long given the approach McDonald’s is taking. Only when viewed through the lens of McDonald’s Lock-in does this venture look like something to brag about.
Cut cost, extend product lines and go to new markets – that’s the same strategy Krispy Kreme said would turn around their lagging fortunes. That was before they went bankrupt. There’s nothing insightful about that strategy, and it’s not likely to put the fizz from its soda into McDonald’s stock price either. It’s a Defend & Extend strategy, when what McDonald’s needs is more White Space, the ability to listen to changing market needs, and some really new ideas for growth.
by Adam Hartung | Jun 10, 2006 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
DJIA member, and industry leading pharmaceutical company Pfizer has had a rough go of it the last 4 years. While revenues are up from 2001, they were flat in 2005 signaling a growth stall. This had been predicted since 2001, as earnings have been highly erratic over these years. Company value peaked in the late 1990s, and since then investors have lost half their value.
The Challenge at Pfizer is the same malady affecting several other big pharma companies. Their strategy to rely on blockbuster drugs, those that address widespread human conditions (such as male impotence), has left them see-sawing between enormous investments and difficulties getting approvals for sale through the FDA – as well as losses from rushing drugs to market that have later been found not as safe as promised. While there are lots of other opportunities for these companies to grow, many of them keep trying to find the next "blockbuster" and their growth is erratic.
Pfizer’s latest reaction has been to sell their consumer goods business. Even though the business has been growing at a strong 10%/year, and has an 18% operating profit, management has said the business is "non core" and thus they want to sell it. Not many consumers who need Benadryl, Zantac, Rolaids, BenGay and Rogaine think of these products as "non core," but for some reason Pfizer now does.
Management’s real objective is to generate additional cash in an effort to Defend & Extend its poorly producing old Success Formula. Rather than Disrupting their old, and struggling, Success Formula, Pfizer would rather sell a great, growing, profitable business in an effort to make another stand for what the company has always done – even if there is no reason to believe it will be more successful in the future.
Pfizer has $52B in revenue. Their proceeds from the sale will be $14B. That’s before taxes – which could be half the proceeds. But rather than trying to grow this business even faster, they are ready to sell it to Glaxo SmithKline or Johnson & Johnson. Both of these companies are huge as well, but both of them know how to recognize a pearl in the oyster bed. They are ready to grow what Pfizer won’t.
Normally, the investors in selling businesses come out the winner. But in this case, the buyers are the winners. They are getting great brands in a great business with opportunities to increase their growth rates simply because the current owner is too Locked-in to its "blockbuster" addiction to unleash the value in its own assets.
This is too bad for Pfizer’s shareholders. They get a relatively small amount of cash and they give up a potentially high growth business. And all because leadership is focused on its short-term problems, rather than the long-term Challenges to its Success Formula. And thus Pfizer leadership is Defending & Extending a struggling model, hoping to regain past glory, instead of using Disruptions and White Space to create new value.
by Adam Hartung | Jun 5, 2006 | Defend & Extend, Disruptions, In the Swamp, In the Whirlpool, Leadership, Lock-in
I talk a lot about the deadly impact of growth stalls. Whenever companies suffer two consecutive flat or declining quarters, or a year-over-year decline, I call that a growth stall. And the results are deadly, with fewer than 10% of these companies ever achieving sustained growth of 2% again.
I’m often asked if two quarters, or year to year comparisons, aren’t too short. After all, I preach on the importance of White Space and using transformations for long-term good health. Aren’t I supporting the short-term thinking that gets leaders into trouble?
My answer is no. Leaders and managers must be impatient for results. The world moves quickly, and it takes precious little time for a company to falter and fail. Take for example Sun Microsystems. This was a high-growth tech company for 20 years and a big winner in the internet boom of the 1990s. But now the company has seen 4 consecutive years of declining revenue. It’s value has been lackluster that entire time as well. And now it has announced it is planning to cut another 4-5,000 jobs in an effort to find profitability.
Investors and managers can’t wait 4 years for improved results. In fact, they shouldn’t wait at all. If a company can’t grow, it will atrophy and eventually falter. The purpose of Disruptions is to constantly challenge Lock-In to old Success Formulas, and the purpose of White Space is to identify new opportunities that can create long-lived growth. The problem is that too many companies try to milk the Lock-in, and they wait too long before they Disrupt and seek White Space. They confuse short-term optimization of an old Success Formula with the requirement to continuously identify and develop growth opportunities ad infinitum.
When it was doing incredibly well, Sun Microsystem decided the right strategic action was to "identify its core strengths" upon the recommendation of Gary Hamel. Scott McNealy said the company’s future was "selling iron" (his macho-speak for selling computer server hardware.) As a result, Sun never moved into networking gear, like Cisco, or network software like Google. Also, Sun was pushing boxes so hard it missed the Challenge Linux placed on its own Unix software. Sun was a hot player in the center of the action, but by "sticking to its core" it wasn’t prepared when the marketplace determined it had sufficient server capacity and good a good software alternative. It’s market started collapsing. And Sun wasn’t prepared to move to the next market opportunity. The first two declining quarters led to nearly 20 declining quarters.
The best time to Disrupt and fund White Space is when your business is doing well. It is then that you can clearly evaluate new Success Formulas without the crisis of declining revenue making you "bet the company" on limited options – and do so quickly. By the time you see two consecutive bad quarters, or year-over-year revenue declines, the business is already stuck in the Swamp and well on its way into the Whirlpool. It might not look that bad, but it already has almost no hope of ever growing again.
by Adam Hartung | May 31, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Last week a phase ended when the top execs at Enron were found guilty of crimes related to the downfall of Enron. The are likely to spend the rest of their lives in prison for "white collar crimes." Unfortunately, those crimes cost investors, employees and suppliers billions of dollars. No longer is "white collar crime" considered something easily forgotten.
It was a year ago that I blogged about the fall of Bernie Ebbers at Worldcom (see Dieing for Results). At that time I mentioned that executives can easily find themselves committed to Defending & Extending old Success Formulas – leading them to be sure they’ve done nothing wrong despite the havoc they’ve visited upon so many. The downfall of executives Lay and Skilling give an exclamation point to that blog. They maintain their innocence because they continue to believe that their Success Formulas cannot be wrong.
More troubling than Enron last week was the $400million fining of Fannie Mae. An organization created by congress in the 1930s to help supply mortgages for all Americans was found guilty of acting "arrogantly and unethically" by creating an environment "where the ends justified the means." Top management "manipulated financial reports to win ill-gotten bonuses in the hundreds of millions of dollars." (see report and full text in the Chicago Tribune.)
Have business leaders all turned unethical? Since 1990, the number of classes on business ethics has skyrocketed, and the number of articles on the same topic has grown geometrically. It’s doubtful that any of these leaders think of themselves as unethical – especially as they spend millions defending themselves. And they go on television proclaiming their innocence.
Rather, its an issue of personal Lock-In to old ideas of executive Success Formulas. Executives see themselves as working hard to do what will increase the value of their companies, and themselves. They all protest "I’ve broken no laws" as investigators, prosecutors and reporters tell of how their poor decisions cost billions while sometimes personally enriching themselves. It is their Lock-in to the old notions of what an executive can do that makes them convinced they are not responsible for the damage they’ve wrought.
We all have personal Success Formulas and personal Lock-ins. As leaders, these personal views often spill out into the organizations we manage. If we are unable to see Challenges to our personal views, we are unable to Disrupt ourselves and use White Space to develop new Success Formulas. For leaders, especially in large organizations, this can be very expensive Lock-in to the thousands of investors, employees and suppliers who depend on the company’s future ability to succeed.
by Adam Hartung | May 31, 2006 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
This week one of America’s great media companies jumped nearly 10% in value. The Tribune Company – owner of the Chicago Tribune, Los Angeles Times, WGN superstation, the Chicago Cubs and other great assets – announced a significant stock buyback. After falling nearly 40% over the last year, the stock made jump up. Does this signal a good time to own this venerable company?
The Tribune Company announced that it was going to borrow a lot of money, and use the proceeds to buy back its stock. It will sell some assets, but not most of them. There is no plan for a significant restructuring. Nor a big change in the business. The company said its value is understated, so it is going to borrow money, crash its debt rating, and use the money to hopefully resurrect its moribund valuation.
Will this address the issues which has caused the 40% devaluation? Let’s see, large display advertising customers, such as auto and movie studios, have moved 20 to 40% of their newspaper advertising to Google and other on-line sources. Classified ad customers are finding good service at much lower rates at CraigsList.com and Autotrader.com. In entrenched markets like Baltimore, where the Tribune operates the Baltimore Sun, the well financed Examiner paper is entering the market stealing advertisers.
The Tribune’s actions are an example of Defend & Extend Management. Management knows that the low valuation makes them a target for corporate raiders. So they load up on debt in order to keep the outsiders from trying a takeover. Meanwhile, the company strategy is to change very little. And that is unfortunate, since the marketplace has significantly shifted since the Tribune became an industry leader. Such Defend & Extend tactics will not create value for investors, and shows a much greater probability of significantly weakening a company already under attack from "new media" Challengers.
What would be good to see would be more White Space at the Tribune. Rather than a disturbance, which may well lead to complacency, a real internal Disturbance demonstrating that the company recognizes serious change is needed. And White Space that is funded, and given permission to develop a new Success Formula for the company. Since we don’t see those things, it’s unlikely the company will sustain its recent valuation improvement.
by Adam Hartung | May 24, 2006 | In the Swamp, Leadership, Lifecycle, Lock-in
I love to watch soccer. A very popular sport around the world, it’s popularity is gaining every year in the U.S. Part of the game’s allure is how players will work, and work, and work to move the ball around the field for many minutes – always looking for an opportunity, a crack in the defenses – and then its POUNCE – GO, GO, GO – and if they execute within seconds its a score. And in soccer, often a single goal makes all the difference between winning and losing.
This happens in business as well. There can be extended periods of competition without enormous change. But then, a crack develops, and its time to POUNCE – GO, GO, GO.
The time is now for manufacturers of home appliances. After months of haggling with the government, Whirlpool has acquired Maytag. And the company strategy? Why, to gain synergistic cost benefits by closing the old home office, various plants and laying off thousands. In other words, Whirlpool has publicly committed to a Defend & Extend strategy, which it plans to execute for the next several months. And, since its earnings aren’t what they’d like, they have no choice but to stay committed to this strategy.
So, what should GE (and other appliance manufacturers) do? POUNCE. All of this D&E behavior, including pushing to common systems and focusing on old assets, is creating an enormous opportunity to change the game. Whirlpool will be working hard, but it will be strategically complacent. For the company to succeed it relies on competitors to sit still and let them create the future as a projection of their past. Thus, now is the absolute best time for the competitors to not behave that way. Now is the time to bring out new products, to implement new pricing schemes for retailers and consumers, to increase the ante in advertising and promotion. Anything that will Challenge the old marketplace and evolve it to a new level of competition.
When Whirlpool is least able to do anything about it.
Being Locked-in makes you a competitive target. Once you commit to an old Success Formula, your competition can use it against you. Prepared companies will have White Space projects operating that they can blow into the market and tear the heart right out of your ability to compete. Now is a very risky time for Whirlpool. It’s a great time for their competitors.
by Adam Hartung | May 24, 2006 | Defend & Extend, In the Swamp, Leadership, Lock-in
According to an old Greek legend, thunder was the sound of giants falling in battles in the sky. There’s been plenty of thunder in the tech world lately. Dell Computer, not even a decade ago considered one of the most admired American companies, has seen its market value decline by more than 40% since last summer. Over the same period, Intel has fallen by almost the same amount.
Both of these companies have the same problem – they focused on optimizing their strategies too long, and they have missed important market shifts. They let their Lock-in to an old Success Formula keep them from installing White Space to keep them evergreen.
Dell has long said it has the best supply chain in its industry. It prided itself that it could take an order, make the machine, ship it and get the cash before it had to pay its vendors. Companies globally marveled at this optimized machine, and sought insight to copy it. But, now competitors have learned to copy Dell – and Dell has not developed any new markets that will allow it to continue its growth in revenues and profits. Earnings are down, and there’s no obvious plan for a turnaround. The company CEO has said that he plans to invest more in the same old business model, hoping results will turn around.
Meanwhile, "Intel Inside" – the famous tag line, isn’t on as many boxes as it used to be. Long suffering, and much smaller rival AMD has been winning over customers from Intel. Although this is largely in high-end multiprocessor servers (rather than desktop or laptop PCs), and AMD still only has about 20% of this market, people are legitimately concerned that Intel may really suffer, as once predicted by its famous CEO Andy Grove when he said that "Only the Paranoid Survive." Even stalwart Dell, long a 100% Intel user, has switched to AMD of late.
Both companies point to just how easy it is for even very successful companies to succomb to Lock-in on their old Success Formula. How easy it is to overlook market Challenges as they focus internally on optimization. And, how they can begin Defending & Extending the old Success Formula rather than seeking Disruptions to it and maintaining aggressive use of White Space to spur innovation and maintain growth.
Just like Wal-Mart, any company can become too focused on its Success Formula – even those in high-tech. History has shown that when this happens, the future risk is incredible. Remember Compaq, DEC, Wang, Unisys – and even what happened to IBM in the 1980s? Dell and Intel must react to their market Challenges quickly, because if they stall the losses this far are just a start to what could be an even more painful decline.
