by Adam Hartung | Aug 21, 2005 | Disruptions
Today’s Chicago Tribune had a front-page article on declining innovation in the midwest (Illinois Could Use a Few Good Edisons). Rightly so that this should make the front page and not just the business section. Declining innovation is often a harbinger of economic decline. People in Illinois should be worried.
Looked at individually, the leaders in Illinois innovation (Motorola, Abbott, Caterpiller, ITW, etc.) all took actions since 2000 to improve their performance. No one has faulted them for cutting costs – especially in an area where the payoff is as long-term as R&D. (A companion article discusses the strategy at Motorola for curbing its appetite for patents.) Moving the focus to better profits has, generally, pleased analysts and supported their stock price. Each of these companies has acted to defend and extend their business model.
But looked at by an outsider, the implications are really shocking. Illinois is now the 22nd state in patents – 22nd – even though it’s home to some of America’s biggest companies. What the Tribune can see no locked in company can. That from the inside, cutting these innovatoin expenses looks very different than it looks to someone from the outside.
It’s important for businesses to listen to outsiders. There is no way that any business can avoid having blinders. The quest for profits simply leads to lock-in and focus. Outsiders often see what insiders simply can’t.
by Adam Hartung | Aug 20, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Some of you may remember the old war movies in which the soldiers say "it’s the bullet you don’t hear that gets you." There have been a lot of movies in which the people who are killed make the point that it’s not what you see that gets you, it’s what you don’t see. There is no "Cry of the Banshee" prior to receiving the deadly blow. In business, it’s the same thing. It’s not the factors you plan on that kills your profitability, it’s what you don’t see. It’s not the threat from the direct competition that makes you business model unviable – it’s something that you never expected.
During 2005 there are two remarkable businesses that never saw it coming – and now they are facing great pain. They are household names with tremendous legacy and unbelievably profitable histories. But I can’t find any analysts who think they have growth in their future – and even the companies themselves admit they are facing a lower growth future. And their market values, employees, vendors and customers are all facing difficulty
Wal-Mart and Merck.
Wal-Mart has done about everything a discount retailer can do right. They’ve cut costs, appealed directly to their customers with lower prices. Created tremendous careers for their employees. But what they didn’t predict was a tripling of gasoline prices taking a relatively huge bite out of the discretionary incomes of their target customers. Now, with energy costs eating up the money they’d spend at the Wal-Mart stores the company is struggling to find a way to keep up its growth history.
Merck was the darling of Wal-Street in 1987. It was the highest P/E in the DJIA. It’s growth was spectacular. Not one analyst thought you could go wrong by buying Merck stock (and in all fairness if you bought it then you would have made a lot of money). But no one ever figured that one questionable drug (Vioxx) could destroy billions of dollars in shareholder wealth. The Merck business model made them rich while improving the lives of millions of people. But that same business model pushed Merck to aggressively market drugs directly to patients (rather than to doctors only), and to possibly push drugs into market use a bit quicker. And now the very health of Merck itself is in question.
Both these companies have been undeniably successful. World leaders. And they honed and pruned their business models to perfection for the competitive marketplace they were in. They locked-in that business model, and worked to defend and extend it as fast as possible. And that lock-in to the successful past practices meant they never saw it coming – they didn’t see what would cause them to stall. They didn’t see what could eventually knock them off their top spots.
by Adam Hartung | Aug 20, 2005 | In the Swamp, Leadership, Lock-in
This story hurts almost too much to tell.
This last spring a friend of mine for 25 years called asking for help with his small 2-year old business. He was competing in a fiercely competitive wireless data marketplace, where the rewards were potentially huge but no sure thing. His ambition was high, but his performance was struggling.
I met with him, and all too quickly realized that he was locked into management practices he had learned 15 years earlier as a successful executive in a very, very large wireless company. He was trying to run his new company, his much smaller company, the same way he ran the very large division of the much larger corporation. He wasn’t nimble, he wasn’t agile. He wasn’t holding the door open for extensive innovation amongst his 80 person staff, but instead he was trying hold to "hold everyone’s feet to the fire on performance" (against standards he was setting.) He wasn’t experimenting with new options, new ways of competing and disruptive market practices – instead he was trying to compete head on with much larger and better healed (although unprofitable) competitors.
I worked with him for two weeks trying to increase his agility. I offered him lots of options. He wasn’t willing to try new approaches, but rather he wanted someone to help make his business model more productive (and successful). At one point I pointed out that he wasn’t being as flexible as he might consider, to which he responded "I’m not inflexible, it’s just that there’s only one way to do this kind of business."
He stayed locked in to his business model, to his behavioral model and to his single-minded approach. I learned within the last two weeks that he’s now out of his company (his investors pushed him out) and the company is floundering – likely to be shut down shortly.
Lock-in can afflict any company of any size or age. Lock-in doesn’t only apply to large and mature organizations. And no matter where lock-in takes hold, it is both painful and deadly.
by Adam Hartung | Jul 21, 2005 | Defend & Extend, General, In the Swamp, Innovation, Leadership, Lifecycle
Motorola announced a great profit leap this week. Sales keep going up in all markets, and most notably sales of Motorola handsets have been gaining share. It was just 2 years ago that most analysts had given up on Motorola. They tagged the company as unresponsive to customers and a bad investment. But now, analysts all over are trumpeting the success at this aged, but recovering, company and recommending investors buy the stock (as well as the products).
Unfortunately, the same can’t be said for Kodak. Since dropping off the DJIA Kodak has been struggling to re-orient the company toward markets and renewed growth. Kodak announced a loss last quarter, and longer delays before returning to profitability. Although Kodak has been working on its "turnaround" for over 5 years (from film to digital photography) they still are saying that reaching their goals is at least 18 months away. Eighteen months ….. that’s longer in the future than Motorola has been executing its turnaround. And analysts are far from optimistic about the Kodak’s future.
Motorola is opening two new R&D centers, while Kodak is planning to lay-off 20,000+ employees.
Last January (2004) Motorola undertook a pattern interrupt and launched a host of new white space initiatives. The new leader (Ed Zander) escshewed massive layoffs in favor of reigniting his employees and seeking new growth markets. In fairly short order, Motorola has unleashed creative energy trapped in the organization and taken new products to market which are growing the company again. Motorola, in about a year, moved from the Swamp back into the Rapids by effectively disrupting itself then creating and managing White Space projects.
On the other hand, Kodak keeps trying to Defend and Extend its old business while "transitioning" to a new future. The leaders at Kodak won’t let go of the past and unleash their own organization to seek the future. Kodak has plenty of talented people, a great brand, and good distribution. But it keeps trying to defend its past instead of taking the actions to reignite growth in new markets. Its a shame, since Kodak was one of the early pioneers in digital imaging (they held many of the first patents) and its employees have had a clear view of "the future" for 20 years. But management has let lock-in to an old success formula keep them from unleashing their own resources.
Two big and "mature" companies found themselves stuck in the Swamp. Growth had stopped and financial results tanked. One followed the Phoenix Principle, and the other followed traditional management practices. One is now regaining share and growing again, the other remains seriously troubled.
by Adam Hartung | Jul 13, 2005 | Defend & Extend, Leadership
Today Bernie Ebbers was sentenced to 25 years in prison. For some it is seen as a signal to all CEOs they had better not commit fraud. For others it’s revenge for the ruination of a large corporation. For others it’s yet another sign of America’s misguided business leadership. And for others this is just an isolated, and irregular, activity by a wildman CEO. No matter what the view, unless this decision is overturned on appeal it’s very likely Bernie Ebbers will die in prison.
What we know from the trial is that Bernie Ebbers worked hard to pursue quarterly revenue and earnings goals. He never for a moment took his eyes off the P&L. He was so single-minded, he was found guilty of altering his books in a massive fraud in order to produce those desperately sought after results. Yet during his leadership at WorldCom he was hailed as a great leader by those in and out of his company who admired his single-minded behavior and focus on results.
Ebbers forgot the basic rule – the P&L is about RESULTS. You don’t create results, they happen because of the business decisions you make. When results don’t come in as favorably as desired it’s not the results you should focus upon, but instead the business decisions which create those results.
Bernie Ebbers is nothing more than another manager who fell victim to Defending and Extending a broken Success Formula. He went farther than most – to the point of fraud – in order to defend and extend that Success Formula. As such, he represents just how far Locked-In management can go to practice D&E Management. All managers who fall into the trap of D&E thinking, and D&E practices, run the risk of facing the reality that the RESULTS simply aren’t what they projected. Then they face very, very difficult choices.
There are other such victims in management today. Some are going through the wringer for it – AIG, Enron, Healthsouth to name a few. And there are many, many more that aren’t on the front page of today’s business section or under investigation. But all represent a common threat to their organizations and investors. The threat created by locking-in, focusing on the results and thereby not preparing to make strategic shifts when market changes require them. Then these managers don’t know what to do when the RESULTS aren’t what was projected.
It appears that Bernie Ebbers may well die in prison because of the decisions he made. Everyone loses – the wiped out WorldCom shareholders, the laid-off employees, the stranded customers, the defaulted suppliers and now the leader himself. And this could have been avoided if Worldcom management (led by Ebbers) simply hadn’t locked-in on that Success Formula and become single-mindedly devoted to Defending and Extending it. And that is the lesson for us all, we have much to fear from Lock-In and D&E Management practices.
by Adam Hartung | Jun 29, 2005 | Defend & Extend, In the Whirlpool, Lock-in
Can you recognize a leadership team (and business) in the Whirlpool?
Today’s Chicago Tribune quoted UAL as saying their losses were the result of "brutal" fuel costs. If it just wasn’t for those darn high fuel prices, why they could break-even.
And if pigs could fly….
For many years United’s management has had one excuse after another as to why they couldn’t make money. Unions, too many planes, high gate costs, insufficient ridership, too much competition…. fuel costs… Their business model is broken and it can’t make money. They have no idea how to fix it. They keep trying to find a way to Defend what they’ve done and Extend it in some fashion that will save the company. But nothing works. And it won’t. Yet, they can’t seem to get the gumption to disrupt themselves and try to really do something new before everyone loses their jobs (they already wiped out the shareholders) and leave creditors owning a bunch of planes.
Why, if they could just get those pigs to fly….
by Adam Hartung | Jun 24, 2005 | Defend & Extend, In the Swamp, Lock-in
McDonald’s is spending $20M this week to feel better about itself. Unfortunately, it won’t help shareholders. McDonald’s hit a growth stall 4 years ago, and ever since has been trying to use Defend & Extend management to regain growth. That’s included selling off assets and shutting stores.
Now it includes McDonald’s bringing 5,000 store managers (most at franchisee expense) to Vegas in an effort to pump them up and thereby improve store execution. The goal? To regain a future by focusing on better execution in the store. But, even the North American President admits "the U.S. would continue with ‘solid’ sales next year but probably not the double-digit growth..seen at times during the recent past."
So, a big chunk of one of America’s largest training budgets is going into a straightforward Defend & Extend program. Why? According to the Chicago Tribune, "The store managers’ performance will largely determine just how successful McDonald’s is going forward." Amazingly, we’re to believe the future of this DJIA multi-billion dollar corporation’s growth relies on the execution of 5,000 front line store managers in making and delivering Big Macs? "Results are [expected to be] evident through better execution of procedures in the restaurants." Where’s the leadership in that?
McDonald’s cannot rely on execution to regain its growth rate. The company heritage – consistency – is all focused on execution. So it’s comfortable for leadership to lean on execution as ‘the fix.’ But McDonald’s needs more than new chicken sandwiches – it needs to find a way to compete with the likes of Starbucks. And that won’t come from doing magic shows for 5,000 store managers in Vegas.
by Adam Hartung | Jun 23, 2005 | Defend & Extend, Disruptions, In the Swamp, Leadership, Lifecycle
Readers of my BLOGs might think I am always opposed to layoffs. It is true that the majority of layoffs are efforts to Defend & Extend outdated Success Formulas with short-term cost reductins that do not effectively address Challenges. Those layoffs (such as across the board reductions) do nothing to improve a business and are difficult to support. They simply push the business closer to the Whirlpool. But, layoffs can also be important Disruptions tied to turning a troubled company around.
Troubled Success Formulas are turned around by White Space projects. And White Space requires both permission and resources. But where is a troubled company supposed to get the resources? In many cases, it requires making tough decisions to STOP doing some things in order to refocus the business on developing a new Success Formula. Layoffs targeted at redirection and resource generation for new projects are very effective Disruptions that can unleash new innovation and move toward renewed success.
HP and Time Warner have both stalled. They must undertake serious redirection. And both are taking Disruptive actions intended to generate Pattern Interrupts plus unleash resources to be invested in White Space.
According to BusinessWeek, HP is going to redirect what it sells and how it sells it. An action intended to get much closer to customer needs – something HP desperately needs to do. And in order to finance this action it will likely layoff 15,000+ workers.
TimeWarner is selling its cable business in order to invest in AOL. A risky move – but one to applaud. Cable franchises are not high growth businesses. Capitalizing the future value of cable into current cash creates a treasure chest for developing new growth opportunities — which likely lie in AOL as it moves aggressively to reposition and compete with Yahoo!
Both companies are far from out of the Swamp and back into the Rapids. But both are doing exactly what they need to do to prepare themselves for the transition. Investors may applaud these moves simply because these changes raise cash that will improve the balance sheets of both firms. What investors should cheer is raising cash to invest in transitional White Space projects that could return both companies to higher growth.
by Adam Hartung | Jun 8, 2005 | Disruptions, In the Rapids, Innovation, Leadership
It’s easy to beat up on old businesses. But lately, a very old business is making some very smart moves.
The venerable New York Stock Exchange came under some severe attacks last year. It Chairman was accused of improper compensation and the Exchange Board was accused of improper oversight. Things weren’t looking too good as prosecutors went after specialists and floor traders.
But hand it to the new CEO. He used the troubles to create an internal Disruption. The NYSE’s troubles were more a reflection of its inabilities to address its challenges from the NASDAQ than malfeasance (although the latter is still being argued.) So he used the attacks to rethink the future of the exchange.
Viola – in a master stroke the new Chairman of the 200 year old exchange has acted to revitalize the NYSE by buying Archipelago. Instead of taking actions in defense of the past, he is moving quickly to push the Exchange into the forefront of trading for the new millenium. This acquisition is a classic example of using a Disruption to create White Space – and develop a new Success Formula for an old business.
In the hectic pace of change in business, many have paid little attention to this action. But it’s a great example of a new leader identifying the real challenge to the business – rather than reacting to its problems. And then taking actions to create a pattern interrupt and new opportunities to learn. And possibly saving a venerable, and horribly locked-in, organization.
This is a great move for the NYSE – and a stellar example of The Phoenix Principle in action.
by Adam Hartung | May 21, 2005 | Defend & Extend, In the Swamp, Lock-in
WalMart is an amazing company. From a small rural store a behomoth of retailing emerged in just a few years. No one seems able to compete with WalMart in discounting.
Despite its success, WalMart is now struggling to grow. Poor revenue growth has stalled the share price. Now, more than at any previous time, WalMart needs to find new ways to grow. Its Success Formula has worked so well that no one can outperform WalMart at being WalMart. But, it’s unclear that there’s a need for more WalMarts. And foreign markets aren’t nearly as excited about WalMart as Americans. So, how is WalMart to grow?
WalMart needs White Space projects that can launch new revenues. Just as Sam’s was once a new project that became large. But WalMart has become so focused on its retail store strategy that it’s lost the ability to do new things. Last week WalMart gave up on its effort to rent videos on-line, handing that business to NetFlix.
Amid the announcement WalMart pointed out that its stores sell more in one day than NetFlix does in a year. But the real story is that WalMart can’t figure out how to compete on-line. At WalMart, it’s all about the stores. How to drive more revenue to the stores. And that’s getting increasingly difficult.
There was another retailer that never rose to this challenge. Once the biggest innovator in retail, they were the first to capture the rural customer (with mail order) and they became a powerhouse across the country. But, when they couldn’t adapt to changing times and learn to do new things they fell to an acquirer’s axe. That company was, of course, Sears.
So, it may seem silly to think that WalMart’s failure to sell videos, or anything else, on-line is a serious concern. But people thought Sears’ on-line failures were no big deal 6 years ago. It’s actually a very, very big concern when any company becomes so locked in that it can’t undertake new projects. It portends very bad things ahead.
