by Adam Hartung | Nov 27, 2004 | Defend & Extend, Disruptions, In the Whirlpool, Leadership, Lifecycle
Does anyone think KMart + Sears = a better company? It doesn’t look that way. Most experts say the company is worth nothing more than it’s inventory value plus the real estate. Too bad, for both companies started as tremendous innovators in American retailing.
Kmart pioneered the discount store concept. And Sears pioneered the retail catalog, store credit, private label tools and appliances, and lifetime warranties. Both companies saw tremendous growth during their cycles of innovation.
Was it inevitable that they would both be relegated to below average returns? Absolutely not. Both simply stopped innovating. They turned to defending and extending what they already knew, while other competitors attacked them with new innovations.
But why not change the game now? The bankruptcy of KMart opened the door to new options – including the acquisition of Sears. If the two chains view this latest action as a chance to simply defend and extend their outmoded businesses, they will both simply die off. But if they view this as a major disruption to their business, and realize success will not come from chasing the two entrenched leaders (Wal*Mart and Target), they have the chance to create substantial value for their investors, employees and customers.
The new company needs to open its organization to innovation. The new CEO, coming from restaurants, should eschew the conventional merchandisers and strike out for something new. With the stock worth no more than the real estate, he has nothing to lose and everything to gain.
We haven’t yet heard the new CEO make any claims about the future. If he heads down the road of putting Craftsman in KMart and Martha Stewart in Sears – with great goals of a turn-around – run for the hills! Investors should sell the stock and employees find new jobs. But if he creates a new company that innovates away from the old business and toward something brand new he has a chance of creating a new company that could produce great returns.
The fate of KMart and Sears is not cast in concrete. But the leadership must act quickly while the cement is still wet! They must use this disruption to create something new — not defend and extend "the best parts" of what’s already not working.
by Adam Hartung | Nov 12, 2004 | Defend & Extend
This is just too good. I just read on Business 2.0 blog that Blockbuster is trying to buy Hollywood Video, a rival chain of video rental stores. OK, this is CLASSIC Defend & Extend Management. They must be thinking that if they can just get big enough, they will be able to get those elusive scale savings and be able to have more control over their pricing. It won’t happen. They have to understand that storefront video rentals will never get any better as a business, no matter how big they get. (See my previous blogs on this.)
It’s amazing to see companies with broken Success Formulas buy other companies with the SAME Success Formula and expect that to improve the business. Didn’t anybody at Blockbuster ask WHY it would improve the business? Why it would make someone suddenly decide not to order that video on demand and charge down to the video store instead? Sadly, there are many other examples. Here’s one: Tupperware, who thinks its home party concept is still a viable concept in the 21st century, bought Beauty Control a few years ago because the company also sold through home parties. They expected to benefit from the synergies. Want to guess how that turned out?
by Adam Hartung | Nov 11, 2004 | Defend & Extend, Lock-in
I have noticed a common behavior among companies in the Swamp and Whirlpool stages of the lifecycle. They never seem to plan ahead for unexpected things to happen. It is as if they make an annual plan and there are no contingencies for marketplace challenges and disruptions. Maybe they really do believe that the plan will turn out like they lay it out if they simply hold the leaders accountable, which would indicate a terminal case of denial and self-deception.
Consider the major airlines which always seem to be on the verge of bankruptcy. After 9/11, they have all been in survival mode and their actions have been classic Defend & Extend Management: cut costs, layoff employees and reduce their pay, reduce prices, reorganize the business, replace management. They think that if they can do these things, they will become competitive again.
But they didn’t plan on oil prices reaching all time highs, which meant they had to make deeper cuts and go to even harsher extremes. And now, it seems that these troubled airlines didn’t plan on their healthy competitors adding more planes as part of their growth plans. (Well duh!) That’s a problem because more planes means more capacity which means more competition which means lower prices. And that means that the major airlines’ plans to rebound aren’t worth much. The fact is that they never were worth much.
Troubled organizations like those late in their lifecycle don’t have
any excess capacity. That’s why they keep getting knocked further and
further down by marketplace changes. No sooner than they recover from
one crisis, another crashes onto the scene. If you need proof, read the
countless annual reports that offer excuse after excuse for unexpected
events that hurt the company’s performance that year. Then read the hollow
promises about how they’ll plan better next year.
It would be valuable for any senior manager of a business or functional unit to assume that unexpected things are going to happen and to plan ahead for them. Scenario planning as a discipline has been around for many years and is a useful practice. In addition, every organization must budget for excess capacity to deal with unexpected challenges. Where will you get the money, people, capital, and management bandwidth to deal with surprises? In order to estimate how much extra capacity is necessary, managers can evaluate prior years and determine how much was consumed by surprises in the past. This, coupled with effective scenario planning, can help companies minimize the consequences of unexpected disruptions.
Oh, and adopting The Phoenix Principle wouldn’t be a bad idea either!
by Adam Hartung | Nov 10, 2004 | Lock-in
The Praying Mantis is a remarkable example of evolutionary adaptation. I saw one today and marveled at how well it had adapted to prey on unsuspecting insects. It was solid brown, looked like a stick and has lethal forearms and claws. It is easy to understand how it can blend into the limb it is standing on and capture its prey as it wanders by.
Trouble is, the Praying Mantis that I saw was on my garage wall, which is solid white. So, it stuck out like, well, a carnivorous bug. This particular specimen wasn’t going to surprise any prey. It may as well have hung up a sign saying " BUGS BEWARE, I"M HERE TO EAT YOU!"
The Preying Mantis has an exceptional Success Formula… for the right habitat (context). However, when the context changed, that Success Formula became a liability. A brown colored Praying Mantis on a white background loses the element of surprise, and will go hungry.
That’s exactly what has happened to countless businesses today. They developed Success Formulas for a different competitive environment and have not adapted adequately to the changing business context. They’re like a brown Praying Mantis on a white wall, and they are struggling and suffering as a result.
by Adam Hartung | Nov 1, 2004 | Disruptions
Kirsten Osolind, a delightfully witty and thought-provoking marketing whiz, pointed out in a recent blog that women were not nearly as likely to embrace the “built-to-flip” mentality as men. The Phoenix Principle is based on an assumption that the owners/managers of a business are in it for the long-term. Otherwise, why bother investing in creating a business that will renew itself?
According to Marsha Clark, an expert in issues related to women in business, women are dropping out of the big corporate buisness scene in record numbers. Many of these women are starting their own companies where they can, as Kirsten says: “groom them as we would our child’s hair.” I wonder what this trend portends about business in the next 20 years, and about the likelihood that increasing numbers of business entrepreneurs will be building businesses that they expect to last over the long-term?
I suspect that women’s influence on business, which is growing quietly in the background, will one day in the not too distant future burst into prominence and create an unexpected disruption across the economy. Why? Women will have irrevocably put their stamp on managment practice and organizational design… and it promises to be remarkably different from that of industrial management.
by Adam Hartung | Nov 1, 2004 | Disruptions
We all know our business goal is to create above-average results. Yet, much of what we’re trained to do in business is sure not to achieve these results.
In the August 24 issue of FORTUNE you’ll find the following analysis of modern marketing http://www.fortune.com/fortune/valuedriven/0,15704,686868,00.html :
“And here is one of the key insights of that science: In category after category, the market leaders are virtually identical. “Virtually” is important. They aren’t absolutely identical. They’re just very, very close. Whether it’s potato chips, toothpaste, disposable diapers, or any of hundreds of other products, the pattern holds. You can tell the difference between Coke and Pepsi if you care about soft drinks, but the difference is minuscule. That’s because endless research has established what consumers like most, and straying too far from those specs is asking for failure.”
What we’re missing from much management science today, including marketing, is the capability to create marketplace disruptions. It’s only by creating market disruptions that companies can achieve competitive advantage. Me-too strategies lead to me-too returns, until the inevitable price war breaks out when one competitor tries to buy share causing everyone to go from mediocre to below-market shareholder returns.
Leaders today need to unlock the breakthroughs inside their companies. They need to encourage breakthrough thinking among the employees. They must overcome the “me too” approaches taught too often in business school, and practiced too often in business. Lead your competition in breakthroughs and you’ll lead them in returns as well.
by Adam Hartung | Oct 29, 2004 | Lock-in
I was worried. I couldn’t find my son and his grandfather who were supposed to be fishing together. I looked out behind my father-in-law’s house at the boat dock where they should have been standing to fish in the lake. And they weren’t there. I knew they weren’t out on the lake because the fishing boat was slung up in the boat house. Despite looking everywhere I thought they would be, I still couldn’t find them. So, perplexed, I waited in the house for them to show up, trusting that my son was in good hands.
An hour later, they walked in and I immediately jumped up and demanded to know where they had been. “We we’re out fishing on the lake,” my son said with a puzzled expression on his face. I explained that they couldn’t have been because the boat was docked in the slip. My son laughed and said “Dad, take another look,” and pointed to the boat house. I did, and there were… TWO boats! My father-in-law’s fishing boat was tied up at the dock looking just like I remembered it—small, green hulled, simple, rigged for fishing. And there, moored in the slip, was a ski boat—a big, white, designed-for-speed rigged-for-skiing boat-that-looked-nothing-like-a-fishing-boat boat sat there as clear as day. And despite looking right at it all morning, I had not seen it. I had not expected it to be there, and to me, it wasn’t.
The real voyage of discovery consists not in seeking new landscapes, but in having new eyes. — Marcel Proust
This story illustrates the power that our expectations have to distort our perception and literally show us what we expect to see rather than what is really there. It is this perceptual bias that is a main reason that businesses do not see competitive threats until it is too late. It is why leaders look at the numbers and see evidence that defending the old Success Formula is working… right up to the day that everything crashes down around them. It is why customer-facing employees often have a dramatically different—and mostly more accurate—understanding of the competitive realities than senior executives.
In order to create the breakthroughs that they desire, executives must first disrupt their mental lock-in. This is the only way to open up their perceptual bias to see new information and reach new understandings. Only in seeing the situation “with new eyes” are rich new possibilities opened up for truly novel innovation.
by Adam Hartung | Oct 18, 2004 | Defend & Extend, In the Whirlpool
Blockbuster’s competitors are making it difficult for the company to make strides toward profitable growth. Netflix, the leading online DVD rental business, just announced a price cut in an attempt to double the size of its business (a bad move, but that’s another story…). And Blockbuster, in order to not be under-cut, dropped its own prices in response.
This is the problem with Defend and Extend management. While Blockbuster is busy fending off competitors to its current business, it is consuming scarce investment dollars and organizational attention that cannot be applied to meeting the real threat, which is video on demand.
Even if Blockbuster succeeds against Netflix, how will they out duel Wal-Mart on price in this space? And now Amazon.com is rumored to be getting into the market, and Netflix may find a deep-pocketed buyer. Can Blockbuster keep this up indefinitely? Of course not. Instead of chasing around after paper-thin margins in a business that has no future, the company needs to wake up to the reality that it doesn’t have a Success Formula that can win in the long run and act now to reinvent it.
by Adam Hartung | Oct 14, 2004 | Defend & Extend, In the Whirlpool
What do you think; does Blockbuster’s Success Formula have a chance of being saved? The company IS innovating and CEO Anitoco’s recent investor tour was centered around convincing shareholders that the company has a plan to reinvigorate the business… but really, who are they kidding (besides themselves)?
Blockbuster’s innovations are clever and will certainly put some more dollars on the top-line (at least temporarily). These include increasing game rentals (competing with stores such as Gamestop), allowing people to trade-in their old movies, a subscription service to allow people to keep movies indefinitely (to compete with Netflix). Ultimately, the company is saying that it is changing its business from “a place you rent a movie to a brand where you rent buy or trade movies and games, used or new, in-store or online.”
We don’t think its going to be enough. Why? Because there are too many alternatives for renting movies, but the really big show-stopper is a disruptive technology: video on demand. Blockbuster claims that it has certain advantages over video on demand such as a two-month lead on getting new movies. But even this is based on the assumption that movie theaters fear cannibalization of retail sales. And that can change overnight.
Blockbuster’s actions won’t work over the long-term because they aren’t addressing the challenge. In essence they are just extending the old business model which is to have lots of brick and mortar retail outlets providing entertainment-related products for home use. It’s the lock-in to all the real estate that’s killing the company. What will happen when sales drop precipitously due to the rising popularity of streaming video that can be downloaded in the comfort of your home? It’s inevitable.
What else could they do? Stop investing in their dead business model–the current business model is in the Whirlpool and has no future. Instead it can start selling off valuable real estate and use the money to experiment with leading-edge business concepts. What would you do if you were CEO?
by Adam Hartung | Oct 8, 2004 | Disruptions, In the Swamp
Belo’s problems continue with a whole raft of shareholder lawsuits. So what do you do when you have a problem? You solve them.
So, when Belo admitted to the inflated circulation, it set out to solve the problem. They did that by finding guilty parties and firing them, and they made restitution to their advertisers. And in focusing on the problem they made a big (and excruciatingly common) mistake. They didn’t look for the external challenge that is the root cause behind all these problems.
What’s the challenge? The company’s Success Formula has become obsolete and they are struggling financially. So, is firing some guilty parties going to solve that? No. Maybe those people should have been fired. Fine. Now what? What will Belo do about the challenge?
Just as I wrote about Merck’s crisis, Belo has the opportunity to really take advantage of this situation. They could create a disruption by seeing this as an indictment of their strategic assumptions and decide to reinvent them. However, if they stick with the actions they’ve taken thus far, this whole unsavory event will amount to a mere disturbance—an annoyance that the company has to deal with so they can get on with business as usual. And if that happens, we may not have to wait long for the next negative headline…
