by Adam Hartung | Oct 8, 2004 | Disruptions
It isn’t every day that a company loses $25 billion (yes BILLION) dollars of stock value in a single day… or a company has the courage to do the right thing even knowing they’re going to get hammered for doing so. But that’s what Merck did.
Merck & Co. on Thursday recalled its arthritis drug Vioxx after an ongoing trial confirmed the medication increases the risk of heart attack and strokes. The news sent stock down nearly 27 percent and erased $25 billion from its market value.
Merck’s pulling of their blockbuster drug Vioxx off the market was an act of courage and integrity that is almost unheard of in an age of Enrons and Tycos . But instead of focusing on that, everyone seems to be wondering who to blame. Well that’s the wrong question and the wrong line of thought.
I would be asking, “who’s going to be the hero at Merck that seizes on this challenge and uses it as an opportunity to create a breakthrough for the company?” This event has created a disruption at Merck—there’s white space in the shadow of this disaster that will allow them to make just about any changes they want to make—and this sort of opportunity is very hard to come by.
Normally, companies are so hide-bound by their locked-in behaviors and organizational structure that they can’t break out of the status quo to make the important strategic shifts that would position them for a brighter future. SO, as bad as this situation is for Merck, it is also a golden opportunity. The big question is what will Merck do with it?
What could they do? Well they could leverage the integrity of their action to create trust with a customer base that has grown wary and cynical about drug companies—what would that be worth? They could re-examine their assumptions about the viability of the drug company model that puts them in feast-or-famine mode depending on the next great blockbuster drug to emerge from the R&D labyrinth. What changes could they make that would diverge from the industry norms and give them a real advantage?
What ideas do you have?
by Adam Hartung | Aug 27, 2004 | Defend & Extend, Leadership
As the world watches the Olympics this week, I was struck at how different sporting competition is from business competition. Those business leaders that make positive analogies are doomed for problems – and most likely failure.
The Olympic gymnast is a great athlete. Designed and practiced to be the best at his sport. He might have been a great baseball player, or swimmer, but he is, today, a finely tuned athlete capable of competing – and winning – at gymastics.
Likewise, the Olympic Greco Roman wrestler is a great athlete. He too is practiced to be the best at his sport. And, he too could have been a football player, or other competitor. But today, due to repetitive practice and a determined focus he is ready to compete in his one sport of wrestling.
Both of these are potential gold medal winners. But which is the more “fit”? That is impossible to say, for each is now finely tuned to a narrow field of competition. What would happen if the coach asked them to switch sports? It would be disastrous. They are capable of winning at one game, and have limited competitiveness in any other area.
What will become of these athletes when the game ends? Both will hope for endorsements and great fortune. Perhaps they will have one – at most two – more possible trips to the Olympics. And endorsements may last for a year or two. But they are almost sure to not compete in any other athletic endeavor. For, as good as they are, they are so highly specialized that their skills are not transferable to compete in another game. They will have to find entirely new careers in short order.
For business this is a recipe for disaster. Specialization leads to obsolescence. Any business that optimizes itself to compete so specifically will find itself upset by another competitor that makes a slight alteration in the “rules of the game.” The dynamism of markets, and competition, assures us that no highly specialized competitor can survive long. Glory may reign for a short time, but the specialized competitor will be upset in short order.
Today’s business success requires adaptability in the face of changing market conditions and competitors. New rules are created often, and the abilty to move across markets with wide skills is required for any business to remain powerful for more than a few years. Even great size, as with the wrestler, will not protect the competitor when the rules change slightly favoring speed or agility over size.
Business is not an Olympic sport. We should not confuse the testosterone laden thrill of a gold medal with the success of creating returns for shareholders. Instead, we should remember that Olympic winners are the 1 in 100,000 that made it to success. The odds were stacked far against them before they began. In business, the ability to change the competitive rules means that the odds can be stacked in your favor – as long as you remember to be adaptive in thinking and behavior in order to keep your competitor guessing and yourself in the lead.
by Adam Hartung | Aug 25, 2004 | Lock-in
“Better the devil we know than the one we don’t know…” I saw this quote from a business leader the other day and realized that this pretty much sums up the logic that leads to lock-in.
Every CEO is saying today that their strategic agenda is innovation and growth. But what they’re doing instead is incrementalism and cost optimization. Why would business leaders do the opposite of what they say they’re going to do?
One reason is that innovation requires venturing into the unknown, what we call “white space.” In this creative space there is infinite potential for innovation, but there are no guarantees. In fact, most innovations fail… and failure is a career killer in Defend & Extend Management.
I’m sure that business leaders’ reasoning goes something like this: “I can put a lot of time and money into finding a breakthrough strategy which we have no way of knowing will succeed or not, OR, I can drive up short-term profits through more cost-cutting and efficiency efforts like more downsizing or squeezing our vendors. Hmmm, the first option holds the promise that we’ll be here a decade from now, but the second assures me I’ll make a big bonus this year… I think I’ll go with option 2 and study this innovation thing a bit longer…” As they say, nobody ever got fired for making the current quarter’s numbers…
Ok, so maybe that’s an exaggeration, but it is surely accurate in principle. Here’s the flaw in that logic: it assumes that avoiding innovation is the safer option. In today’s economy, if you don’t reinvent your success formula on a recurring basis—that is, take the risk of breakthrough innovation—you may not even have a decade, you may have only a couple of years. In fact, the only way to HAVE a future is to disrupt and reinvent your business.
To stay ahead, leaders and their organizations must learn to trust the devil they don’t know—to trust the future to innovation. This requires that leaders must place their confidence in their ability to figure things out when there is no proven road forward, instead of relying solely on what they already know and can prove. And that will be a big step for leaders, a step that we predict very few will make.
by Adam Hartung | Aug 20, 2004 | Defend & Extend
You’re either “Green and Growing” or “Ripe and Rotting.” Unfortunately most companies and even entire industries are Ripe and Rotting — they’re locked into obsolete Success Formulas and innovative companies are putting them out of business. Do you know how many of the top 500 hundred companies on the 1994 Fortune 1000 list of companies are still there today? What would you guess… 90%? 85%? Wrong. It’s about half — 55%.
That’s really amazing when you think about it. These are our biggest and most successful companies… how could this happen? What explains this? That is the question Adam and I have been trying to answer together since 1999, and that’s what this blog is dedicated to exploring.
Ripe and Rotting companies — which in our language would be companies in the “Swamp” and “Whirlpool” parts of our “River” lifecycle metaphor — cannot transform themselves because they are locked-in. They are unable to reinvent their business even when they want to, although most don’t. What they do want is to make their old Success Formula vibrant and effective again, and they do this through what we call Defend & Extend Management (D&E).
D&E management is a way of responding to marketplace challenges that enables companies to keep doing what they’ve always done; only maybe they make it better faster or cheaper. Well, it doesn’t work in today’s economy—it did 30-50 years ago when these management concepts originally became codified and eventually hardened into dogma—but not today. And that’s why so many companies are failing, and almost every company is struggling. Their basic assumptions about the economy and how to compete have become obsolete and they—and in fact the business world at large—have not made the leap to a new set of principles that does work.
That’s why the investment community tries to squash Google’s IPO instead of finding a way to transform themselves to prosper in a world where the Dutch auction is the standard for IPO’s. It’s why music companies sue their customers instead of adapting to a world where downloading individual digital songs is the norm. It’s why the major airlines cling to their hub-and-spoke business model instead of ditching it and experimenting to find a new approach where they can make some money.
Oh, and about Google’s IPO… well apparently it was successful after all. And now the media is reporting that other companies may go this route with their IPO’s (oh really??!). And the big investment companies? Their D&E response was to stay away from the IPO… and in doing so missed out on this tremendous business opportunity.
by Adam Hartung | Aug 19, 2004 | Disruptions
Google’s IPO is the talk of the town today. The company’s decision to take an unconventional approach (called a “Dutch auction”) and offer shares for sale to small investors has drawn the ire and ridicule of all but a few (Fast Company magazine praises Google’s courage in their current issue, but they’re the exception).
Who knows if it will earn Google the extra hundred’s of millions of dollars that they hope for… that’s not the real story here anyway. The real issue is about Google breaking the rules for how big companies do IPO’s and the hue and cry it has raised among the entrenched investment banking community.
This is a classic example of an emerging trend that is signaling a sea change in how the established system works. The traditional way of doing IPO’s involved the investment banks determining the market price, offering the shares to their best customers, and raking in huge profits as a percent of the capital invested. A Dutch auction involves selling directly on the open market, thus avoiding much of the cost and generating significantly more capital for the company.
Google isn’t the first company to use this approach but it is the biggest. The institutional investment community is hoping and praying that it will fail… because, if it doesn’t, their way of doing business will change profoundly and they will end up big losers. Predictably, they’re doing Defend & Extend (D&E) actions to protect their Success Formula—ridiculing the approach in the press, vowing to boycott the IPO, etc.
Here’s the bad news for the entrenched institutions: the game is already over. It doesn’t matter how Google’s IPO goes, your Success Formula is doomed. Why? Because it is obsolete for today’s technology and today’s society. It has been propped up for years through oligopolistic practices, cronyism, fear-mongering and intimidation. But the evolution of Success Formulas is relentless and undeniable—yours will fail and be replaced, it is only a matter of time. However, due to your lock-in to the current system, it is unlikely you will participate in the new system that emerges.
That’s bad for the entrenched investment community, and good for just about everyone else, and that should have been their first clue that something was amiss…
