by Adam Hartung | May 7, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
Good public policy and good management don't always align. And the banking crisis is a good example. We now hear "Banks must raise $75billion" if they are to be prepared for ongoing write-downs in a struggling economy. This is after all the billions already loaned to keep them afloat the last year.
But the bankers are claiming they will have no problem raising this money as reported in "The rush to raise Capital." "AIG narrows loss" tells how one of the primary contributors to the banking crisis now thinks it will survive. And as a result of this news, "Bank shares largely higher" is another headline reporting how financial stocks surged today post-announcements.
So regulators are feeling better. They won't have to pony up as much money as they might have. And politicians feel better, hoping that the bank crisis is over. And a lot of businesses feel better, hearing that the banks which they've long worked with, and are important to their operations, won't be going under. Generally, this is all considered good news. Especially for those worried about how a soft economy was teetering on the brink of getting even worse.
But the problem is we've just extended the life of some pretty seriously ill patients that will probably continue their bad practices. The bail out probably saved America, and the world, from an economic calamity that would have pushed millions more into unemployment and exacerbated falling asset values. A global "Great Depression II" would have plunged millions of working poor into horrible circumstances, and dramatically damaged the ability of many blue and white collar workers in developed countries to maintain their homes. It would have been a calamity.
But this all happened because of bad practices on the part of most of these financial institutions. They pushed their Success Formulas beyond their capabilities, causing failure. Only because of the bailout were these organizations, and their unhealthy Success Formulas saved. And that sows the seeds of the next problem. In evolution, when your Success Formula fails due to an environomental shift you are wiped out. To be replaced by a stronger, more adaptable and better suited competitor. Thus, evolution allows those who are best suited to thrive while weeding out the less well suited. But, the bailout just kept a set of very weak competitors alive – disallowing a change to stronger and better competitors.
These bailed out banks will continue forward mostly as they behaved in the past. And thus we can expect them to continue to do poorly at servicing "main street" while trying to create risk pass through products that largely create fees rather than economic growth. These banks that led the economic plunge are now repositioned to be ongoing leaders. Which almost assures a continuing weak economy. Newly "saved" from failure, they will Defend & Extend their old Success Formula in the name of "conservative management" when in fact they will perpetuate the behavior that put money into the wrong places and kept money from where it would be most productive.
Free market economists have long discussed how markets have no "brakes". They move to excess before violently reacting. Like a swing that goes all one direction until violently turning the opposite direction. Leaving those at the top and bottom with very upset stomachs and dramatic vertigo. The only way to avert the excessive tops is market intervention – which is what the government bail-out was. It intervened in a process that would have wiped out most of the largest U.S. banks. But, in the wake of that intervention we're left with, well, those same U.S. banks. And mostly the same leaders.
What's needed now are Disruptions inside these banks which will force a change in their Success Formula. This includes leadership changes, like the ousting of Bank of America's Chairman/CEO. But it takes more than changing one man, and more than one bank. It takes Disruption across the industry which will force it to change. Force it to open White Space in which it redefines the Success Formula to meet the needs of a shifted market – which almost pushed them over the edge – before those same shifts do crush the banks and the economy.
And that is now going to be up to the regulators. The poor Secretary of Treasury is already eyeball deep in complaints about his policies and practices. I'm sure he'd love to stand back and avoid more controversy. But, unless the regulatory apparatus now pushes those leading these banks to behave differently, to Disrupt and implement White Space to redefine their value for a changed marketplace, we can expect a protracted period of bickering and very weak returns for these banks. We can expect them to walk a line of ups and downs, but with returns that overall are neutral to declining. And that they will stand in the way of newer competitors who have a better approach to global banking from taking the lead.
So, if you didn't like government intervention to save the banks – you're really going to hate the government intervention intended to change how they operate. If you are glad the government intervened, then you'll find yourself arguing about why the regulators are just doing what they must do in order to get the banks, and the economy, operating the way it needs to in a shifted, information age.
by Adam Hartung | May 4, 2009 | Current Affairs, Defend & Extend, General, In the Swamp, Innovation, Leadership, Openness
Today Yahoo.com picked up on Mr. Buffett's recent comments, with the home page lead saying "Buffett's Gloomy Advice." The article quotes Buffett as saying newspapers are one business he wouldn't buy at any price. Even though he's a reader, and he owns a big chunk of the Washington Post Company (in addition to the Buffalo, NY daily), he now agrees there are plenty of other places to acquire news – and for advertisers to promote.
I guess the topic is very timely given the Marketwatch.com headline "N.Y. Times hold off on threat to close Boston Globe". Once again, in what might remind us of an airline negotiation, the owner felt it was up to concessions by the workers, via their union, if the newspaper was to remain in business. After squeezing $20million out of the workers, the owners agreed not to proceed with a shutdown – today. But they still have not addressed how a newspaper that is losing $85million/year intends to survive. With ad revenue plunging over 30% in the first quarter, and readership down another 7% in newspapers nationally, union concessions won't save The Boston Globe. It takes something that will generate growth.
And perhaps that innovation was also prominent in today's news. "Amazon expected to lift wraps on large-screen Kindle" was another Marketwatch headline. Figuring some people will only read a magazine or newspaper in a large format, the new Kindle will allow for easier full page browsing. According to the article, the New York Times company has said it will be a partner in providing content for the new Kindle.
Let's hope the New York Times does become a full partner in this project. People want news. And the only way The Boston Globe and New York Times will survive is if they find an alternative go-to-market approach. Printing newspapers, with its obvious costs in paper and distribution, is simply no longer viable. Trying to defend & extend an old business model dedicated to that approach will only bankrupt the company, as it already has bankrupted Tribune Company and several other "media companies." The market has shifted, and D&E practices like cost cutting will not make the organizations viable.
It's pretty obvious that the future is about on-line media distribution. We've already crossed the threshold, and competitors (like Marketwatch.com and HuffingtonPost.com) that live in the on-line world are growing fast plus making profits. What NYT now needs to do is Disrupt its Lock-ins to that old model, and plunge itself into White Space. I'm not sure that an oversized Kindle is the answer; there are a lot of other products that can deliver news digitally. But if that's what it takes to get a major journalistic organization to consider switching from analog, physical product to digital on-line distribution as its primary business I'm all for the advancement. Those who compete in White Space are the ones who learn, adapt, and grow. Being late can be a major disadvantage, because the laggard doesn't have the market knowledge about what works, and why.
This late in the market evolution, the major print media players are all at risk of survival. While no one expects The Chicago Tribune or Los Angeles Times to disappear, the odds are much higher than expected. These businesses are losing a tenuous hold on viability as debt costs eat up cash. Declining readership and ad dollars makes failure an equally plausible outcome for The Washington Post, New York Times and Boston Globe. Instead of Disrupting and using White Space, as News Corp started doing a decade ago (News Corp owns The Wall Street Journal and Marketwatch.com, as well as MySpace.com for example), they have remained stuck in the past. Now if they don't move rapidly to learn how to make digital, on-line profitable they will disappear to competitors already blazing the new market.
by Adam Hartung | May 3, 2009 | Current Affairs, In the Swamp, Leadership, Web/Tech
Warren Buffet held the annual meeting for Berkshire Hathaway this weekend, and upwards of 40,000 people came to hear his opinions. For hours he waxed eloquently, offering opinions on a wide range of topics sure to cover websites, blogs and tweets for a few days. But I was interested in the comment "Buffett, Munger praise Google's 'moat" according to Marketwatch.com's headline. It's pure 1980s industrial thinking, and why you have to be careful about forecasting and investing following Mr. Buffett.
The concept is that a business can be like an old castle, with a moat around it protecting it from competitors. The company can prosper because no competitor can jump the moat, and thus the profits of the business are protected. And today, Buffett and his partner think Google has such a moat. Now, remember, Buffett bought only 100 shares in Microsoft and long eschewed other high tech companies like Apple, Oracle, SAP and Cisco systems. His favorite phrase was to say he didn't understand these businesses. Now, suddenly, the elder Buffett is becoming tech-savvy, he'd have us think, and he loves Google. Or perhaps he's late to the game, and trying to apply outdated concepts.
I too like Google. But not for the reasons Buffett does. There is no doubt Google is far in front in the search business, and coupling that with ad placement gives them a huge market share today producing double digit revenue and profit growth. Big growth and profits is a good thing. But moats have a way of being jumped, or drained, or filled incredibly rapidly these days. And as good as Google is, what makes Google a good company is how it does not rest on its business success. The company keeps branching into other businesses which have the ability to extend company growth even if search runs into some unforeseen problem.
"Moats" are the industrial classicists way of thinking about strategy. Moats were powerful tools a few hundred years ago, but competitors changed tactics and moats lost their value. Even America's moats – the Pacific and Atlantic oceans - have been breeched by attackers from Japan and the middle east. And the same is true for business moats. They were an industrialists tool, based on big investments and high share, but they no longer have the ability to defend a business's profits. Just look at the Buffalo newspaper Buffett owns. "Newspapers face 'unending losses,' Buffett says" as he now admits newspapers (including his) are not going to make profits any more. Their "local market moat" was made obsolete by internet news competitors and ad sites like Craig's list and Vehix.com.
And now even Berkshire Hathaway is facing a growth stall. Nobody would dare predict bad things for the "oracle of Omaha." But reality is that Berkshire stock is at the same value it was 6 years ago as "Berkshire quarterly operating profit falls." Even the amazing financial machinations and sophisticated tools (like derivatives and credit default swaps) almost nobody understands and Berkshire has been famous for have been unable to overcome losses in the 60+ operating units. And even some of these financial tools are losing money – something Buffett historically avoided completely. But he's learning that competitors are making even these products less profitable.
Times have changed. It's no longer the era for the industrialist, and the financial whiz that can extend an industrialists profits. We live in a fast-paced world where adjusting to market shifts is at the core of maintaining ongoing profits. Google's willingness to Disrupt and use White Space to expand makes it a company worth watching. But stay away from those "moat' protected businesses. Not even one of the world's richest men can make money in that game any longer.
by Adam Hartung | May 1, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Innovation, Leadership, Lock-in, Web/Tech
My book talks about Growth Stalls. Whenever a company sees two consecutive quarters of flat or declining sales or profits, or 2 consecutive quarters where year over year sales or profits were flat or declining, it is in a growth stall. Unfortunately, only 7% of companies that hit a growth stall will ever again consistently grow at a mere 2%. Yes, that's damning and almost unbelievable. And very worrisome given how many companies are now entering growth stalls.
Take a look at Motorola. They stumbled badly in mobile phones because they didn't keep pushing out new products into the market. They tried to Defend & Extend their popular Razr product, and eventually profits disappeared as they cut price. Then sales fell off a cliff as people shifted to newer products. The stall was created by the company insufficiently pushing innovation into the market, and the market shifted to new solutions.
Now "Motorola to cut more jobs as non-cell business weakens" according to ChicagoBusiness.com by Crain's. When the mobile business weakened, management took action to "shore up" the business. It went hunting for a buyer (none found), and it started cutting resources. Including monster layoffs. But it still had to keep investing or the business would collapse entirely. This had a cascading, spiraling negative effect on the rest of Motorola. With resources pushed into the failing cell phone business, there was less management attention and money spent on other businesses. Those also stopped pushing new innovations to the market. Now sales of network gear, set-top boxes, and 2-way radios are all down double digits.
So Motorola plans to cut another 7,500 jobs. More resource cuts, which will cause more cuts in innovation, fewer new products, less White Space. The process of Defending & Extending the past becomes more entrenched, because there are fewer resources around. What gets cut most is anything new. The stuff that could generate growth. Cuts lead to people hoping for an economic recovery that will somehow improve their competitive position. But it won't.
Motorola is now pinning its future on successful smart phone sales. But reality is that every quarter Motorola becomes a far more distant provider in mobile phones. While the best performer had flat volume last quarter, Motorola saw unit sales drop 46%. Motorola moves farther from the market, and into role of niche player. And even though cell phones is supposed to be for sale as a business, as we can see the company is diverting resources from the best part of Motorola (non-cell phones) to mobile handsets because they won't quit trying to Defend & Extend that business.
It's now clear that Motorola is in a vicious circle of cutting resources, losing sales, losing market share, discontinuing innovation, delaying new products, cutting more resources, losing more sales, losing more profits, doing even less innovation, offering up even fewer new products, …… Almost no one ever recovers from this spiral. By trying to Defend & Extend the old business, the actions – including layoffs – significantly harm the business. With less and less innovation, and fewer resources, the company slips into decline and failure.
And that's why growth stalls are deadly. They exacerbate Defend & Extend's weakness as a management approach. The lack of innovation, remaining Locked-in, was what caused the stall. Blaming a recession is just looking for a bogeyman so the business doesn't have to take responsibility for its own mistake. But after a couple of quarters of bad performance, the next wave of actions – the "best practices" to "shore up a problem company" – kill it. The layoffs and resource cuts – especially the delaying or killing of White Space projects and new products – cause customers to accelerate their move to competitors. And the company simply fails.
Today employees in those companies in growth stalls have a lot to worry about – as do their investors. If you hear leadership talking about job cuts and other D&E actions – while deflecting blame elsewhere besides the lack of meeting new market needs – then you're best off to find a new job and sell the stock. These companies will only continue to get weaker, and competitors will displace them as market leaders. An improving economy will be created by their growing competitors, not them, and their boat will not rise with the tide.
The solution is obviously not to practice D&E management. When you identify a growth stall is when all attention needs to be focused on rolling out new solutions to return to growth. Instead of cutting costs while trying to save the past, the business needs to move as rapidly as possible to the solutions needed in the future. Old businesses that caused the stall need to see dramatic resource constraints, while the new opportunities take front and center attention.
It wasn't "the economy" that got Motorola into desperate straits. It was Apple's iPhone and Nokia's relentless new product introductions. Without commensurate innovation, Motorola will never return to its former leadership position. And without resources, that cannot happen.
By the way, thanks Carl Icahn. You were the first to really push Motorola down this track of resource cutting. You're efforts to push Motorola this direction worked, even if you didn't get to lead the cuts. But the results are the same. And if Motorola isn't careful, the whole company may disappear as both halves of what now remain continue declining.
by Adam Hartung | Apr 29, 2009 | Books, Current Affairs, Defend & Extend, General, In the Swamp, Leadership, Lock-in, Openness
Today the U.S. Federal Reserve indicated that the worst of America's economic downturn may be over, according to "Fed stands pat, and says worst may be over" at Marketwatch.com. Fed officials seem to think that the rate of decline has slowed. Note, they didn't say the economy is growing. The rate of decline is slowing. They hope this points to a bottoming, and eventually a return to growth.
With interest rates between banks at 0%, and short-term rates for strong companies near that level, there really isn't much more the Fed can do to create growth. It will keep buying Treasury securities and keep pushing banks to loan. But growth requires the private sector. That means businesses – or what reporters call "Main Street."
The government doesn't create growth. It can stimulate growth with low interest rates and money that will stimulate business investment. Growth requires people make products or services, and sell them. Those who are waiting on the government to create a growing economy will never gain anything from their wait, because it's up to them. Only by making and selling things do you get economic growth.
Recent events, closing banks and massive write-offs, are a big Challenge to old ways of doing business. Those who keep applying old practices are struggling to generate profits. The tried-and-true practices of American industrialism just aren't turning out gains like the once did. And they won't. The world has shifted. Entrepreneurs in India, Malaysia and China – places we like to think of as poor and "third world" – are building fortunes in the information economy. American businesses have to shift. If you make posts to install on highway sides, well lots of people can do that and competition is intense. To make money you need to make products that help move more people on the highway faster and safer – some kind of post that perhaps can provide traffic information to web sites and aid people to look for alternate routes. Posts aren't what people want, they want better traffic flow and today that ties to more information about the highway, who's using it, and what's happening on it.
Growth will return when businesspeople move toward supplying the shifted market with what it wants. Like Apple with a solution for digital music that involved players and distribution. Or Amazon with a solution for digitally obtaining books, magazines and newspapers, storing them, presenting them and even reading them to you. These companies, and products, appeal to the changed market – the market that values the music or the words and not the vinyl/tape/CD or the ink-on-paper. The customers that want the information, not necessarily the tangible item we used to use to get the information.
For the economy to grow requires a lot more businesses realize this market shift is permanent, and adjust. During the Great Depression those who refused to shift from agriculture to industrial production found the next 40 years pretty miserable – as rural land prices dropped, commodity prices dropped and the number of people working in agriculture dropped. Agrarianism wasn't bad, it just wasn't profitable. And going forward, industrialism isn't bad – but to grow revenues and profits we have to start thinking about how to deliver what people want – not what we know how to make. You have to deliver what the market wants to grow sales – even if it's different from what you used to make.
Starbucks offered people a lot of different things. And the old CEO tried to capitalize upon that by expanding his brand into liquor, music recording, agency for entertainers, movie production, and a widespread set of products in his stores – including food. But then an even older CEO returned, and he said Starbucks was all about coffee. He launched some new flavors, and he pushed out an instant coffee product. But a year later "Starbucks profit falls 77% on store closure charges" reports Marketwatch.com. His "focus" efforts have cut revenues, and cut profits enormously. He's cut out growth in his effort to "save" the company.
By trying to go backward, Chairman Schultz has seriously damaged the brand and the company. He has closed 570 stores – which were a big part of the brand and perhaps the thing of greatest value. Stores attracted people for a lot more than just coffee. People met at the stores, and buying coffee was just one activity they undertook. So as the stores were shuttered, the brand began to look in serious trouble and people started staying away. The vicious cycle fed on itself, and same store sales are down 8%. No new flavor or packaged frozen coffee bits for take home use is going to turn around this troubled business. It will take a change to giving people what they need – not what Mr. Schultz wants to sell.
With more and more people working from home the "virtual office" for many small businesspeople can still be a local Starbucks. When you can't afford take a client out for a snazzy lunch you can afford to take them for a coffee. When your wasteline can't take ice cream, you can afford a no-cal hot coffee in a great environment. Starbucks never was about the coffee, it was about meeting customer needs in a shifted market. And when the CEO realizes this he has the chance to save the company by taking into the new markets where customers want to go. Not by bringing out new instant coffee granules.
Starbucks is sort of a model of the recession. When you try to do what you always did, and you blame the lousy economy for your troubles, you'll see results worsen. As businesspeople we must realize that the recession was due to a market shift. We went off the proverbial cliff trying to extend the old business – just like Apple almost did by trying to be the Mac and only the Mac. To get the economy growing we have to look to see what people really want, and supply that. And what they want may be somewhat, or a whole lot, different from what we used to give them. But when we start supplying this changed market what it wants then the economy will quit contracting and start growing.
So be more like Steve Jobs, and less like Charles Schultz. Quit trying to go backward and regain some past glory. Instead, look into the future to figure out what people want and that competitiors aren't giving them. Be willing to Disrupt your business in order to take Disruptive solutons to the market. And get your ideas into White Space where you can develop them into profitable businesses. Don't wait for someone else to turn the economy around – just to find out then it's too late for you to compete.
by Adam Hartung | Apr 26, 2009 | Books, Current Affairs, Food and Drink, Games, General, In the Rapids, Innovation, Leadership, Openness, Sports, Television
I recently listened to a great presentation on innovation by Bill Burnett, partner at Launchpad Partners. I recommend you download the slides to his presentation, "The CEO's Role in Innovation," in order to understand just how important innovation is to profitability as well as the CEOs role in creating the right culture. I also hand it to Bill that he not only lays out the CEO's role, but discusses what it takes organizationally to implement innovation – including getting the right people involved to go beyond just coming up with good ideas.
Markets shift. Sometimes there are long periods in which the market is reasonably the same (like newspapers). And sometimes it seems like new changes are happening rapidly (like computers). How long between shifts is impossible to predict. But it is certain that all markets shift. Some new technology, or a new form of solution, or a new way of pricing, or a new competitor will enter the market and change things such that the profitability of previous solutions declines. And it is the role of CEOs to create an open culture in which the management team feels it must keep its eyes peeled for market shifts, bring them to the company for discussion, and propose innovations which can increase the longevity of company sales and profits by addressing the market shifts.
Take for example the current shift in the sports market. This is important, because a throng of businesses advertise in the sports market. Everything from TV or radio ads during games, to ads inside event brochures, to putting logos on equipment and uniforms, to paying athletes as endorsers. Being aligned with the right sports, the right teams and the right athletes is worth a lot of money. You can legitimately ask, would Nike be Nike if they hadn't been the first company to sign up Michael Jordan – and later Tiger Woods? So the money is very large (billions of dollars) making mistakes very expensive. But getting it right can be worth billions in returns.
So catching a recent MediaPost.com blog "The Allure of Action Sports" is important. While most of us think of basketball, baseball, American football and possibly NASCAR – for GEN Y (young folks) sports is taking on an entirely new meaning. These are sports with almost no rules – just technique. They pack the stands at events such as the Dew Tour and X Games. Active participants include almost 12 million skateboarders, 7 million snowboarders and 3 million BMX riders. Not only do people watch these sports, but the most popular performers have their own cable TV shows – like "Viva La Bam." Just like football and basketball overtook our fathers' love of baseball as America's pastime – young competitors are shifting to watch and practice action sports. For people in consumer goods and many retailers, it becomes critical that the CEO provide an environment where the company can Disrupt its old marketing practices and create White Space to explore how to link with these new markets. The winners will rake in millions of higher profits. The laggards will see the value of their sports market spending decline.
Have you recognized this shift in the sports market? Are you prepared to take advantage of this shift? Are you considering sponsoring a local skateboard competition – for example – to promote a restaurant, quick stop, or T-Shirt store? You can react faster than Wal-Mart, Coke or GM – are you considering the options to grab loyal customers when they are still "McDonald's targets"?
A great example of the right kind of CEO has been Jeff Bezos of Amazon. As I reported in this blog back in January, book sales declined about 10% in 2008. You would think this would spell a huge problem for the world's largest bookseller. But SeattlePI.com recently reported "Amazon Profits Jump Despite Recession." CEO Bezos recognized long ago that book readership was jeapardized by changing lifestyles. Fewer people have the willingness to buy printed books, carry them around and take time to read them. So he Disrupted his retail Success Formula and implemented White Space to develop something new. This led to Kindle, a product which is small, light, can hold hundreds of books, can be read "on the go", accepts downloads of journals (magazines and newspapers) and can even read the book to you (Kindle has an audio feature.) And that's just product rev 2 – who knows where this will be in 3 years. By focusing on the future he could see the market for reading shifting – and he created an environment in which new innovation could be developed to keep Amazon growing even when the traditional products (and business) started declining. Kindle is now outselling everyone's expectations.
Innovation is the lifeblood of businesses. Without innovation Defend & Extend management leads to declining returns as competitors create market shifts. So it is crucial leaders, from managers to the CEO, keep their eyes on the future to spot market challenges and obsess about competitor actions that are changing market requirements. Then be willing to Disrupt the old Success Formula by attacking Lock-ins, and use White Space to test and implement new innovations which can lead to a new Success Formula keeping the business evergreen.
by Adam Hartung | Apr 22, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Lock-in
Yesterday I discussed how Sun Microsystems nailed its coffin shut in the mid-1990s when it committed itself to hardware instead of following the market into software. Even though Sun was the then leader in Unix operating systems (Solaris) and internet application development (Java), the company chose to only offer its software on its own hardware (Solaris) – or give it away (Java). Had Sun recognized the market shift to valuing software rather than "systems" the company could have transitioned itself and avoided being gobbled up by Oracle – which is sure to close Sun's R&D facility and discontinue hardware sales.
Now we hear that the New York Times company behaved very similarly at almost the same time, putting itself at unnecessary risk that has destroyed huge value for shareholders and cost thousands of jobs. In 1995 NYT was worth between $1.5B and $2B. The Boston Globe recently reported in "What Went Wrong?" that same year the founder of Monster offered to sell a chunk of his new company to the Globe (which is owned by NYT) for $1million. And Monster would start cooperating with the Globe to offer help-wanted ads on-line as well as in the newspaper. At the time, help wanted ads alone was a $100million business at the Globe. For 1% of just one segment of the Globe's revenue – and a far lesser fraction of NYT sales and equity value – the company could have been part of the great migration to the web.
Globe and NYT management said no. And for the rest of the decade advertising growth remained on a tear, driving the value of NYT up to about $6.5 to $7billion by 2000. And even though the recession came in 2001, NYT's value remained in that range until 2004. But then, in 2004, early market shifts started to become pronounced. Like the proverbial snowball rolling downhill, internet usage had become a big market and advertisers were looking for lower cost and more capable options. Advertisers from auto companies to movie studies started moving ad dollars to the web – as did companies advertising for help. The value of NYT started to drop, and hasn't stopped yet. In 5 years more than $6billion of that value has evaporated – leaving the whole of NYT – including not only the Globe but the venerable New York Times worth a mere $700million (see 5year chart here). Value is dropping precipitously as losses mount ("New York Times loss widens; shares fall 16%" was headline on Marketwatch yesterday), and the company leverages its Manhattan real estate to try preserving its now unprofitable Success Formula.
When business was good NYT had the opportunity to Disrupt itself and invest in some White Space to help understand the direction of future markets. Instead, management clung to the old Success Formula and ignored impending market shifts. While the company racked up profits it eschewed investing in new projects, because there were no Disruptions causing it to consider White Space. And now that the market has shifted it very likely is too late to save the company (investor Rupert Murdoch with investments across all media, including the web, is licking his chops for the opportunity to take over these influential journals with which he has long tangled politically. Even if only to watch them decline and remove a thorn in his side.) Because of decisions made in 1995, when business was good, the nails were being driven into the coffin. Management failed to recognize how deadly those decisions were, because they were focused on Defending & Extending the past rather than exploring how markets might change.
The Sun and NYT story emphasize how easy it is to remain Locked-in. Profits during good times – often right at the peak of the business – become an excuse to do more of the same. But what we see over and over is that long-term success requires Disruptions during these best times. Companies that make the transitions don't wait for the crisis. When times are good they invest in new market opportunities, so they can learn what works and how to compete. They Disrupt their old model so they pay attention to market shifts, and invest in White Space where they learn and inform the entire organization about what's coming. Lock-in is very dangerous because it is so easy to ignore. But if you want to survive market shifts you must create an organization that can evolve with new markets. That requires you manage Lock-in by constantly Disrupting and keeping White Space alive.
PS – a note of thanks to reader Tejune Kang for pointing me to the Globe article about Monster. I encourage all readers to forward me your insights to companies Locked-in and at risk, as well as those practicing The Phoenix Principle.
by Adam Hartung | Apr 21, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in, Web/Tech
"With Oracle, Sun avoids becoming another Yahoo," headlines Marketwatch.com today. As talks broke down because IBM was unwilling to up its price for Sun Microsystems, Oracle Systems swept in and made a counter-offer that looks sure to acquire the company. Unlike Yahoo – Sun will now disappear. The shareholders will get about 5% of the value Sun was worth a decade ago at its peak. That's a pretty serious value destruction, in any book. And if you don't think this is bad news for the employees and vendors just wait a year and see how many remain part of Oracle. A sale to IBM would have fared no better for investors, employees or vendors.
It was clear Sun wasn't able to survive several years ago. That's why I wrote about the company in my book Create Marketplace Disruption. Because the company was unwilling to allow any internal Disruptions to its Success Formula and any White Space to exist which might transform the company. In the fast paced world of information products, no company can survive if it isn't willing to build an organization that can identify market shifts and change with them.
I was at a Sun analyst conference in 1995 where Chairman McNealy told the analysts "have you seen the explosive growth over at Cisco System? I ask myself, how did we miss that?" And that's when it was clear Sun was in for big, big trouble. He was admitting then that Sun was so focused on its business, so focused on its core, that there was very little effort being expended on evaluating market shifts – which meant opportunities were being missed and Sun would be in big trouble when its "core" business slowed – as happens to all IT product companies. Sun had built its Success Formula selling hardware. Even though the real value Sun created shifted more and more to the software that drove its hardware, which became more and more generic (and less competitive) every year, Sun wouldn't change its strategy or tactics – which supported its identity as a hardware company – its Success Formula. Even though Sun became a leader in Unix operating systems, extensions for networking and accessing lots of data, as well as the creator and developer of Java for network applications because software was incompatible with the Success Formula, the company could not maintain independent software sales and the company failed.
Sort of like Xerox inventing the GUI (graphical user interface), mouse, local area network to connect a PC to a printer, and the laser printer but never capturing any of the PC, printer or desktop publishing market. Just because Xerox (and Sun) invented a lot of what became future growth markets did not insure success, because the slavish dedication to the old Success Formula (in Xerox's case big copiers) kept the company from moving forward with the marketplace.
Instead, Sun Microsystems kept trying to Defend & Extend its old, original Success Formula to the end. Even after several years struggling to sell hardware, Sun refused to change into the software company it needed to become. To unleash this value, Sun had to be acquired by another software company, Oracle, willing to let the hardware go and keep the software – according to the MercuryNews.com "With Oracle's acquisition of Sun, Larry Ellison's empire grows." Scott McNealy wouldn't Disrupt Sun and use White Space to change Sun, so its value deteriorated until it was a cheap buy for someone who could use the software pieces to greater value in another company.
Compare this with Steve Jobs. When Jobs left Apple in disrepute he founded NeXt to be another hardware company – something like a cross between Apple and Sun. But he found the Unix box business tough sledding. So he changed focus to a top application for high powered workstations – graphics – intending to compete with Silicon Graphics (SGI). But as he learned about the market, he realized he was better off developing application software, and he took over leadership of Pixar. He let NeXt die as he focused on high end graphics software at Pixar, only to learn that people weren't as interesed in buying his software as he thought they would be. So he transitioned Pixar into a movie production company making animated full-length features as well as commercials and short subjects. Mr. Jobs went through 3 Success Formulas getting the business right – using Disruptions and White Space to move from a box company to a software company to a movie studio (that also supplied software to box companies). By focusing on future scenarios, obsessing about competitors and Disrupting his approach he kept pushing into White Space. Instead of letting Lock-in keep him pushing a bad idea until it failed, he let White Space evolve the business into something of high value for the marketplace. As a result, Pixar is a viable competitor today – while SGI and Sun Microsystems have failed within a few months of each other.
It's incredibly easy to Defend & Extend your Success Formula, even after the business starts failing. It's easy to remain Locked-in to the original Success Formula and keep working harder and faster to make it a little better or cheaper. But when markets shift, you will fail if you don't realize that longevity requires you change the Success Formula. Where Unix boxes were once what the market wanted (in high volume), shifts in competitive hardware (PC) and software (Linux) products kept sucking the value out of that original Success Formula.
Sun needed to Disrupt its Lock-ins – attack them – in order to open White Space where it could build value for its software products. Where it could learn to sell them instead of force-bundling them with hardware, or giving them away (like Java.) And this is a lesson all companies need to take to heart. If Sun had made these moves it could have preserved much more of its value – even if acquired by someone else. Or it might have been able to survive as a different kind of company. Instead, Sun has failed costing its investors, employees and vendors billions.
by Adam Hartung | Apr 20, 2009 | Current Affairs, Defend & Extend, Film, General, In the Swamp, Leadership, Lock-in, Television
How do you pick a movie to see – whether at the theatre or at home? The movie studios think you pick movies by what you see on TV ads, according to the Los Angeles Times "Studios struggle to rein in marketing costs."
I remember the old days when my friends and I grabbed a newspaper and shopped the ads looking for a flick to go see. And we were influenced by television ads as well. But, as time went by, we started asking each other, "Is that movie any good, or are all the best parts in the ad?" (Admit it, you've asked that question too.) Then we found out we could get sneak peaks from shows like "Siskel & Ebert at the movies," so one of us would try to watch that and see if we liked the longer scenes. And we didn't ever agree with the critics, but we could listen to hear if they described a movie we would like. Now, not only myself but my sons follow the same routine. Only we go to the internet looking for a YouTube! clip, and for reviews from all kinds of people – not just critics. Mostly when we see a TV ad we hit the mute button.
Everywhere, businesses are still wasting money on old business notions. For movie studios, they keep trying to get people to watch a big budget by advertising the thing. (To death. Until nobody watches the ad any more because they have it memorized. And get angry that the ad keeps showing.) But even the above article admits that studios know this isn't the best way any more. With the internet around, we all listen less to advertisements, and gain access to more real input. From web sites, or Twitter, or friends on Facebook, or colleagues on Linked-in. We watch a lot less TV, and what we watch is more targeted to our interest and available on cable. Or we download our TV from the web using Hulu.com. Yet, the studios are so Locked-in to their outdated Success Formula that they keep spending money on TV ads – even though they know the value isn't there any more.
So why do the studios spend so much on advertising? Because they always have. That's Lock-in. Lacking a better idea, a better plan, a better approach that would really reach out to potential viewers they keep doing what they know how to do, even as they question whether or not they should do it! The industrial era concept was "I spent a fortune making this movie, and distributing it into theatres, so I better not stop now. Keep spending money to advertise it, create awareness, and get people into the theatres." The studios see movie making as an industrial enterprise, where those who spend the most have the greatest chance of winning. Spend a lot to make, spend to distribute, spend to advertise. To industrial era thinkers, all this spending creates entry barriers that defends their business.
And that's why movie studios struggle. It's unclear how well those ideas ever worked for filmmaking – because we all saw our share of blockbuster bombs and remember the "American Graffiti" or "Blair Witch Project" that was cheap and good. But for sure we all know the world has now permanently shifted. Today, small budget movies like "Slum Dog Millionaire" can be made (offshore in that case – but not necessarily) quite well. The pool of new actors, writers, directors, cinematographers and editors keeps growing – driving production quality up and cost down. And distribution can be via DVD – or web download – between low cost and free. A movie doesn't even have to be shown in a theatre for it to be commercially successful any more. And any filmmaker can promote her product on the internet, building a word of mouth driving popularity and sales.
From filmmaking to recordings to short programs to books, the market has shifted. Things don't have to be big budget to be good. The old status quo police, like Mr. Goldwyn or Mr. Meyer, simply have far less role. Digitization and globalization means that you don't need film for movies – or paper for books. Thus, democratizing the production, as well as sales, of "media" products. Thus the old media companies are struggling (publishers, filmmakers, magazines, newspapers and recording studios) because they no longer have the "entry barriers" they can Defend to allow their old Success Formulas to produce above average returns. And they never will again. The world has changed, and the market has permanently shifted.
Is your business still spending money on things that don't matter? Does your approach to the market, your Success Formula dictate spending on advertising, salespeople, PR, external analysts, paid reviewers or others that really don't make nearly as much difference any more? When will you change your approach? The movie studios are preparing to spend hundreds of millions of dollars on summer ad promotions for new movies. Is this necessary, given that the downturn has increased the demand for escapist entertainment? Is your business doing the same?
If you want to cut your cost, you shouldn't cut 5% or 10% across the board. That won't help your Success Formula meet market needs better. Instead, you need to understand market shifts and cut 90% from things that no longer matter – or that have diminishing value. Quit doing the things you do because you always did them, and make sure you do the things you need to do. You want to be the next "Slumdog Millionaire" not the next "Ishtar." You want to be Apple, not Motorola. You want to be Google, not Tribune Corporation. Spend money on what pays off, not what you've always spent it on.
by Adam Hartung | Apr 20, 2009 | Current Affairs, Food and Drink, General, In the Rapids, Leadership, Openness
"PepsiCo bids to buy its bottlers for $6billion," is the Marketwatch headline today. Another big Disruption, this time at the industry level, orchestrated by PepsiCo's Chairperson/CEO Indra Nooyi. Now that changes are being made with the product line, packaging and brands this latest move will allow Pepsi's beverage division to much more quickly implement changes to align with market needs. While Coke is doing little, Pepsi is disrupting the industry organization changing the marketplace and placing serious challenges onto all competitors. And without waiting for the recession to end.
Many leadership teams should pay close attention to what's going on at PepsiCo. By moving fast to align with future market needs they are catching competitors unwilling to take action due to recessionary concerns. Their Disruptions are creating changes that will help Pepsi return to the "muscle building" organization created in the days of former Chairman Andrall Pearson. And the changes coming out of White Space are helping Pepsi to develop a stronger Success Formula for competing in the post-industrial age.
Investors, employees and vendors should be encouraged by Pepsi. Competitors had better be worried. And all leadership teams can learn from the action being taken to gain share during this period of uncertainty. As companies hit growth stalls the tendency is to "wait and see". But winners react quickly to Disrupt and use White Space where they overtake delaying competitors – returning to the Rapids of growth and gaining share.
