by Adam Hartung | Jan 11, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lifecycle
Do you remember when Jim Cramer of Mad Money fame told his viewers to buy Sears Holdings because "his good friend" Ed Lampert, hedge fund manager, was going to make them all rich? That was in back in 2005 and 2006. For many months analysts, investors, vendors and customers watched what was happening at Sears, wondering what Mr. Lampert was going to do. In the end, he followed a very traditional turn-around strategy, slashing employment, benefits, pay and inventory – and Sears became a much smaller business. But the value of having friends hosting TV shows was clear. Sears went from $30 to nearly $200/share on the strength of Cramer's chronic recommendation. As it became clear Sears was getting smaller with no benefit to investors, and no strategy to grow, the value crashed back to $30/share in 2008 (see chart here).
Lately, some shareholders are bidding Sears value up again. Largely entirely due to additional cost cuts, store closings and inventory sell-downs, Sears profits exceeded expectations (read article here). At the same time, senior leaders admit Sears has "a long way to go catching up to competitors that have been more consistent in merchandising and driving traffic to their stores." Creating profits by financial engineering and asset sales has not made Sears a more competitive retailer, and not likely to grow. Investors will be well served to ignore Jim Cramer, and recognize the fundamental decline Sears has undergone – and is continuing.
This same week, Walgreen (chart here) announced it was cutting 1,000 management jobs (read article here). As I've previously blogged, Walgreen has to figure out how to grow revenues in its existing stores – not just open new stores. The old Success Formula has run out of gas, and Walgreen needs a new one. But we don't see any plans for how it intends to open White Space and find that new Success Formula. Instead, only cost cuts have emerged, intended to improve profits if not revenue growth. Not a good sign.
And Best Buy (chart here)is finding that even as its #1 competitor, Circuit City, slowly goes bankrupt it can't grow revenues or profits (read article here.) Many were hopeful that the failure of Circuit City would create an opportunity for Best Buy. But faster than Circuit City can shut stores, new competitors are filling the gap. Not only are general merchandisers, like Wal-Mart, trying to sell similar products – but independents (like Abt and Grant's in Chicago) are fighting to bring in customers with product selection and better pricing. Last month, a basic refrigerator at Grant's was half the price of a basic unit at Best Buy, and the selection of high-end products was more than twice as large at Grant's and 4 times larger at Abt.
Retailing has been hit with significant challenges from market shifts the last few months. Critically, low cost and easily available credit that financed not only customer purchases but lots of inventory is now gone. Cost and supply chain efficiency will not sustain a retailer any longer. Nor will simply opening lots of new stores, financed by low cost mortgage debt. But none of these 3 leaders have Disrupted their old Success Formulas. Instead, each keeps trying to fiddle with minor changes, hoping their size and past legacy will somehow drive new revenue and profit growth. Rather than Disrupt, all 3 keep trying to Defend & Extend the old Success Formulas with cost cutting measures.
When big market shifts happen rarely are the old winners able to maintain their leadership position. Why not? Because they react by trying to do more of the same. These Defend & Extend actions – usually cost cutting and efforts at efficiency and execution – only serve to push the business further into the Swamp, and closer to the Whirlpool. In Sears case, the company is rapidly becoming irrelevant as a retailer. Honestly, what retail analyst closely monitors sales and profits at Sears any longer? Sears is closer to the Whirlpool than most would like to admit. Walgreen and Best Buy aren't nearly as close to irrelevancy, but we can see that the are stuck in the Swamp. Lacking Disruptions and White Space to develop a new Success Formula, we can only expect mediocre (or worse) performance out of them.
So who is the frequent winner from market shifts? New competitors more closely aligned with new market conditions. We don't yet know who the biggest winners will be. Perhaps it will be on-line players. Perhaps it will be an emerging retailer that today has only a handful of stores (like Abt or Grant's). Some kind of hybrid customer distribution? Some new sort of merchandiser? New competitors will do some things very differently than the old leaders, and in so doing offer better value that more closely aligns new market needs. Look not at large, traditional names. Instead, look on the fringe at competitors you may not know well, but that are continuing to grow even as times are tough.
As we move into 2009, we must keep our eyes closely on changing market conditions. As old leaders stumble, we can expect recovery only if we see Disruptions and White Space. And this becomes a wonderful opportunity for new competitors, perhaps not well known today, to emerge with new Success Formulas poised for growth. If so, a new wave of Creative Destruction will change retailing – just as Woolworth's (now gone in both the U.K. as well as the U.S.) once did a long time ago.
by Adam Hartung | Jan 6, 2009 | Current Affairs, Defend & Extend, Innovation, Leadership, Lock-in
The Marketing Executives Network Group (site here) has just released its second annual top marketing trends study (read press release and overview here, and study results here). Kudos to MENG for keeping up the effort – and especially so given the surprising results.
Many people think marketers lead their customers. Often, employees think marketers are the people charged with being ahead of customers, scanning the horizon for market shifts that can affect future sales. The perception is that marketers are looking for ways to Disrupt markets, introducing new technologies, products and services to generate competitive advantage. But the results of this survey show that isn't exactly what's going on – at least today. Statistically, according to responses, it appears that most marketers are firmly Locked-in to Sustaining past company sales. The results indicate that the 650 people responding to this survey are more deeply rooted in the past than in the changes now happening which are affecting results at many businesses to their core.
- The #1 business book was considered Good To Great by Jim Collins, and #2 was The Tipping Point by Malcolm Gladwell. No doubt, both of these books have been big sellers. But, the first was published in 2001, and the second in 2000 – neither are exactly "latest thinking" about business, marketing or innovation. Worse, both have been extensively reviewed in academia – and despite their popularity have been proven to be without merit as guidebooks for success. While their logic is appealing, when backtested and when applied, both led to worse results, rather than better, than average. Rosenzweig even has taken the time to publish The Halo Effect which is dedicated to disproving the validity of Mr. Collins (and other's) tales as benefactors of increased sales or profits. A book not even on the list.
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As gurus, the marketers like Seth Grodin, Warren Buffet and Malcolm Gladwell in the first 3 spots, with Tom Friedman in fifth. Again, interesting array. While Seth has an MBA, he was never a successful marketer – until he started selling short books with catchy titles and simple answers for complex problems. Malcolm Gladwell and Tom Friedman neither have any business training or business experience at all – both having been writers and editors by academic training and career (The New Yorker and The New York Times, respectively). I asked Malcolm what led him to write "The Tipping Point" and he said "you get paid a lot more to write a catchy business book than to do serious writing." And Warren Buffet is famous for his total disdain for marketing. As he said in an interview once "if you have to spend on marketing your product doesn't sell itself – so what good is it? Marketing dollars can be spent better elsewhere."
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By far the #1 target market is considered Baby Boomers. Interesting, given that all studies show that as Boomers are nearing and entering retirement their spending (in dollars, and as percent of income) is declining precipituously. Neither Gen X or Gen Y received more than 2/3 the interest of Boomers – even though both are driving more consumption individually than the long-focused-upon but aging Boomers. Given that by 2015 there will be more non-European ancestry Americans than European, hispanics were only 76% as interesting as Boomers, and Asians were only 1/3 as interesting. With President-elect Obama taking the most recent election while losing a majority of the Boomer vote – yet winning the younger and the non-white vote, it is interesting where these marketers showed a preference to focus.
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Aligned with other responses, these marketers felt that Marketing Basics were the #1 issue for marketers, more than twice as important as innovation or "green"and more than 3 times as important as using technology. Further, the leading disliked buzzwords included Web 2.0, Social Networking, Social Media, Blogs and Viral marketing. Yet, the President-elect pulled off an incredible upset primarily by jumping past the old marketing basics and using the latter techniques to reach a new audience, build an amazing brand and create intense loyalty surpassing much better known and initially better funded competitors. At the same time, in 2008 MTV stopped running music videos entirely because they could not compete with YouTube.com, and blogs have shown the ability to spread messages at a fraction of the speed used by traditional advertising or public relations
There is no doubt business saw a lot of change happen in 2008. And we all expect considerable additional change in 2009. But it would appear that the marketers in this study are customers of their own product – potentially to a fault. Old brands (Collins, Buffett, Boomers) still captivate their attention, while newer, upcoming trends and messages are considered far less interesting. As market shifts are happening, they seem more interested in defending past marketing approaches than moving to the front edge of what's working in a rapidly changing, digitized, globally competitive marketplace.
There's no doubt that a lot of marketing is about sustaining an existing business. In most companies, Defending & Extending old products, old brands and old distribution systems get the lion's share of attention. Unfortunately, this behavior can set up many companies to be "knocked off" by emerging competitors who don't operate by the old rules, or in the same way. Google paid absolutely no attention to the gentlemanly behavior of the media as it systematically pulled advertisers to the internet – leaving newspapers and magazine publishers to decline, merge, declare bankruptcy and completely fail. It's these Disruptive competitors, using new techniques, that today are putting many of our oldest businesses at risk.
At times of great change, great opportunity emerges. Someone has to lead the charge for identifying these opportunities and moving forward. Success cannot happen by trying to Defend old Success Formulas after market change makes their rates of return sub-optimal. For many of us, we want to turn to marketers. And my guess is that marketers ARE the best people to discern these opportunities, and take the lead. It's important that now, more than ever, we encourage them to lead customers, rather than follow old markets. Now, when investing in legacy brands, products and technologies is suffering rapidly declining returns, is when we most need our marketers to take to the forefront of exploration and chart a course toward new markets and opportunities.
by Adam Hartung | Jan 5, 2009 | Current Affairs, Defend & Extend, Disruptions, General, In the Swamp, Leadership
The New York Times Company is in a heap of trouble (see chart here). Long the #1 daily newspaper in the USA, advertising revenues fell 21% versus a year ago in November – a feat similar to its revenue decline in December, 2007. NYT is in a growth stall – and shows no signs of making a turnaround. The decline in ad revenue and subscriptions is horrific. The company has recently slashed its dividend 74%, and is taking out a $225million loan against the value of its headquarters location raising cash to keep its newspaper operations going. The company is running television ads in most major markets – like Chicago and LA – to seek out new subscribers. And now the newspaper is placing ads on its page 1 – an act that is a big deal to people in the newspaper business. (Read about New York Times front page ads here.)
So by taking these actions, is the New York Times Company preparing itself for change? After all, the problem with newspapers is that increasingly people want their news via the internet – not a paper. So even though the management at "the Times" is distressed over the actions they have taken, investors should be asking if these actions are likely to turn around the company. Value fell 67% in 2008 – and is down practically 90% for the last 5 years.
Long term successful companies Disrupt their Lock-ins – those behaviors, decision-making practices and policies that keep the company doing what it always did. As businesses grow, developing their Success Formulas, they figure out ways to Lock-in that Success Formula so it repeats. While the market is growing, and the Success Formula is meeting customer needs, these Lock-ins help the business focus on execution and grow with the market. Lock-ins are great, helping people do more, better, faster.
That is, until markets shift. When external markets shift – because of new technology, new services, new competitors or other factors – the Success Formula loses its advantage. The solution to market shifts isn't to continue optimizing the Success Formula. Returns are declining because the Success Formula is becoming obsolete. The solution is to migrate the business to a new Success Formula which supports market needs and regain growth. And that migration happens after the old Success Formula is Disrupted – through attacks on the Lock-ins – demonstrating to everyone that the company is serious about advancing to meet new market needs.
Unfortunately, far too many companies claim they are Disrupting – and preparing for the future – when in fact they are merely disturbing the Success Formula. Layoffs, financial adjustments, asset sales and outsourcing may be painful, but they don't attack the old Lock-ins nor alter the Success Formula. People are often dramatically disturbed by the changes, but the Success Formula is unaffected. When this happens, the business keeps deteriorating despite the actions.
And that's what's happening at the New York Times Company. Leadership has not taken the actions necessary to demonstrate to customers, employees, vendors or investors that they have to change. They have not Disrupted. To be a world leading news organization now requires deep expertise and success on the internet – yet NYT is in no way a major player on the web. And they have shown no signs of investing there in a major turnaround effort. NYT has not Disrupted its operations to set the stage for new White Space where a powerful new Success Formula can be developed (similar to the major programs like MySpace.com at News Corp., for example). To the contrary, the actions taken by the New York Times Company are directed at trying to preserve an outdated past. Advertising on page 1 is almost unimportant to the vast majority of readers – and completely unimportant to internet news mavens. It's not even newsworthy.
Like Tribune Corporation (owner of The Chicago Tribune and the Los Angeles Times as well as other papers), New York Times Company is focused on the wrong things. And as a result, is just as likely to end up in bankruptcy. Even Tribune management invested in Careers.com, Cars.com and Food Network along the way – each of which show demonstrably more promise for growth than any of the newspaper companies. But because management won't Disrupt – won't attack old Lock-ins – these companies keep hoping for a return to the days when newspapers were central to life. And that isn't going to happen. The world has moved onward. So, like Tribune, New York Times will eventually run out of resources and find itself in bankruptcy as well.
Unwillingness to Disrupt is a key indicator of a company likely to fail. Over time, all markets change. New competitors create new products that serve customers differently. Old Success Formulas see their returns evaporate as customers move to the new market solutions. And these companies end up, like Polaroid, being companies with a great past – but no future.
by Adam Hartung | Dec 31, 2008 | Current Affairs, Innovation, Leadership, Openness
The prognosticators are busy forecasting a tough 2009. Coming after the big slowdown in 2008, it would be tempting to do like Microsoft (see chart here) and cut costs in an effort to improve short term profits (read article here). Microsoft hasn't developed new products generating excitement or growth for a few years. It's botched effort to take on Google by purchasing Yahoo! was a disaster, leaving the company with no growth projects of note. Meanwhile, Vista had a lackluster launch, and is now being forced on new computer purchasers who regularly say they would prefer to run the older Windows XP. And every month Linux eats into Microsoft's market share. So for the first time ever, Microsoft appears to be planning to layoff employees - of as many as 10%. For a tech company dependent upon growth, this is not a good sign.
A better response can be seen at Domino's (see chart here). Since inception, Domino's has been synonymous with home delivered pizza. Although a leader in its segment, the company has not fared well for years, causing it's equity valuation to fall precipitously. Price wars in pizza are constant, and new product varieties are consistently being brought to market by endless competitors. In the last quarter, sales in open stores fell 6% versus a year ago, and net income fell almost 10%. It would be easy for Domino's leadership to redouble its effort to Defend & Extend its pizza business, and let some franchisees fail as it shrunk the open store base and cut costs.
Instead, Domino's is going into 2009 with an attack on Subway's Sandwich shops (read about launch here). In 2008 Domino's leadership recognized that following the pizza market into price warring would not improve sales or profitability. So it Disrupted and explored new opportunities to grow. After various tests, the company identified an opportunity in sandwiches, and a target competitor in Subway's. Using White Space to test and refine the approach, the company developed its initial Success Formula modifications to move beyond pizza – which has long been part of the company name and identity – and enter this market, reaching new customers at new times of day with new products. Confronting a difficult market, instead of "digging in" to an unprofitable war Domino's used scenario planning, competitor focus, Disruptions and White Space to identify a growth opportunity — even in a tough economy.
There are no rules requiring businesses keep doing what they always did. Those who prosper realize that when growth slows it's smartest to find new markets in which to compete. For every market suffering from price wars and over-competition there is a market with opportunity. Maintaining long-term success requires moving into new markets, launching entirely new products and acquiring new customers. Those companies exhibiting these Phoenix Principle behaviors will do a lot better in 2009 than those who focus on layoffs and cost cutting.
by Adam Hartung | Dec 29, 2008 | Current Affairs, Disruptions, General, Innovation, Leadership, Lifecycle, Openness
2008 was quite a year. Many businesses came out far worse than they dreamed possible when the year started. The Wilshire 5000 (one of the broadest measures of U.S. equity values) declined 40% – losing some $7trillion dollars of value. More than 1.2million jobs disappeared in the USA. Foreclosures and bankruptcies are at record levels. Although we'd like to think this has been a very recent phenomenon, bankruptcies and business failures took a dramatic turn upward in 2000 (to what were then record levels) and remained at rates far above any historical norms for the decade. Not only small, but very large companies (those with assets greater than $1B) have been failing at rates exceeding 10x the failures of almost all decades in the 1900s. 2008 was more the climax of a trend than really something totally new.
So, what should you do about it? One option would be to cut costs and try to "survive the downturn." Unfortunately, that approach is very likely to doom the business. Firstly, the recovered economy won't look like the previous economy. Macro shifts in competitiveness and required capabilities to succeed have been happening since the 1990s, so the recovery will not benefit those who did well (and certainly not those who were mediocre performers) in previous times. Second, more innovative competitors who are better aligned with current markets will steal sales, customers and share while you retrench. Innovation doesn't stop during weak economies, and retrenching companies fall further behind while in survival mode to those who embrace the shifts and alter their Success Formulas. Just look at previous recessionary cost cutters like Xerox, DEC and Montgomery Wards.
With companies like Circuit City, Bed Bath & Beyond, The Bombay Company and Sharper Image failing while WalMart sales increased 3% in November, it might be tempting to say that now is the time simply to grow by doing more of what you've previously done. Or by focusing on ways to cut costs. But that would ignore the underlying trends that caused these companies to fail – and WalMart to stagnate with wickedly weak performance the entire last decade. While the credit crisis pushed the failures over the brink, their troubles were tied to broader themes in consumer demand and retail expectations. These companies were doing poorly long before the credit crisis emerged. And customers didn't flock to WalMart. 3% growth isn't what would be called spectacular. When WalMart looks good only because it isn't failing, it tells us that the future opportunity isn't to be like WalMart (which is the retail leader in low cost operations) – but instead to lead customers in new trends. Customers don't want all retailers to be like WalMart (which happened to be in the right place when this once in a lifetime crisis happened). They want innovation which will attract them.
Darwin himself said, "It is not the strongest that survive, nor the smartest…It is the most adaptable."
Increased use of digitization opened the floodgates to greater globalization. The search for "low cost" went global seeking the cheapest labor and lowest currency values. But it has also opened doors for more innovation. Companies in the U.S., Europe, India and China all have the opportunity to bring forward innovation in new products and new services to delivery value. The search for lower cost does not create growth, merrely lower cost. Innovation leads to real growth. Those companies which will emerge much stronger will be those who identify opportunities for real growth in these changed markets – by looking internally and externally for innovation.
If you find it hard to get excited about Delta, which is now the largest airline since merging with Northwest, don't feel bad. Just because higher fuel prices pushed some airlines over the brink, and left others (like United) badly crippled doesn't mean Delta is going to be a leader. Lower fuel prices short term, combined with decreased capacity due to failures, may increase short-term airline profits, but does not mean customers are any happier flying now than before. To the contrary, now that customers have to pay for their own soft drinks and sandwiches (at incredibly expensive prices, by the way), pay extra fees for checking bags, have to take connecting flights more often with longer travel times and greater risks of delays, and deal with unhappy airline employees who are working for less pay, benefits and pension means customer satisfaction is at an all-time low. It's not likely that Delta will lead people back onto flights. Instead, customers are looking for a supplier that will use innovation to provide a better experience and value — possibly Virgin America?
If we all go into 2009 with plans only to cut costs and "wait it out" then 2009 will not be a good year. What are we waiting out? How can we expect things to "get better"? But if we use 2009 to identify innovation which can better meet customer needs, we have every reason to be optimistic. Now, more than ever, it is time to Disrupt our Lock-ins to old behaviors. We don't need "more of the same, but cheaper". We need to be aware of the limits in our existing Success Formulas by Disrupting. And we need to explore White Space where innovations can be tested. White Space will create new Success Formulas which will create growth – and that could make 2009 into a great year for those companies focused on the future and willing to adapt to this latest market shift.
by Adam Hartung | Dec 28, 2008 | Current Affairs, General, Leadership, Lock-in, Openness
It's that time of year when people take to making forecasts. From Marketwatch.com (see how you can enter as a forecaster at Barron's here) to networking groups, organizations are asking for forecasts. Many executives will turn to their favorite journalist, economist, internal strategy leader, or perhaps marketing leader and ask for a forecast for 2009.
But seriously, why bother? Did you read any forecasts in December of 2007 that came close to predicting the events and outcomes of 2008? From current events (such as the U.S. election), to the markets (such as the DJIA or S&P 500) to business conditions (such as GDP performance, manufacturing indeces, unemployment), to commodities (such as the price of oil, corn and gold) no one guessed hardly any of these correctly.
Actually, it's surprising anyone tries to forecast. All forecasts are based upon taking some historical time series and predicting it into the future. The forecasting process itself is flawed because it tries to project some sort of similarity to the past – with variations explained by some predicted event. Things really aren't much different than they were when Benjamin Franklin made his forecasts in Poor Richard's Almanac. The odds of things going along the same are not very good, and the odds of predicting the unusual events is almost impossible. So forecasting doesn't help managers much at all – unless we can expect things in the future to be mostly like the past. And after 2008 – who would think that's very likely?
Instead of forecasting, we should spend some time now developing scenarios. These vary considerably from forecasts because they don't project the past. Instead, scenario planning starts by looking into the future, and describing a scenario. Then, working backward to see how we should prepare in case that scenario happens. Rather than planning from the past, the process begins with a view of the future. Because we all can recognize major trends, like uncertain energy supplies, ongoing religious conflicts, increased globalization of trade, declining value of labor, etc. it's actually a lot easier to imagine what the future will look like. Building an impression of how people are likely to live, based upon how we see major trends emerging, is more accurate than trying to forecast based upon history. After all, we all knew the U.S. was in a recession months ago – but it took the experts almost a year to identify a recession had begun! The closer people are to the "data", especially historical data, the harder it is to identify shifts.
No one should plan their future based upon a single scenario. Because none of us know which trends will dominate, or be offset by another trend. So it's best to develop several scenarios. By working through multiple views it is possible to best understand the strategy most likely to succeed given multiple possible outcomes. Most importantly, this helps us understand how we're likely to perform, given our current Success Formula and the various scenarios.
Scenarios can help us understand likely market shifts. Maybe not today, but likely. And then to evaluate our Success Formula not on how we've done in the past, but how we're likely to do in the future. When gaps emerge, we can then assess how to Disrupt outselves – and determine what White Space projects to pursue in order to evolve our Success Formula to remain competitive.
Forecasting can be fun sport. But as a business exercise – it's not worth the bother. No one trusts the forecast, so no one uses it. And worse, it will most likely further Lock-in the old Success Formula by projecting a future not dissimilar to the recent past. What will help us succeed in 2009, 2010, 2011 and onward is to have scenarios which help us plan for the future and pull us toward better competitive position as things change.
by Adam Hartung | Dec 22, 2008 | Current Affairs, Defend & Extend, Leadership, Lifecycle
Walgreens (see chart here) has been one heck of a company. It's growth has been unparalleled for such a large retailer the last 2 decades. But quarterly earnings just came out, and management announced they were down 10% versus a year ago (read here). That's a big warning signal. Two consecutive quarters of such performance and Walgreens will officially hit a Growth Stall. Company's that hit Growth Stalls only find the ability to grow a mere 2% a remarkably low 7% of the time. Or – stated another way – after a growth stall 93% of companies never again find consistent growth.
Why would such short term performance – only 6 months – indicate such horrible ongoing performance years into the future? The answer is that most companies Lock-in on a Success Formula, and they practice perfecting it. As long as they grow, such behavior is sensible. But, when markets shift and growth slows the company is unable to change to meet market needs. It only takes a couple of quarters to bring out the market shift. And most organizations react by trying to do more, better, faster, cheaper of what they've previously done (the old Success Formula) hoping results will return. But because what's needed is a change in the Success Formula – not just cost cutting or "better execution" – the returns stagnate. Companies fail to realize that they were already executing really well, so execution isn't the problem. The market has shifted and what's needed is more permanent Success Formula change.
Walgreens has been a marvel at opening new stores. Somewhat like Starbucks, there seemed to be a new Walgreens opening every time we drove down the street. All across the country. Similar to WalMart, Walgreens was riding a wave of perfecting the success of their unique stores – which were a rare combination of goods unlike any other competitor. So Walgreens kept opening more and more of them – almost one per day. Many of us have wondered if that sort of new store opening rate could continue. When would there be all the Walgreens (like all the McDonalds or all the Starbucks) we need. With the recent credit squeeze, we've found out that in fact the number of additional stores needed may not be nearly as great as thought. And as store openings have slowed the overheads are rising as a percent of sales – and results are struggling. Walgreens NEEDS to open all those stores to keep the Success Formula working, without them it's unclear the company is worth anywhere near its old valuation.
Walgreen has had other options. I've even blogged about them. Walgreen's brought out its own cosmetic line, including "cosmoceuticals" which are cosmetics with pharmaceutical properties. Walgreen's brought out exclusive clothing. The company built relationships to offer unique photo services for digital photographers seeking prints. And they launched a printer ink cartridge refill service. These are just some of the things they brought to stores the last few years.
But Walgreens didn't create any Disruptions when launching these new business ideas. The ideas did not find true White Space – because although they had permission to do new things, they were not given adequate resources. Instead, money was poured into opening new stores rather than developing new Success Formulas which could generate growth. As a result, they consistently did not receive sufficient management attention. And they consistently fell by the wayside as management kept focus on opening new stores. Certainly some of these ideas (or others not on this list, but taken to market), would have been able to generate incremental revenue across all stores – had they been pursued, analyzed, developed and grown to take a leading market position. But that didn't happen because everyone was happy to keep pushing the old Success Formula – opening more stores. Lacking a Disruption, the White Space didn't "stick" and the opportunities disappeared.
Now, Walgreens' growth has slowed. Walgreen's needs to figure out how to make more money with the stores it has, not just open more stores. But the organization and people at Walgreens are not geared for this new task. They are Locked-in to the new store opening Success Formula. Unless Walgreens Disrupts really fast, growth will remain slack – and profits will struggle. We can expect the reaction to be layoffs and other cost cutting – but that will not help Walgreens become a "great" retailer. "Survival" behavior does not make for "great" companies.
Walgreens is on the precipice of change. The stock is down over 50%, to values not seen for almost a decade. Either they Disrupt and fast open White Space to learn how they can change their Success Formula and regain growth — or they will end up cost slashing to prop up profits but erode their ability to succeed. We need to watch Walgreens closely, because the direction they take NOW will determine what employees, investors, customers and suppliers can expect for the next several years.
by Adam Hartung | Dec 18, 2008 | Current Affairs, Defend & Extend, Leadership, Lock-in
I was talking to a restaurant waiter this week. He was bemoaning his fate. He had a large van, complete with overstuffed chairs, movie player – the works – for his family to drive in comfort and his children to enjoy. But when gasoline hit $4.00 a gallon he thought it unaffordable. So, as he told me, when he paid $150 to fill it one day he quickly sold it for almost nothing. He took out a loan and bought a car that used less gasoline. Now gas is under $2.00, and his family is tired of his smaller car. But he's locked-in to the payments, so now he can't afford to switch back. (Read about low oil prices here.)
He didn't plan for oil to go over $100/barrel, and he was caught with too costly transportation. But he didn't do a careful analysis of the fixed versus variable cost of trading for a higher gas mileage car – and now he's unhappy with oil at less than $40/barrel. Because he didn't think about the future possibilities he was unprepared for BOTH scenarios – and he's "one unhappy camper" these days.
But like my waiter, most businesses don't do enough scenario planning either. Instead, they simply plan for the future to be mostly like the past. When things shift, they simply try to Defend & Extend old business practices without thinking about what is most sensible. Most were unprepared for higher energy prices when they came along – even though analysts had been saying for years that America was primed for supply chain shocks from natural events or refinery problems. So too many made investments on the short-term price run-up, investments that are likely to take a lot longer to pay off with lower energy prices.
Likewise, most businesses aren't planning for unexpectedly low energy prices. Instead of investing these savings on new innovations that could make them big winners when the recession subsides, most are using what's likely to be a fairly short-term windfall to subsidize old business practices that are rapidly becoming obsolete. Instead of using the gains to create a new future, they are using them to subsidize out-of-date business models at a time when investing is likely to have enormous future payoffs. They are acting like cheap oil will be here forever – a situation we know isn't likely to occur from all we've heard the last 2 years!!!
Planning isn't about doing more of the same – and trying to figure out how to preserve past practices. Planning is about looking into the future and asking "what if something unexpected happens? Am I prepared?" We don't have crystal balls, and for that reason it is incredibly important to plan for situations which aren't like the past – because those are the ones which create competitive opportunities for us, and against us.
Scenario planning isn't done by many organizations. Instead, planning is designed to whittle down the number of potential options. As a result, the forecast is for something most like what is occuring today. Six months ago, everyone was planning for $150 oil. Now they are planning for $35 oil. And the answer is to plan for both! By understanding the impact of both options it allows us to be far better competitors, and to guide our businesses toward opportunities. And never had that been more true than in the chaotic competition characterized by our currently shifting global markets!
by Adam Hartung | Dec 16, 2008 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lock-in, Quotes
In 1993 Pulitzer Prize winning author David Halberstam wrote a book about the 1950s – called appropriately "The Fifties". He takes time in this book to talk about GM – a company today that has seen its leadership embarrassed, and its value for investors disintegrate in the face of mounting competition. It's humiliated executives have asked Congress for a bailout to save the employees and customers from total failure – because they seem unable to figure out a solution themselves. Read what Mr. Halberstam, a New York Times reporter, had to say about GM's rise to prominence:
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"No one at GM could ever have dared forecast so much prosperity over such a long period of time. It was a brilliant moment, unparalleled in American corporate history. Success begat success… The postware economic boom may have benefited many Americans, but no one benefited more than General Motors. The average car, which had cost $1,270 at the beginning of the decade, had risen to $1,822 by the end of it…twice as fast as the rest of the wholesale cost index.
There was in all of this success for General Motors a certain arrogance of power. This was not only an institution apart; it was so big, so rich, and so powerful that it was regarded in the collective psyche of the nation as something more than a mere corporation: It was like a nation unto itself, a seperate entity, with laws and a culture all its own.
The men who ran the corporation, almost without exception, came from small towns in America… Everything about them reflected their confidence tht they had achieved virtually all there was to achieve in life. Others, critics, outside Detroit, might believe that these men were not such giants and might believe that they did not so much create that vast postwar economic wave as they had the good fortune to ride it… As for the intellectuals, if they wanted to drive small foreign cars, live in small houses, and make small salaries, why even bother to argue with them?
As success of the company grew, its informal rules gradually became codified. The culture was first and foremost hierarchical: An enterprising young executive tended to take all signals, share all attitudes and prejudices of the men above him, as his wife tended to play the sports and card games favored by the boss's wife, to emulate how she dressed and even to serve the same foods for dinner.
The essential goodness of the corporation was never questioned. It as regarded as, of all the many places to work, the best, because it was the biggest, the most respected, made the most money and, very quietly, through bonuses and stock, rewarded its top people the most handsomely."
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If this was the world of GM, codified as Mr. Halberstam explains, it becomes easier to understand the behavior of GM in the 1960s, 1970s, 1980s and 1990s - as competitors kept chipping away at market share and power. From 50% share of all automobiles sold in the 1950s, GM's share is now only half that. Executives, managers and even union employees quickly came to believe (in the late 40's and 50's)the future would always be like the past. But Toyota, Honda, Nissan, Subaru, Kia and others didn't accept GM's claim to a monarchy. And now, everyone is paying for it.
Lock-in is built when companies are doing well. And Lock-in keeps the organization from changing. It is easy to belittle challenges, and blame poor performance on others. As competitors evolve, at times making big improvements, the Locked-in organization will explain away poor performance – but resist accepting the need to change. In the end, if we don't learn how to Disrupt the Lock-in and use White Space to become more competitive we all end up in the Whirlpool. Even GM.
by Adam Hartung | Dec 10, 2008 | Current Affairs, Defend & Extend, General, In the Whirlpool
Illinois' Governor Rod Blagojevich has burst onto the national scene. Not in a good way, obviously. What's surprising, though, is how people are reacting to the fact that today he returned to work and has shown no inclination to resign. They seemed surprised. They seem perplexed that he did not immediately resign. One newsperson on superstation WGN television said he thought this case was in greater need of a psychologist to explain the governor's behavior than a lawyer. I could not help but chuckle when I heard an NBC political analyst on "Countdown" say the "logical" thing for the Governor to do was resign. None of these people are taking the time to think about the Governor's Success Formula.
Rod Blagojevich is the product of some pretty rough-and-tumble politics, still carried out in the wards around Chicago. This is not to imply any wrongdoing on the part of Chicago's Mayor or his administration, nor any of the state employees of Illinois. But reality is that for many years politics in Chicago meant, "you wash my hands and I'll wash yours." While things have changed at the top, for many people in the bowels of government work, this Success Formula was ingrained. For many, if you want your street plowed of snow early, you make sure you contribute to the Alderman's re-election fund – and that was considered absolutely normal. In the old Secretary of State's office you could buy a truck driver's license without even taking the test. Even though several leaders have changed, there's been no real Disruption in local politics and so for many participants, many work teams and some functional groups, this Success Formula has endured. (Although the Secretary of State's office is a model example of change – and nothing at all like it was for many years under previous Secretaries.)
Governor Blagojevich got his "jump start" into politics by marrying the daughter of a powerful Chicago Alderman – Richard Mell. Mell has been powerful for a long time, and as a result he's learned how to play big time, hard ball politics. You don't back down easily, and you play each and every situation to win – not tie – and certainly not to withdraw. You never quite know what might happen, and those who attack may be attacked before they can make something stick. Play to win, all the time, every time. Horse trading is part of the game.
I would not be surprised to learn that similar hard-ball poiticing is common in many city halls and state offices across America – and between most of our representatives in the Congress and Senate. Even Presidents learn how to make compromises – albeit a lot more subtly and ethically than how we're hearing the Governor did it. To some extent, he seems less the "political criminal" (as characterized by the U.S. Attorney) than the politically naive who got too high without the proper training in "how to get things done" politically.
A result of his training was that the Governor learned to play to win. Never give up. Thus, he's utterly predictable. From his point of view, so far he's been convicted of nothing. He may be disliked right now – but there are many examples of politicians who see themselves publicly rehabilitated. In the 1980s a highly discounted politician, who had not even bothered to pay taxes for more than a decade, was elected Chicago's mayor and was quite popular (Harold Washington). Why would the Governor give up? Why resign? He still has the power of the governorship, and any effort to impeach him will take months – if it should succeed. Until the day comes when he absolutely, positively has to stop – why stop?
That's the way of Success Formulas. They don't work by other people's rules. They don't work by consensus, or public opinion, or even common sense. George Wallace extolled the virtues of segregation and even launched a campaign for the Presidency long after segregation was widely deplored in America. Richard Nixon felt humiliated as Vice-President by the lack of respect he was given from Eisenhower – including a complete lack of endorsement when he ran for President. And of course he lost his first run for President, and he was not well liked in his own party. Yet, he successfully positioned himself to win 2 terms as President before resigning in disgrace due to his involvement in ordering the Watergate break-in. None of these people did what would seem "normal" to most people. But they were entirely consistent with their Success Formulas.
We can expect that Governor Blagojevich will work very hard to protect himself, his family and his future. After all, if you listen to the counts against him you can see that was exactly what he was doing as Governor. There is no reason to think he will change that behavior now. While he is now severely challenged, and he has a big stack of problems, he has not been Disrupted – and he has not taken on any White Space where he would try anything new. To the contrary, he is in the same job, with the same people, doing the same work. What he will do is very predictable – it will be the action most likely to help himself and his family. You don't need to be a psychiatrist to understand the Governor – you just need to look at his past and understand his Success Formula. And notice that nothing has happened which is likely to make the Governor think he should change that Success Formula now.
After all, his predecessor (a Republican) didn't change his Success Formula and now the #2 Democrat in the U.S. Senate (Dick Durbin) is asking the President to pardon him for past wrongdoings so he can get out of prison. Why wouldn't Blagojevich ask the incoming President to pardon him in exchange for stepping down from the Governorship (for the good of the state)? To this day, many people think that was "the deal" Nixon made with Congressman Ford when he gave him the Vice-Presidency - which led to him becoming the first President to never be voted on by the American population when Nixon resigned. It was rather quickly that the new President Ford pardoned ex-President Nixon "for the good of the country."
Never underestimate the power of Success Formulas. People will follow them long, long after their results have proven unsatisfactory. Lock-in, established years (often decades) before keeps the person going in the same direction despite the lack of recent success. As small wins come in, they reinforce that the Success Formula will work again, if just adhered to closely enough. And many leaders – in government or in industry (don't forget Bernie Ebbers at Worldcom or Mr. Skilling at Enron) will deny wrongdoing and remain committed to their course even in the face of considerable evidence that to change would be more beneficial.
Of course, if you allow yourself to be Disrupted – and you keep White Space alive in your life – you can avoid this problem. You can learn to adapt your Success Formula to produce better results as environments around you shift. But that has not been the way of Governor Blagojevich. Do you allow Disruptions and White Space in your life? Or are you risking a drift into weaker results while remaining tied to old Lock-ins?
