by Adam Hartung | Dec 8, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
So we now hear that Congress will loan $15billion to GM, Ford and Chrysler intended to keep them going concerns until at least March. We've been told that there are requirements on the loans that will better the industry. But honestly, there's nothing new being proposed that makes any difference, nor the proper teeth in Congress's proposed bill. (Read about the bill here.)
The bill limits executive bonuses and severance packages. But why does it let management (and the Boards of Directors) keep their jobs? It is clear that these leaders, and their management teams, led these companies into desperate circumstances. They put their bondholders, equity investors and employees all at risk. They passed the "brink" and got to the point of requiring government assistance to stop a cataclysmic disaster. So why are these people left in their jobs? How can anyone expect a really changed industry if the people who sold off assets for 2 decades trying to Defend & Extend a thoroughly out of date and broken Success Formula are given the money to invest?
Oh, we can expect a "car czar" who is supposed to oversee these loans and assure a the industry invests appropriately for change. Who's the right guy for this job (don't forget – I applied!)? We now read that the lawyer who oversaw the handout of money to survivors of 9/11/01 victims. This is, of course, the right qualifications to evaluate business plans, investment rates and innnovation programs for an industry. He's shown he can hand out money – but where has he shown he knows anything about re-engineering a very broken, large company? Where does he have credentials for un-knotting the Lock-in that keeps these companies dysfunctional? And how is he supposed to stand up to management teams that claim to have superior knowledge about auto company management – despite driving these companies into the proverbial financial ground.
The union leadership apparently wants Board seats in exchange for concessions. What difference will that make? Do union leaders know how to turn around companies where they encouraged Lock-in that cost them thousands of jobs? Are they trying to reach back to the kind of union practices that kept coal stokers on trains long after electric automotives were introduced? Defending & Extending out of date union practices won't fix these companies either. What these union leaders need to be asking for is government promises to secure the unfunded pension obligations, and creating a government program to preserve heath care costs that are likely to be stripped in an effort to lower variable costs. There is no bailout that can cover these costs indefinitely – and that is where labor restructuring needs to focus.
As investors, Americans deserve better than leftover thinking for their investment. More of the old management won't fix the problems. What's required is White Space to make significant changes:
- Auto design has to change from backward integration and standardization for manufacturing to forward-thinking which brings customers
- Distribution has to allow customers more opportunites to buy than the old-fashioned, and tedious, dealer structure which puts off almost all customers (and makes buying an unpleasant event). Customers deserve the right to buy direct if they like, and from dealers if they enjoy what dealers offer.
- Manufacturing has to change from "scale" to "build to order". Flexibility has to overtake 80 year old industrial design practices which have made the products inflexible and too expensive.
- Pension reform is essential. The overhead costs of pensions makes these companies unviable. This will require government intervention.
- Health care reform is essential. Perhaps Michigan should follow the Oregon example (and Massachusetts), and be a leader in developing programs to have state-assisted insurance coverage for everyone. Perhaps this should be an experiment in changing from employer paid health coverage, which offshore competitors do not have to shoulder, to self-paid coverage with guaranteed protection.
These are complex problems. They defy simple solutions. They require White Space. Cut Saturn free (again, like when it was founded) to experiment with new solutions. Give other nameplates the indepence to experiment with other possibilities. Monitor performance, see what works, and migrate toward what succeeds.
Now is the time to implement Disruptions and try something new. When the airline industry was grounded in 2001 there was a tremendous opportunity to restructure from unprofitable hub-and-spoke systems with outdated practices to new approaches using White Space. But neither government, nor the industry, took advantage of the stoppage to really try something new. Everyone was in a rush to start operating again, with practically no change. A huge opportunity was lost. And that sounds like the direction we're headed with the desperately uncompetitive auto industry.
We should not make that mistake again. Now is the time to Disrupt these companies. Fire the executive teams and the Boards. They've never been shy about firing employees or vendors. Put new management in place that understands how to manage innovation – rather than Lock-in. Get people in the jobs who don't want to Defend & Extend what's broken – but instead want to make changes and learn what will make these companies world class once again. And put in place competent oversight that can make sure change happens.
by Adam Hartung | Dec 7, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
A year ago Sam Zell was telling Chicago that he knew how to make money in newspapers. He was certain, absolutely certain, that Tribune Company newspapers – including The Chicago Tribune and The Los Angeles Times – would soon be returned to higher readership, higher ad rates and greater profits. Now, Tribune Company is preparing for bankruptcy (read article here.)
Sam Zell did a horrible job of scenario planning. He didn't look into the future and develop scenarios about what was likely to happen in news. Instead, he simply assumed that readers would return if he made a few format and editorial changes, the economy would strengthen and he could depend on advertisers returning as well. He expected a fast, big payback for his investment. Just like he'd done in real estate all those years.
Sam Zell had a very Locked-in Success Formula. He had spent a lifetime buying property, usually properties already in locations demanded. All he had to do was fix up the property and let growing demand for the scarce resource – his building in a demanded location – drive up the value. He didn't stick around to make money off rent. He didn't run a business that made a product and sold it. He bought properties, dressed them up and sold them at a profit. To him, Tribune Company was a property that was being ignored. All he had to do was fix it up a bit, wait a bit, and sell it to someone for more than he paid.
Oops. That Success Formula doesn't work when customers are walking away from the property to pursue a better one. News seekers in droves are going to the internet for their news. They no longer want to browse a newspaper – understanding that takes time, and it gives only a single source. The internet gives them fast answers to their queries from multiple sources. And advertisers are going where the readers are going – to the internet as well. The cost for a printed medium is high, and the results are hard to prove. Whereas internet ads can be tracked for number of page views, number of click-throughs and even sales. The readers are more, and the follow-up is superior. Advertisers have found it easy to forget about newspaper ads, especially in a soft marketplace.
Meanwhile, the Tribune Company Success Formula was firmly stuck in the 1990s. From sales people to editors, denial about shifting reader needs was everywhere. Even though each news company – from newspaper to radio and TV – had great access to reporters and first touch at many news stories, they did not realize that readers were looking for that news on the web first. Each newspaper and station was Locked-in to pushing the news through its format, ignoring the enormous audience opportunity they had in their local markets by using cross-media approaches, including the web. There was no one approaching customers with multi-format advertising opportunities. Nor was the company investing heavily into web sites or portals that could attract large numbers of on-line readers. The on-line environments were under-invested, and selling ads was completely fractured. There was limited, at best, sales efforts to get advertisers onto the weak websites running news from each individual business unit.
What Tribune Company needed was not only scenario planning that identified the range of opportunities for ad sales – but a sincerely intense analysis of on-line competitors. Instead of bragging that the company had leading newspapers in major cities, the leadership should have recognized its fast declining share of total news coverage – due to shifts in how people acquire their news. By focusing internally, cutting costs and trying techniques like new formats, Sam Zell missed the opportunity to really study competitors and figure out how to transform Tribune into a competitive news company – like, say, News Corp.
And while he was busy firing people and making changes on the periphery, Sam Zell was unwilling to really Disrupt Tribune Corporation. He didn't change the business model – the Success Formula. He whacked the chicken coop, scaring employees, readers and advertisers alike as he talked about firing people until he made money. But he never caused his leadership team to really stop and talk about the future of news. They were too busy looking for people to lay off or protecting their own jobs — while Sam was trying to find buyers for the Cubs, Wrigley Field and the Tribune Tower as a potential condo project.
And Sam's Success Formula had no space for White Space. Sam didn't see any reason to try new things – like having salespeople sell internet ads as well as print ads. Or trying to drive traffic to the Tribune or L.A. Times web sites. As a property "flipper" extra-ordinary, Mr. Zell was not interested in developing a new business model. So none was developed – nor any energy spent trying to create one.
Now, America's second and third largest cities are at risk of losing their primary local newspapers. The suppliers are seeing their customer shrink, and possibly their accounts receivable jeopardized. Advertisers are wondering how they reach their local customers. And employees are looking for new jobs. Meanwhile, citizens are wondering who will be out interviewing the mayors, governors and congresspeople of their fine states. Who will be supplying the news?
The cost to Sam Zell Defending & Extending both his Success Formula and that at Tribune Company is enormous. The bond holders – most certainly pension funds and bond mutual funds - will take a horrible hit. The employees and employees of suppliers pay as well. And the citizens, dependent upon a robust news community will also suffer. It's too bad Mr. Zell didn't talk less, and listen more – implementing White Space to make a leading news company that would impress his customers across the U.S.A. I guess he'll have a lot of time to read Mr. Murdoch's newspapers (like the Wall Street Journal), watch Mr. Murdoch's Fox television stations and look at Fox's web site (have a MySpace page yet Sam?) after Mr. Zell's equity value gets wiped out in bankruptcy. Surely the creditors will ask for a new leader – who faces a much more difficult challenge now that the resources have been gutted by Mr. Zell.
by Adam Hartung | Dec 4, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Innovation, Leadership
Well the heads of GM, Ford and Chrysler are back in Washington asking Congress for cash. According to Senator Dodd it's a sure thing they'll get it (read article here). And accordinto the the Government Accountability Office even if Congress doesn't approve bailout money, Treasury or the Federal Reserve can provide assistance from the TARP fund (read article here). So, it looks like something will happen.
This time the auto companies are saying they intend to "reinvent" themselves with the money. Uh-huh. And exactly who's going to lead this re-invention? Why the same leaders that got into this problem. Now, do we believe that? A lot of people in Congress have their doubts – seeing as how the bankers didn't seem to change much after being told they would get bailed out. So these Congressional folks are saying they want the auto leaders to report back on their plans to change – and of course GM's head said he'd be happy for the oversight. "It would be very helpful for us, whether it's a board or an individual, to have someone to work with on this, to submit our proposals and then for that person to say,'OK, don't agree with that. You've got to change this," said GM CEO Richard Wagoner. (Read quote and more here.)
So Senator Dodd and Speaker Pelosi – for the good of America – I volunteer for the job. I'll review GM, Ford and Chrysler's plans for innovation and report back on the likelihood of them revitalizing the industry. Now that I've put that on the table – I'll just wait for your phone call or email – you can reach me right here through this blog if you like (see the "contact me" area).
Oh, you don't think I'm the guy Mr. Wagoner had in mind? Why not? Do you suppose he was looking for some "industry guru" who is already sympathetic to his claims that the problems are not of management's making – but rather due to economic circumstantces? Do you think Mr. Wagoner prefers someone who is more traditional, on corporate boards that have been agreeable to CEOs for years – accepting of their tough jobs and approving their extreme paychecks? Do you suppose he doesn't want somebody who has expertise in innovation at all, but rather someone who wants to slowly seek change via one small, incremental step at a time, because that's the way big companies do things? Perhaps someone with government experience, used to the pace of change in government agencies? Or perhaps a lawyer who will be sure all actions are within current legal boundaries – whether they actually create benefit or not?
I do think GM and Ford can be saved. But I don't think current management will do it. They are so Locked-in, so used to the "boundaries" of convention, that there is no way they can create companies competitive with Honda, Toyota and Kia. The first thing any oversight agency should do is change the leadership teams, attack the industry Lock-ins and establish White Space to build a new company. Maybe look at Tessla – the electric car company auto execs love to laugh at — but that hasn't asked for any money from Congress as it's built its sold-out sports car using laptop batteries – for some new management. Or ask John DeLorean to quit dealing drugs long enough give up a few ideas (Ok, that is going to far). But surely, with all those talented graduates at the University of Michigan and Northwestern there has to be some people ready to actually do things differently.
GM needs more than oversight. It needs change. Big change. Let's hope Congress takes Mr. Wagoner's words to heart and finds somebody who knows something about innovation to watch over the billions they give these companies.
by Adam Hartung | Dec 2, 2008 | Current Affairs, General, Leadership, Openness
For years business books have preached "focus". Getting the business to understand its "core", and then focusing on that "core" has been the theme of books from "Competing for the Future" to "Good to Great." It's almost become a foregone conclusion that the best business practice is to focus.
But when markets shift, it's the focused competitor that hurts the most. Just look at the auto companies. Things have turned badly for auto manufacturers. In November, sales were down some 30% + to levels not seen since October 1982 (26 years ago) (read article here).
But a closer look is revealing. GM sales down over 41%, with revenues at its most recent acquisition - Hummer - purchased to increase revenues in the auto business down over 62%. Ford was down 31%, helped by a less decline in its pick-ups. Chrysler down a whopping 47%. Toyota down almost 34%, Nissan over 42% and Honda more than 31%. With numbers like that, you have to be concerned for all auto companies.
And that is where you can smile and be glad that one of these companies chose not to "focus." Unlike all those other companies, Honda doesn't just make and sell cars. It sells manufactures and sells motorcycles, boat motors, snowmobiles, lawn mowers, electric generators, snowblowers, leaf blowers, robots and jet airplanes. It sells directly to customers, sells through traditional retailers, has distributors and dealers. This distribution of business provides Honda multiple opportunities to grow, rather than constantly trying to Defend & Extend its car business. Can you imagine any of the U.S. car manufacturers saying it has that many different products, or multiple sales channels?
In the early 1980s GM started down this future-oriented road. It once owned EDS, and was the largest supplier of IT services globally. GM once owned Hughes Aircraft, making it the largest manufacturer of aircraft avionics. These businesses offered GM the opportunity to grow beyond autos and the struggles the company had with unions and dealers. But, in order to "focus" GM sold both EDS and Hughes – and used the money to Defend & Extend its focus on cars. Just look how that turned out for investors and employees.
"Focus" is highly overrated. Early in a business's life cycle focus is necessary in order to create a Success Formula that helps the company grow. But, as time passes the Success Formula becomes increasingly at risk of market shifts which jeapardizes returns. The best way to avoid getting trapped in low returns is to keep your eyes on the future, and make sure you keep White Space alive building new opportunities to exploit future market opportunities. It would have been easy for critics to attack Honda for being in so many businesses – but in times like these having multiple businesses pushing into future growing markets reduces the problems from severe market shifts.
by Adam Hartung | Nov 25, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, Leadership
Are you encouraged by the Federal Reserve's actions to purchase $100B debt from Freddie Mac, Fannie Mae and Ginnie Mae? Government leaders say this is necessary to "get the markets moving again" (read article here).
Unfortunately, this action is really no different than if the government purchased $100B of SUVs from GM, Ford and Chrysler to "get the auto market moving again." Or, if they purchased $100B of coffee from struggling Starbucks, whose per store sales are predicted to fall all through 2009 (read article here) to "get the coffee shop market moving again." Or if they purchased $100B of homes, now that prices have fallen over 17% in the last year and sales are down at least that much (read article here) in order to "get the real estate market moving again". None of these actions will help the banks, or the auto companies, or Starbucks or homebuilders be more competitive. At best, any of these (including the Fed's planned action) is a stop-gap effort attempting to protect the status quo – in the middle of dramatic market change.
When markets shift, the impact is often delayed by ongoing efforts to Defend & Extend the status quo. Eventually, however, the market shift is unavoidable – and in what seems a very sudden shift change is very dramatic. The market moves from one equilibrium to another. And it is at this shift point (what's called a punctuated equilibrium) that the weaknesses in old competitors become highly visible. Like Citigroup, GM, etc. At the same time, the opportunities for new solutions become visible as well.
When violent market shifts happen, efforts to return to the old status quo never work. Look no further than Japan's economy in the 1990s – which suffered a recession for more than a decade as the country's leaders refused to adjust to the changed competitiveness of Japan in the global economy. Today, 15 years after Japan's recession began, that economy has still not recovered on a consistent growth plan because the leaders keep spending resources trying to protect old business practices which do not work in today's global economy. Consequently, Japan keeps falling further behind China, India and other more competitive economies - and the companies in those economies. Is this the direction we should lead America today?
Future success depends upon changing to meet dynamic market requirements. So far, none of the TARP activities, or the spending by the Treasury or Federal Reserve, are meeting this need. While Congress denies aid to everyone else, a situation likely to change, the spending on financial assets is not creating any new jobs, nor helping the advancement of any innovations in technology, or business practices. Increasingly, however, people are beginning to realize that attempts to shore up these old industry practices are not preparing the American economy, and its companies, for global competition.
What's needed is leadership that will use funding to improve competitiveness – not attempt to preserve the past. Spending funds on unnecessary business trips, unnecessary perquisites, bonuses and dividends does not increase the likelihood of having a vibrant competitive set of industry players in 2010. What does work is installing leaders willing to develop new Success Formulas which are more competitive – by intensely focusing on competitors, Disrupting current practices and using White Space to innovate. If Congress is going to make citizens stakeholders in these businesses, it is within their purview to demand Disruptions – or create them – so the recipients move forward rather than waste money in a vainglorious effort to find the past.
by Adam Hartung | Nov 20, 2008 | Current Affairs, Defend & Extend, Disruptions, General, In the Swamp, Leadership, Lock-in
The auto execs have not made their case in Washington D.C. Speaker Nancy Pelosi is saying Congress has not yet seen a plan in which they can invest taxpayer money. Almost half of Americans don't think a bailout should be undertaken (read article here).
For those of us who've been around a while, reflections on the last time an auto company asked for help are inevitable. It was 29 years ago, from September into December of 1979, that Lee Iacocca (former Ford executive) and the UAW asked Congress to provide $1.5billion in loan guarantees (not a loan – not cash – just a government guarantee) in order to save Chrysler from bankruptcy. The economy was bad, but nothing like the banking crisis we're in now, and a recalcitrant Congress was not happy. Nonetheless, they prevailed and Democrat Jimmy Carter signed guarantee approval in January, 1978. (Read about the Chrysler loan guarantee here.)
By all accounts then, and certainly later, Lee Iacocca was nothing like Rick Waggoner (GM CEO) or Alan Mulally (Ford CEO). Iacocca had been fired from Ford because he told management they were going the wrong direction. He was a person willing to dissent, to Disrupt, and he'd shown it at Ford before ever coming to Chrysler. Additionally, as a new leader at Chrysler, he was willing to demonstrate changes were afoot by proposing from the beginning to place the head of the UAW on the Chrysler Board of Directors. After decades of labor wrangling, this was a significantly Disruptive act never before considered – and showed a leader willing to do things very differently. Mr. Iacocca even promised to take no salary his first year – he'd only get paid if his plan worked allowing him to earn a bonus according to predefined metrics. (Imagine that – an executive with real skin in the game.)
Iacocca was never a fellow to do what was "easy" or "natural". A feisty fellow with Italian roots, he spoke his mind. When Ford was making boring cars, and considered the Edsel "every man's car" (the Edsel was an enormous failure), Mr. Iacocca conceived of the Mustang — a car that was small, sporty and affordable. Something otherwise not on the American market scene. That car, more than anything else, saved Ford in the 1960s. Even today, Ford is hanging its future and much of its brand image on the 45 year old Mustang.
When he got to Chrysler, Iacocca kept that focus on the future. At a time when automakers were struggling to figure out a profitable way to develop cars that fit American needs he brought out the mini-van – a practical vehicle never before seen. As the economy improved he felt a convertible would be a good idea. He asked his head of engineering how long it would take to make a convertible for him to test – and the exec told Mr. Iacocca 3 years. CEO Iacocca told his engineer he didn't understand – Iacocca wanted him to pull a car off the line, take a saw and cut the top off. That should take about 4 hours. The action was taken, and Mr. Iacocca took the topless sedan for a ride around the block. In less than an hour he was convinced bringing back convertibles would be a huge boost to Chrysler profits.
Mr. Iacocca didn't look to his customers for ideas, he looked at future needs and competitors. Mr. Iacocca studied the cars, and manufacturing processes, from Europe and Japan. By obsessing on everything they did he found ways to make better cars that were more desirable and less costly. At a time when the Japanese Yen was a screaming buy compared to the dollar he changed processes to permenantly lower car costs – not relying on layoffs or more traditional cost cutting – making his company much more competitive than Ford or GM.
Mr. Iacocca never was slow to Disrupt those around him, or the market. As discussed, he was ready to launch new car concepts quickly, and go to the union with changes in work rules and compensation schemes. He created White Space everywhere from car design to manufacturing process groups to union discussions in order to find ways to make his company competitive with offshore players – and the most preferred of the American auto companies.
Ledership makes a difference. Congress has asked Messrs. Waggoner and Mulally to sell off the private jets, cut executive pay and produce a plan that shows the future will not be like the past. And that's fair. But it's not at all clear these leaders are of the Iacocca (or Jobs) way of thinking. If they keep trying to preserve what used to be normal, things aren't likely break their way from those in charge of giving a bailout. Mr. Iacocca is now retired, and far removed from the demands and dilemmas of the current auto manufacturers. But there are other managers out there – other leaders with the ability to focus on the future, obsess about competitors, Disrupt and implement White Space to turn around these troubled companies. I sure hope someone puts them in the right place to persuade Congress fast – before a couple million people lose their jobs and this recession turns into a Depression!
