“Playboy’s Circulation drops 34%” is the Chicago Tribune headline. Is anyone surprised? If ever there was a brand, and business, that was out of step with current markets it has to be Playboy. That the business still exists is a wonder. But let’s spend a few minutes to see why Playboy has fallen on hard times, and what the alternative might have been – and could still be.
The Playboy Success Formula is really clear. Since founded by Hugh Hefner, the company has focused on titillating the male libido with a magazine that focused on pictures of naked women, videos of same (physical videos, on-line videos and television), radio talk shows about sex, and alternative lifestyle issues such as recreational drug use. At one time this was unique, and in a male dominated 1960s it was even tolerated. Although never mainstream, the business was very profitable early in its lifecycle. Thus the founder kept doing more of the same, building a small empire and eventually taking the company public.
But the market shifted. Larry Flint and others ushered in a new era of pornography altering the market for prurient, sexually oriented material. Women in the workforce – and I’d like to think a heavy dose of decency – made public toleration of such material unacceptable. You couldn’t read a Playboy at work, or on the airplane, and you wouldn’t have a business lunch at their clubs. Other magazines sprung up to deal with men’s interests in automobiles, clothing, music, sports, etc. in a more acceptable – and for most people more significant and intelligent – manner. Other lifestyle publications were developed that discussed illicit drug use and non-traditional ways of life more directly, explicitly and with greater advocacy. The advent of cable TV and then the internet increasingly made access to the key features of Playboy’s product readily available, very inexpensive (often free) and targeted at niche audiences.
Yet, despite these many market changes, Playboy’s founder and his daughter, the company CEOs for 40+ years, steadfastly stuck to their old Success Formula. They kept thinking that people wanted those “bunny eared” products. They talked a lot about the heritage of Playboy, how it broke ground in so many markets, and opened the door for lots of new competitors. But they kept doing what the company always did – including foisting upon us the ever aging founder as a “role model” for male menopause and the anti-family aged entrepreneur. Playboy today is what it always was – and there simply aren’t a whole lot of people with much interest in those products any more. Nobody mismanaged the brand, the market just walked away from it. Sort of like the demand for Geritol.
Playboy focused on its core. And now its on the edge of bankruptcy. The company keeps outsourcing more and more of the work, as the staff has dropped to nearly nothing, cutting costs everywhere possible. Sales continue to decline, and the brand looks like it will soon join Polaroid and Woolworths on the heap of once famous but floundered companies. Playboy’s fatal mistake wasn’t that it was started as a prurient men’s magazine – but rather that for 40 years its leadership kept Defending & Extending that original Success Formula despite rather dramatic market shifts. Now, today, Playboy is a sour lemon that not many a marketer would want to be stuck promoting.
But – it didn’t have to be that way. Just imagine if you’d been given control of Playboy 30 years ago. What could you have done?
As soon as Hustler hit the newsstands, and the first women’s right protests developed – including the early push for the Equal Rights Amendment – it was clear that the future of the magazine was in jeopardy. Instead of doing “more of the same” could you have considered something else?
The growth of women in the workforce meant a lot of new opportunities. Why not jump onto that bandwagon? If you’re really at the forefront of “lifestyle” issues, as the leadership claimed, then you would have identified that women in the workforce meant something new was brewing – a group of consumers that would have more cash, and more influence. And not only would that be an appealing market, but so would the men who would be adjusting to new lifestyle issues as homes became dominated by 2-worker leadership.
Playboy was well positioned to be Victoria’s Secret. At a time before anybody else was really thinking about a significant market for attractive and comfortable lingerie Playboy certainly had the leading edge. Or, even more likely, the water carrying publication for Dr. Ruth-style discussions about sexuality. There was an emerging market for information targeted at increasingly affluent women about automobiles, stereos, apartments, resume writing, job hunting and even at-work etiquette — all topics that had been the dominant discussion areas for Playboy’s historically male readership. Had the leadership at Playboy opened its eyes, and scanned the horizon for growth markets being developed as a result of the trends which were negatively impacting it, these leaders would have been able to create a bevy of scenarios that were filled with opportunities for growth.
It’s hard to imagine today Playboy being anything else. But all that stopped stopped Playboy’s evolution was a commitment to its “core” – to its old Success Formula. That the CEO for over 20 years was a well educated woman is testament to the power of “core” philosophy versus a willingness to look at market opportunities. By keeping Playboy’s Success Formula tightly aligned with her father’s founding ideas she quite literally led the company into smaller and smaller sales with less and less profit. The big loser was, of course, investors. Playboy is worth very little today as Mr. Hefner hints at making a bid to take the company private once again.
Singer was once a sewing machine company. But when Japanese products surpassed Singer’s product capabilities and achieved a cost advantage in the 1970s, Singer leadership converted Singer into a defense contractor. And Singer went on to multiply its value before being acquired by General Dynamics.
IBM was an office machine company famous for mechanical typewriters and adding machines. The founder said he would never enter computers. Fortunately for employees and shareholders the founder’s son took the company into computers and the company flourished as competitive typewriter companies such as Smith Corona – stuck on the core business – disappeared.
There’s a time for lemons – in your tea or on a salad. But when markets shift, lemons just turn sour. If you want to succeed long-term you have to shift with markets. And that might well mean making significant change. Adding water and sugar to the lemons is a good start – as lemonade is less about lemons than what you’ve added to it. After you open that lemonade stand, see where the market leads you.
No matter where you start, every day offers the opportunity to head toward new, emerging markets. No matter what your historical “core” you can literally become any business you want to become. Coke was founded by a pharmacist who wanted to boost counter sales in his store – and it was worth a lot more than the pills he was constructing. Those who develop scenarios about the future prepare for market shifts, understand the competitive changes and use them to identify the opportunities for a new future. Then they use White Space teams to move the business into a new Success Formula. Anybody can do it. You could even have remade Playboy. So what’s the plan for the future of your business? More of the same …. or …..
Nearly 20 years ago the Clinton campaign inspired itself with the mantra “It’s the Economy, Stupid.” Their goal was to remind everyone that the economy was critical to the health of a nation, and the economy hadn’t been doing so well. Now we could retread that for business leaders “It’s About Growth, Stupid.” For some reason, all too many seem to have gotten caught up in downsizings and cost cutting, forgetting that without growth there’s no way to have a healthy business!
I’ve long been a detractor of Sara Lee. As the company undergoes a change in leadership, the Chicago Tribune headlines “Nobody Doesn’t Like Sara Who?” Under CEO Brenda Barnes, Sara Lee sold off business after business. Now the company is so marginalized that it’s an open question if it will remain independent. For years the leaders said asset sales were to help the company “focus.” Only “focus” made the company smaller, without any growth businesses. Why would an investor want to own this? Why would a manager want to work there?
Had the asset sales been invested in growth, perhaps a positive outcome would have developed. But Sara Lee was like most companies, as that rarely happens. Had the money been paid out to investors perhaps they could have invested those gains in other growth businesses. But instead the money went into the company, where it propped up no-growth businesses. Leaving Sara Lee a smaller, no growth, low profit business. This leadership has not benefited investors, employees, customers or suppliers.
Likewise, draconian cost cutting does more harm than good. The National Public Radio headline reads “Extreme Downsizing May Hurt Companies Later.” Using deep cuts at Alcoa as an example, Wayne Crascia, professor at University of Colorado, points out that it’s unlikely Alcoa has really “prepared itself for future growth.” Instead, cost cutting often eliminates the ability to compete effectively, by cutting into R&D, marketing and sales in ways that are impossible to rebuild quickly or effectively. By trying to save the old Success Formula with cuts, rather than growth initiatives, the leadership hurts the company’s long term viability. Sort of like repeated vomiting by anorexia sufferers leaves them skinnier – but in far worse health. Even though Alcoa still boasts 60,000 employees it’s very likely the company has permanently Locked-in its old Success Formula leaving itself unable to emerge as a stronger company aligned with new market needs.
Yet, while so many company leaders are trying to “retrench to success” it’s clear that growth still abounds for the companies that understand how to create value. BrandChannel.com headlines “The Elastic Brand: Virgin Expands in Every Direction.” Instead of retrenching to focus on some sort of “core” the article points out how Virgin’s leader, Sir Richard Branson, keeps taking the business into new, far flung operations. Defying conventional wisdom, Virgin is in money lending, mobile phones, gaming, social media, international airlines, domestic airlines and even intercontinental flight! By intentionally avoiding any kind of “core” Virgin keeps growing – even during this recession – adding jobs for employees, higher value for investors, more sales opportunities for suppliers and more chances to buy Virgin for customers!
Conventional wisdom be danged ….. maybe it’s time to look at results! Organizations that whittle themselves down to “core” by asset sales or cutting destroy value. While it may feel self-flaggelatingly good to talk about cuts, it does not create value. Only growth can do that. And there is growth, when we start focusing on market needs. Virgin is finding those opportunities – so what’s stopping you? Is it your “focus on your core” business? If so, maybe you need to read the Forbes article “Stop Focusing on Your Core Business.” It may sound unconventional, but then again – isn’t it those who defy conventional wisdom that make the most money?
Postscript: I offer my personal best wishes to Ms. Barnes on her recovery. It has been reported in the press that Ms. Barnes recently suffered a stroke. I know how difficult a time this can be, as my wife stroked at age 54, and I was her personal caregiver for 3 years of difficult recovery. Stroke recovery is hard work. For the patient as well as the family it is a tough time. While I have been a detractor of Ms. Barnes leadership at Sara Lee, in no way did I ever wish my comments to be personal, and I would never wish anyone suffer such a difficult health concern as a stroke. Again, my best wishes for a full recovery to Ms. Barnes, and for both her and her family to have the strength and tenacity to come through this ordeal stronger and even more tightly knitted.
“Blackberry’s Era May Be Ending” is the New York Times title on a Reuter’s story about the pioneering leader in smartphones. That RIM is in trouble is undoubtedly true – so much so it will not likely survive as a stand-alone company, if it survives at all! The company is in a growth stall, with U.S. market share in the first quarter dropping to 41% from 55% last year. Selling cheaply priced products outside the U.S. has masked the deep revenue problem developing at RIM – as the company tries to convince investors that it really isn’t falling way behind new competitors.
It was just April 8 when I published on this blog “Enterprise Customer Risk” in which I described how Blackberry’s ongoing focus on corporate customers allowed it to fall far behind in the applications development area ( see the 2 critical charts in previous blog showing the application weakness as well as market share problems). Now Apple has 30 TIMES the number of apps available on the Blackberry. On January 10 in “Winners and Losers from Shifts” this blog posted a chart showing how Apple hit 1 billion application downloads in its first 14 months of iPhone sales. Two weeks ago MediaPost.com reported “Android Hits 1 Billion Downloads.” Android now has about 100,000 apps, while Apple has about 225,000 apps. RIM doesn’t even have 10,000 apps.
RIM made a huge mistake. It focused on its core market of enterprise Blackberry customers. It tried to Defend its historical market share by focusing on its historical customers – and ignoring the smartphone non-user markets being developed by Apple (and now Google.) As a result it’s price/earnings multiple has fallen to 10 – amidst clear indications that RIM is unlikely to ever regain much growth as this growth stall continues.
We might like to think this sort of rapid problem creation is limited to technology companies. Unfortunately, not so. Crain’s Chicago Business today reports that “Kraft Foods Sees Slowdown in U.S. Cookie and Cracker Sales, Complicating CEO Rosenfeld’s Growth Agenda.” Kraft has had no measurable organic growth for over a decade, nor successful entries into new markets. The last year Kraft’s CEO demonstrated no commitment to organic growth by putting all her energy into the acquisition of Cadbury in order to expand Kraft’s “core” market position – dominated by Oreo, Chips Ahoy, Ritz Crackers and Wheat Thins. But now sales for the last quarter in the historical business are down 3.8%!
Kraft is another example of what happens when a company hits a growth stall. It may have a few up periods, but overall it is 93% likely to never again consistently grow at a mere 2%! Defend & Extend management uses obfuscation, like acquisitions, to hide underlying problems in the company’s ability to meet changing market needs. Resources are poured into price cutting promotions and advertising, looking only at the marginal cost and the initial sales, which props up the over-spending on worn out products in a worn-out Success Formula – and in Kraft’s case even these aren’t able to keep customers buying brands that are over 50 years aged. Ms. Rosenfeld will try to keep everyone’s attention on the top-line, hoping they forget that “growth” was manufactured by acquisition and that in fact both sales and margins are deteriorating in the “core” brands.
So, are you still trying to find your growth in this “Great Recession” by doing more of what you’ve always done – hoping customers will for some reason flock to your old way of doing business? That, quite frankly, has almost no hope of working. Customers are looking for new solutions every day. If you focus on protecting old markets, maybe by asking old customers what to do, you’ll miss the emergence of new markets where underserved customers are creating all the growth. If you don’t have plans to expand your business by 20% or more in new markets across the next 2 years you have more chance of burning up your resources than growing – and you might well end up like GM, FAO Schwarz or Sharper Image!
“I Failed Fast and Completely Re-invented My Company” is the BNET.com article title. Pixability.com of Cambridge, Mass. started out as a video conversion and editing business for families. Unfortunately, it cost more than most families could afford. Lacking revenue, the entrepreneurs thought up making highlight reals for youth athletes competing for college scholarships. Neat idea, but only 3 sales in 3 months was less than covering costs. Despite the original plan, and a desire to raise more money, it hit the founders that if they “stuck to their core” business plan they weren’t going to survive. More money or not. That’s when they realized that turning down corporate work might not be such a great idea – even though such work wasn’t in the plan. Turning to what the market wanted, editing corporate videos, the company is now growing fast and making a profit.
Same song, different verse, for Blue Buddha Boutiques of Chicago as reported in “Small Businesses Have Flexibility to Make Big Changes” at The Chicago Tribune. The company started out making chain mail jewelry sold on the internet. Not much sales. But when the entrepreneur listened to customers she heard there was more demand for jewelry supplies – so customers could make their own jewelry – than for the finished product. A quick shift in the business, aligning it to market needs, and the company shot up to a half million dollars revenue.
Far too often entrepreneurs hear “find your passion, and go with it.” “Write a business plan, stick with it, persevere, fight for success.” “Do what you’re good at.” Of course, most entrepreneurs fail. Why, because this is such lousy advice. Nobody cares about your passion, nor your plan, or your ability to persevere. Customers care about you selling them what they want. If your products or services don’t align with market needs, all the passion, business planning, fighting and perseverance isn’t worth spit.
Of course, this flies in the face of “Built to Last” author Jim Collins. To him, all winners are those who persevere. Looking backward, he can say entrepreneurs he studied were passionate and hard working. Maybe they wore white shirts, and enjoyed Juicy Fruit gum as well. The point is, that isn’t what made them successful – even if their personality traits were as he described. What’s important is that you find a market with growth, and more customers than suppliers, so you can readily sell something at a profit.Adaptability is the hallmark of great entrepreneurs. They have no product or service religion – no commitment to “excellence” – no predefined notions of how to succeed in business. Rather, they have a keen ear for the marketplace and the mental flexibility to rapidly shift into what customers want!
I beg you to be careful about listening to gurus – and especially Jim Collins. I was appalled by his column “Tuned in to four New Realities” published on Leadership Academy. Still unable to explain why companies he glorified in “Good to Great” such as Circuit City, Freddie Mac and Fannie Mae were such horrible failures – he tenaciously sticks to his guns. To him, all leaders must persevere. His new realities:
“Define your business according to core values”. Values are great, but if they aren’t somehow intricately linked to delivering a product or service the market wants, and wants in enough demand to produce a profit, it doesn’t matter. Simple. I don’t say give up your soul. But values are not where you start. You must be flexible to align with the market. If your values won’t let you do that you need to do something else.
“Organize by freedom of choice.” Honestly, how you organize should relate to meeting the market requirements. Whether its hierarchical or matrix or some other form – it must meet the critical market needs. Freedom is great – as long as it supports meeting the market need. You are free in America to do whatever you want, but if you don’t sell enough stuff at a high enough price you don’t eat. And for all its benefits, “freedom of choice” in the workplace is less important than positive cash flow.
“Lead without using power.” Whether you use carrot or stick, people have to deliver what markets want. And companies have to adapt quickly to shifting wants. Sometimes it happens naturally, and leaders can just guide the process. Sometimes Lock-in to old assumptions get in the way, and then leaders have to get out a 2×4 and redirect attention to where the market wants it. It’s good to be kind and a servant-leader, but employees appreciate a good paying job with some clear guidance (at times dictatorial) to unemployment from “such a nice guy.”
“Walls are dissolving.” I haven’t even figured out what this one means. But it’s clear that any walls which keep you from seeing the real market need is a bad thing. After that, aligning to market needs is “job #1” as Ford ads once touted quality.
Are you flexible to go where the market leads you? Or are you adamant about doing what you want to do?Are values something you use to help align to market needs, or a crutch you use to defend doing what you’ve always done?Are you able to change your management style, and organizational design, to meet market needs – or do you prefer to remain Locked-in to old management ideas and business models? Whether your company is big or small, old or young, does not matter. Lock-in will kill you when markets shift. Whether it’s structural Lock-in to an existing business, or mental Lock-in to a business plan. Adaptability to meet shifting market needs separates the winners – like Apple, Google, Facebook and Twitter – from the market losers – like Microsoft and Dell.
If you have any doubt, just ask the folks at Tasty Catering in Chicago. While others are still complaining about he recession, crying about lower sales, and food service businesses (including restaurants) are half full or closing shop — the folks at Tasty Catering are challenging the monthly revenues they set in peak years of 2007 and 2008.Instead of doing what they always did, the leaders – from the CEO to the 20-something managers talking to customers – are listening to the market and opening new businesses that meet market needs. While most employers are cutting staff, employees at Tasty Catering are working overtime – and in some businesses second shifts are being added. What was once a hot dog stand has been turned by the leaders into the winner of Best Caterer in the USA more than once – and a business that is thriving even in this “Great Recession.” Because they know how to adapt.
PS – Tasty Catering is one of the most value-responsible companies in America. Filled with employees that listen and care, and managers that want their employees to succeed. That’s because the leaders don’t see a trade-off between values and giving the market what it wants. If they keep the business moving forward, through keen connection to the marketplace, everyone wins – and values are not an issue. By being market-savvy, and flexible, Tasty Catering is considered one of the Top 10 employers in Chicago, and in its industry. And if you cater from anybody else in Chicago, or buy your delivered baskets or trays of cookies and muffins from anyone else, you simply don’t know what you’re missing!
Rumors are flying around Chicago about the health of Sara Lee CEO Brenda Barnes. Will she stay or leave? Some investors are wondering as well. While I join the chorus of voices that wish Ms. Barnes good health, her departure would not be a bad thing for Sara Lee investors, employees, suppliers and customers! Whether for health or other reasons, a change in the top at Sara Lee is long overdue.
As Crain's Chicago Business reported in "Sara Lee's Secrecy on CEO Barnes' Health Leaves Investors Wondering" in the 5 years Ms. Barnes has been CEO Sara Lee's value has dropped 25%, even as the S&P consumer goods index has risen by 18%! During her tenure, revenues at Sara Lee have declined 50% – largely due to asset sales from which the cash proceeds have done nothing to improve results. Currently, Ms. Barnes has a large deal on the table to sell another multi-billion dollar business in her ongoing effort to make Sara Lee a smaller and less competitive company.
There's nothing wrong with selling a business. But leaders have a responsibility to either pay the proceeds out to investors or re-invest the proceeds into new, growing businesses with high rates of return that will add more value. In Ms. Barnes case the money has been spent buying up shares of stock (the plan for any future proceeds, by the way). That has done nothing more than make the pool of shares, like the company assets, smaller. As already mentioned, these asset sales have not added anything to revenue or profit growth and thus the company value has steadily declined.
Of course, as I vilify Ms. Barnes reality is that it takes the agreement of Sara Lee's Board of Directors for this strategy to be implemented. And it takes a leadership team which agrees to go along – without offering strong dissent and driving discussion of results and long-term impact. While I make out Ms. Barnes to be a "goat" there is a lot more wrong at Sara Lee these days than simply the CEO.
Sara Lee has long been without any White Space. The company has tried to "milk" its aged brands, hoping to get more profits out of products that were much more exciting to customers in 1970 than 2010. While Jimmy Dean Sausage, Sara Lee frozen desserts and similar products were the stuff of my youth the current generation of young adults have chosen much different fare – in not only food but household and health/beauty products. Sara Lee's leadership before Ms. Barnes started the route of focusing on past sales and simply trying to give existing customers more. As a result, there has been 2 decades of insufficient scenario planning, limited competitor analysis – and no Disruptions. There has been no White Space to do anything new.
Similarly, we can easily make heroes out of CEOs in companies doing well. Steve Jobs at Apple is a case in point. During his 10 year leadership, Apple has gone from near bankruptcy to value greater than Microsoft. But this was not all Mr. Jobs. He has pushed his Board of Directors and leadership team to do more scenario planning, obsess about competitors, implement Disruptions and open White Space for doing new things. As a result, the Apple organization is now entering new markets and launching new products.
Mr. Jobs has not been without his own health concerns the last few years. Hopefully, he is doing well and will live many, many more healthy and happy years. Yet, if he chose to depart Apple for health or other reasons Apple is well positioned to continue doing well. Because as an organization it is planning correctly and implementing Disruptions and White Space – critical capabilities of Phoenix organizations.
CEOs matter. They set the tone for their organizations. Good ones understand the need to build organizations that can enter new markets – like Mr. Jobs. Bad ones spend their energy trying to Defend & Extend past results, often getting trapped in financial machinations as the organization shrinks and value disintegrates – like Ms. Barnes. But it's not all about the CEO and we shouldn't get too caught up in that single job. Good organizations have the skills to produce long-term growth and high rates of returns, and that can be built anywhere. Let's hope Sara Lee's Board wakes up to this and starts making changes in that organization soon.
Every day it seems someone tells me they "are looking forward to an improved economy." When I ask "Why?" they give me a horrified look like I must be stupid. "Because I want my business to improve" is the most frequent answer. To which I ask "What makes you think an improved economy will help you?"
This recession/depression is the result of several market shifts.What people/businesses want, and how they want it, has changed. They no longer are willing to part for hard earned (and often saved) dollars for the same solutions they once purchased. They want advances in technology, manufacturing processes, communications and all aspects of business to give them different solutions. Until that comes along, they are willing to put money in the bank and simply wait.
Take for example restaurants. Many owners and operators are complaining business was horrid in 2009, and still far from the way it was years ago. And regularly we hear it is due to "the recession. People fear they'll lose their jobs, so they don't eat out as often." Nicely said. Sounds logical. Makes for a convenient excuse for lousy results.
Only it's wrong.
In "Dinner out Declines: Economy Not Sole Factor" MediaPost.com does a great overview of the fact that dining out started declining in 2001, and has steadily been on a downward trend. Across all age groups, eating out is simply less interesting – at least at current prices. When the recession came along, it simply accelerated an existing trend. Increasingly, people were less satisfied with cookie-cutter, similar establishments that had similar food (almost all of which was prepared somewhere else and merely heated and combined in the restaurant) and exorbitant drink prices. For years restaurant prices had outpaced inflation, and simultaneously family changes – along with the growth of better prepared foods at grocers and specialty markets – was enticing people to eat at home.
This is true across almost all industries. A revived economy will not increase demand for land-line phone service. Nor for large V-8 American autos costing $60,000. Nor for newspapers, or magazines – or even books most likely. Or for oversized homes that cost too much to heat and cool. In fact, it was the trend away from these products which caused the recession. People simply had all of these things they wanted, so they stopped buying. Fearful of economic change, they simply accelerated a trend brought on by shifts in technology and underlying ways of doing things. When we once again talk about better economic growth in America it will not drive people to these purchases. Rather, people will be buying different things.
For the recession to go away requires a change in inputs. Providers have to start giving buyers what they want. They have to understand market needs, and give solutions which entice people to part with their money. Waiting for "the economy" will make no difference. Government stimulus can go on forever, but it won't create growth. It can't. Only new products and services that fulfill needs create growth. That will cause spending (demand), which generates the requirement for supply.
There are companies that had a great 2009. Google, Apple and Amazon are popular names. Why? Not just because they are somehow "tech" or "internet" companies. 2009 saw the demise of Sun Microsystems and Silicon Graphics, for example. The difference is these companies are studying the market, looking to the future and introducing new products and services which meet market needs. Because of this, they are growing. They are doing their part to revitalize the economy. Not with stimulus, but with products that excite people to part with their cash.
Those who are waiting on the economy to improve are destined to find a rough road. An improving economy will be full of new competitors with new solutions who did not wait. To be a winner businesses today must be bringing forward new products and services that meet today's needs – not yesterday's. And if we start getting winners then we will climb out of this economic foxhole.
If you can't sell products, I guess you sell the business to generate revenue. That seems to be the approach employed by Sara Lee's CEO – who has been destroying shareholder value, jobs, vendor profits and customer expectations for several years. Crain's Chicago Business reports "Sara Lee to sell air care business for $469M" to Proctor & Gamble. This is after accepting a binding offer from Unilever to purchase Sara Lee's European body care and detergent businesses. These sales continue Ms. Barnes long string of asset sales, making Sara Lee smaller and smaller. Stuck in the Swamp, Ms. Barnes is trying to avoid the Whirlpool by selling assets – but what will she do when the assets are gone? For how long will investors, and the Board, accept her claim that "these sales make Sara Lee more focused on its core business" when the business keeps shrinking? The corporate share price has declined from $30/share to about $12 (chart here) And shareholders have received none of the money from these sales. Eventually there will be no more Sara Lee.
Look at Motorola, a darling in the early part of this decade – the company CEO, Ed Zander, was named CEO of the year by Marketwatch as he launched RAZR and slashed prices to drive unit volume:
Motorola lost it's growth in mobile handsets, and now is practically irrelevant. Motorola has less than 5% share, about like Apple, but the company is going south – not north. When growth escapes your business it doesn't take long before the value is gone. Since losing it's growth Motorola share values have dropped from over $30 to around $8 (chart here).
And so now we need to worry about GE, while being excited about Comcast. GE got into trouble under new Chairman & CEO Jeffrey Immelt because he kept investing in the finance unit as it went further out the risk curve extending its business. Now that business has crashed, and to raise cash he is divesting assets (not unlike Brenda Barnes at Sara Lee). Mr. Immelt is selling a high growth business, with rising margins, in order to save a terrible business – his finance unit. This is bad for GE's growth prospects and future value (a company I've longed supported – but turning decidedly more negative given this recent action):
Meanwhile, as the acquirer Comcast is making one heck of a deal. It is buying NBC/Universal which is growing at 16.5% compounded rate with rising margins. That is something which suppliers of programming, employees, customers and investors should really enjoy.
Revenue growth is a really big deal. You can't have profit growth without revenue growth. When a CEO starts selling businesses to raise cash, be very concerned. Instead they should use scenario planning, competitive analysis, disruptions and White Space to grow the business. And those same activities prepare an organization to make an acquisition when a good opportunity comes along.
(Note: The President of Comcast, Steven Burke, endorsed Create Marketplace Disruption and that endorsement appears on the jacket cover.)
Walgreens is apparently going through a dramatic change in leadership. Drug Store News reported that the top 2 folks, including the top merchandiser, have left Walgreens in "What it Means and Why It's Important: Wlagreens confirms departure of Van Howe." The article discusses the "old guard" departure and arrival of younger, new leaders. The magazine clearly paints this as a Disruption.
But I have my doubts. There's no discussion of future scenarios in which Walgreens is going to be a different company – not even a different retailer. There's no discussion about competitors, and how more prescription medications are being purchased on-line from new competiors, or even how Walgreens intends to be very different from historical brick-and-mortar competitors like CVS or Rite-Aid. No discussion about how the company might need to change its real estate strategy (being everywhere.)
There's really no discussion about changing the Walgreens' Success Formula. It's Identity has long been tied to being first and foremost a "drug store" (or pharmacy). A market which has been attacked on multiple fronts, from grocers and discounters like WalMart entering the business to the insurance mandates of buying drugs on-line. To be the biggest, Walgreens' strategy for several years has been tied to opening new stories practically every day. It was shear real estate domination – ala Starbucks. Although it's unclear how profitable many of those stores have been. Tactically Walgreens has moved heavily into cosmetics as a high turn and margin business, then items it an bring in and churn out very quickly – such as holiday material (Halloween, Thanksgiving, Christmas, Valentines Day, St. Patrick's Day, etc.), shirts, sweatshirts, on and on – stuff brought in then sold fast, even if it had to be discounted quickly to get it out the door. Churn the product because the goal is to sell the customer something else when they come in for that prescription.
There is no discussion of these executive changes creating in White Space to develop a new Walgreens. Without powerful scenarios drawing people to a new, different future Walgreens – and without a strong sense of how Walgreens intends to trap competitors in Lock-in while leveraging new fringe ideas to grow – and without White Space being installed to develop a new Success Formula to make Walgreens into something different —– this isn't a Disruption. It's a disturbance. Yes, it's a big deal, but it's unlikely to change the results.
Reinforcing that this is likely a disturbance the article talks about how the company is starting to obsess about store performance – down to targeting every 3 foot section for better turns and profits. The new leaders plan to work harder on supply chain issues, and store plannograms, to increase turns. They intend to put more energy into prioritization and reworking promotions. In other words, they want to execute better – more, better, faster, cheaper. And that's not a Disruption. It's just a disturbance. This may make folks feel better, and sound alluring, but experience has shown that this is not a route to higher growth or higher sustained profitability.
I don't expect these management changes to remake Walgreens. Walgreens has been a pretty good retailer. The Success Formula worked well until competitors changed the face of demand, and market shifts wiped out access to very low cost capital for building new stores. The Success Formula's results have fallen because themarket shifted. Refocusing energy on being a better merchandiser won't have a big impact on growth at Walgreens. The company needs to rethink the future, so it can figure out what it needs to become in order to keep growing!
Real Disruptions attack the status quo. They don't focus on better execution. They attack things like "we're a pharmacy" by perhaps licensing out the pharmacy in every store to the pharmacist and changing the store managers. Or by selling a bunch of stores to eliminate the focus on real estate. Or by promoting the Walgreens on-line drug service in every store, while cutting back the on-hand pharmacy products. Those sorts of things are Disruptions, because they signal a change in the Success Formula. Coupled with competitive insight and White Space that has permission to define a new future and resources to develop one, Disruptions can help a stalled company get back to growing again.
But that hasn't happened yet at Walgreens. So expect a small improvement in operating results, and some financial engineering to quickly make new management look better. But little real performance improvement, and sustainable growth, will not occur. Nor will a sustained higher equity value.
When they can't figure out how to grow a business, leaders often turn to acquisitions. This despite the fact that every analysis ever done of public companies buying other public companies has shown that such acquisitions are bad for the buyer. Yet, after no new products at Kraft for a decade, and no growth, "Kraft shares fall on Cadbury bid, Higher offer awaited" is the Marketwatch.com headline.
Some analysts praise this kind of acquisition. And that's when we can realize why they are analysts, in love with investment banking and deals, and not running companies. "Kraft is demonstrating its operational and financial strength" is one such claim. Hogwash. After years of cost cutting and no innovation, the Kraft executives are worried they'll get no bonuses if they don't grow the top line. So they want to take a cash hoard from all those layoffs and spend it, overpaying for someone else's business which has been stripped of cost by another CEO. After the acquisition the pressure will be on to cut costs even further, in order to pay for the acquisition, leading to more layoffs. It's no surprise that 2 years after an acquisition they all have less revenue than projected. Instead of 2 + 1 = 3 (the expected revenue) we get 2 + 1 = 2.5 as revenues are lost in the transition. But the buyer will claim revenues are up 25% (.5 = 25% of the original 2 – rather than a 12.5% decrease from what the combined revenues should be.)
With rare exceptions, acquisitions generate no growth. Except in the pocketbooks of investment bankers and their lawyers through deal fees, the golden parachutes given to select top executives of the acquired company, and in bonuses of the acquirer who took advantage of poorly crafted incentive compensation plans. These are actions taken to Defend & Extend an existing Success Formula. The executives want to do "more of the same" hoping additional cost cutting (synergies – remember that word?) will give them profits from these overpriced revenues. There is no innovation, just a hope that somehow they will work harder, faster or better and find some way to lower costs not already found. Kraft investors are smart to vote "no" on this acquisition attempt. It won't do anybody any good.
Simultaneously we read in MediaPost.com, "Del Monte To Hike Marketing Spend 40%." If this were to launch new products and expand the Del Monte business into new opportunities this would be a great investment. Instead we read the money is being spent "to drive sales of Del Monte's core brands and higher-margin businesses." In other words, while advertising is off market-wide Del Monte leadership is attempting to buy additional business – not dissimilarly to the goals at Kraft. By dramatically upping the spend on coupons, shelf displays and advertising Del Monte will increase sales of long-sold products that have shown slower growth the last few years. Del Monte may well drive up short-term revenues, but these will not be sustainable when they cut the marketing spend in a year or two. Nor when new products attract customers away from the over-marketed old products. Lacking new products and new solutions such increased spending does not improve Del Monte's competitiveness.
You'd think after the last 10 years business leaders would have learned that investors are less and less enamored with financial shell games. Buying revenues does not improve the business's long term health. A cash hoard, created by cutting costs to the bone, is not well spent purchasing ads to promote existing products – or in buying another business that is already large and mature. Instead, companies that generate above-average rates of return do so by developing and launching new products and services.
You don't see Google or Apple or RIM making a huge acquisition do you? Or dramatically increasing the marketing budget on old products? Compare those companies to Kraft and you see in stark contrast what generates long-term growth, higher investor returns, jobs and a strong supplier base. Disruptions and White Space lead these companies to new innovations that are generating growth. And that's why even the recession hasn't shut them down.
Innovation comes in many forms, and some are a lot more valuable than others.The most valuable bring in users formerly un-served or under-served thus expanding the market and offering new growth – like mobile phones did. The least valuable are variations of something that exists, which do little more than give variety to existing customers.
"Pizza Hut Intros Stuffed Crust Pan Pizza" from Mediapost.com is without a doubt the latter. The company takes a product introduced in 1980, then adds an enhancement developed in 1995, and in 2009 launches a product that is merely the combination of the two. At first blush you say "why not?" But this launch costs money – quite a bit of money. There's the cost in product formulation, the cost in training tens of thousands of store workers to make it, cost in new menus, cost for in-store marketing materials, and cost for media advertising of the new product. The same costs (only much higher now) as incurred to launch the totally new innovation pan pizza 30 years ago.
Only this won't generate new revenue. These kind of variation innovations largely provide an alternative forexisting customers. Restaurants are famous for selling 70% of their product to repeat customers that return week after week. These people often look for new, sometimes strange, variations. Remember Hawaiian pizza with pineapple, or Bar-B-Que pizza with roasted pork and BBQ sauce? These are the kinds of things that don't bring in new customers, they aren't finding an under-served market and bringing those people to the restaurant. They merely offer variations, which might catch the interest of returning customers, but few others. They are very expensive defensive product launches meant to keep the loyal customer from considering the competition. But because these incur cost, with little new revenue, they are negative to the bottom line.
Part of the fallacy comes from the old logic of "ask customers what they want." Unfortunately, customers can only think of cheaper, faster and usually fractionally better. Their ideas about innovation are almost exclusively variations on existing themes. They already are your customer, thus not thinking hard about alternatives. To find new products that can really grow your market, use lost customers to lead you to the new ideas. And scan other industries and markets to see what's happening on the fringe of competition – things that can serve newly developing market needs.
Companies that make high rates of return do not merely try to maintain revenues and cater to existing customers. They use breakthroughs to tap into new markets and new customer segments. Think about the "personal pan pizza" a product innovation Pizza Hut pioneered 35 years ago. That made it possible for customers to buy a pizza for lunch – it was small enough, cheap enough, and could be served fast enough that it expanded the market for lunch pizza buyers in non-urban locations where "a slice" wasn't available. There are new needs emerging in the restaurant business today – but putting cheese in the crust of your old pan pizza isn't the kind of thing that's going to bring new customers into the restaurant any time soon.
