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:
*******************************************
"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."
*********************************************************
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?
by Adam Hartung | Dec 9, 2008 | General, In the Rapids, Innovation, Leadership, Openness
We keep hearing about all the bad news in this recession (Tribune Company, GM, Circuit City for example). You could easily believe there is no good news. But if we look a little harder we can see that there are businesses which are looking forward and taking actions to build market share – winning against competitors that are reacting by retrenching and hiding in a foxhole. There is a better way to manage when times are tough than cutting costs and "waiting for times to get better."
Ever heard of Tractor Supply Company (see chart here)? If you live in a big city, probably not. As the name implies, this retailer has largely supplied products to farmers and competitors in the agrarian economy. Of course, the number of individual farms has been declining for decades as the economy shifted from agrarian to industrial – and now to information. So you would expect Tractor Supply to be disappearing from the retail landscape, especially during times so difficult that much better known retailers are disappearing and filing for bankruptcy.
But that is not the case. Tractor Supply realized that while "production" farms are fewer and becoming a less attractive market, on the periphery of more and more cities there were people with unsupplied needs. And as cities expanded, and corporations moved headquarters to the suburbs, these ex-urban and suburban families were increasing the number of pets – and in some cases picking up pets like horses and other animals traditionally considered livestock. "Gentleman farms" of only 5 or 10 acres were increasing, where families escaped urban lifestyles to enjoy a connection with gardens, small crops and a few animals. They also needed tools, and hardware for fences and buildings – in short a panoply of products not readily available at Home Depot. And with that insight to the changing market, Tractor Supply has been expanding. The chain has 834 stores (and you never heard of them?). The company opened 20 new stores last quarter, compared to 21 a year ago and 70 this year compared to 63 last year. They are now opening 2 stores in outlying Chicago. The company is growing more today than last year, and moving into new markets where even Wal-Mart has chosen to leave. (Read article about Tractor Supply growth moves here.)
Another great example is Papa John's pizza restaurant chain (see chart here). We keep hearing about how people are eating out less now than before. The marketplace is struggling, as chains such as Bennigan's have shut their doors, unable to draw enough customers. So analysts keep talking about more failures in restaurants. Yet, Papa John's ignored the analysts and figured out a way to grow.
Instead of restricting itself to the "tried and true" revenue growth approaches used by most chains – such as television advertising and newspaper coupons – Papa John's studied how people were using the internet, and created White Space to develop new marketing approaches. They created a one-day campaign, flooding websites such as MySpace.com, NHL.com and others with display ads, via Google ad placement. The result was a 20% revenue jump. By driving people to order on-line, rather than old-fashioned telephone orders, they saw average ticket sizes increase 10-15% due to increased ordering. And they have connected many more customers to Papa John's email marketing. For example, on Facebook the number of Papa John's fans increased from 10,300 to almost 187,000 – an 18X increase in just 3 weeks! Now Papa John's is adding more on-line opportunities for customers, such as advance ordering (up to 21 days – say for a party) and "repeat last order" capability to make transactions fast and easy. As the world moves to the web, Papa John's is learning to use the web to connect with customers and grow! (Read about Papa John's on-line marketing programs here.)
It's easy to bemoan a recession, say there's little you can do, and start whacking at costs. It's easy to get down in the dumps, and lose interest in trying to do better. Tough market news can breed discontent and worry and inaction. In the cost-cutting process you well might lose some of your most valuable employees – and leave yourself quite unprepared for future competition (read here at Harvard Business Press about how traditional recessionary cost cutting reduces competitiveness). Even worse, while you tread water, you greatly increase your vulnerability to competitors who focus on market shifts, analyze competitors to upend them, Disrupt their old behaviors to create future focus, and use White Space to try new things which can create a much better returning Success Formula in the changed marketplace. These Phoenix Principle companies are the ones that will lead future growth in revenue and profits by not running for foxholes today, instead concentrating on how they can Disrupt and use White Space to become a far more successful competitor.
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.
