by Adam Hartung | Feb 22, 2009 | Uncategorized
The business news in 2009 is about as expected in 2008. The recession is deep, and shows no sign of abating (see news here.) Meanwhile many are disappointed in the extremely expensive stimulus bill passed by Congress, including both democrats and republicans. Television press of all sorts took time to show Rick Santelli, a commodity reporter on CNBC, who "went off" on what he felt were unfairness issues in the administration's mortgage bailout plan (see video clip and read comments on CNBC here.) Amidst a lot of popular hope for a fast set of improvements based on the change in administration, it appears there is little bipartisan behavior and the same old wrangling may jeapardize improvements in other important issues like energy and health care (read article here on political capital and poor bipartisan behavior.)
Unfortunately, all of this has gone pretty much as readers of this blog should have expected. What we know is that to execute a change, you first need a Disruption. Without a Disruption, something that causes people to stop and reassess their position, people will not put much consideration into change and will instead remain Locked-in to past behaviors. So far, there's been no Disruption in Washington D.C.
"What about the dramatic increase in the number of democrat party Congresspeople and Senators, as well as a democrat in the presidency?" you might ask. "Doesn't that constitute a Disruption?" And the answer is no. It represents a Challenge – primarily to republicans. That the market has shifted is clear. But most organizations remain Locked-in despite obvious market shifts. These shifts pose Challenges, and it is up to us to deal with them. But what we know is that most people, and organizations, deal with Challenges by doing more of what they did in the past!! The view is that the Challenge is best dealt with by refocusing on the Success Formula (and the republicans have a strong one that includes tax cuts, lower spending, and social conservatism.) When Challenged, most leaders will behave as if they just need to do more, better, faster (and in business cheaper) Success Formula execution to get back to old results. And that is exactly how republicans are behaving.
Democrats are also reacting from historical Lock-in. The behavior of republicans, to re-exert their Success Formula, has posed a Challenge to democrats. But their response has been to largely continue pushing their party's Success Formula which includes populism, redistributing the tax base, and public spending. The democratic party also keeps doing more of the same, hoping that execution will "convert" some republicans to their behavior by increasing the Challenge republicans face.
This behavior was entirely predictable. Unlike previous Presidents, Barack Obama has entered the office with an effort to move very, very fast. His first major budget proposal went to the Congress in under 1 month from taking office! Compare that to Reagan who did not propose his big tax cuts (although he had talked about the idea in the election) until June! And Kennedy's proposal to dramatically increase NASA and defense spending didn't come until 6 months in office as well.
Both Reagn and Kennedy had time to Disrupt the Congress, and many important government employees, before recommending a bipartisan change. Reagan fired the striking PATCO air traffic controllers. He showed that there was an alternative approach to governing, and even if Congress didn't support him (which the democratic congress did not) he was intent on running the government differently. Firing all the PATCO workers sent a signal no one could ignore, and opened the door for considering 50% tax cuts the likes of which no one had ever tried! Likewise, by blockading Cuba and entering a "stare down" with the Russians over missile bases Kennedy sent a shock through Washington. Even those adamantly opposed to increased spending had to stop and re-think their next steps after the President's actions – and the lack of successful results implementing the old approach in the Bay of Pigs. Both of these Presidents took action that Disrupted Washington enough that it created the opportunity for doing new things.
President Obama has a powerful agenda. He takes office at a very troubling time. No one thinks doing nothing will work. But getting bipartisan agreement on any plan will not happen without a Disruption. President Clinton in his early Presidency fired the travel office and implemented a "don't ask, don't tell" policy regarding gays in the military. These actions did not Disrupt Washington. People did not think these constituted a need to change their approach to governing. And he struggled to get bipartisan backing. His best success happened after the bombing of the federal building in Oklahoma City, but as that never led to Disruption in the policy apparatus, quickly he was embroiled in political attacks that haunted his presidency. One outcome of this inability to Disrupt was complete failure on any kind of health care or energy policy change (despite enormous efforts by his administration.)
I recommended the President work hard to find the right Disruption early in his presidency. I reiterate that recommendation. America has serious problems that need addressing – and it will require White Space to try new things. But we won't get to try new things as arguments dissolve into party bickering if something does not Disrupt the situation. Right now both parties are focused on their Challenges. Someone will have to Disrupt if they are to focus on new solutions.
by Adam Hartung | Feb 20, 2009 | Uncategorized
General Motors per share value plunged to $1.56 today – reaching a company value of less than $1billion (read article here). The company hasn't been worth this little since before paved highways were common. Investors obviously don't give the company much chance of surviving.
General Motors simply has not made cars that people want at the price they try selling them for to cover their costs. You can't blame suppliers for the cost problem. Costs are the responsibility of the buyer, not the seller. When costs go up business leaders have to find a way to provide more value – so the business can grow! Things change, market shifts happen, and all businesses – repeat: ALL BUSINESSES – have to adjust to market shifts. In the case of GM, their adjustments have not met the shifting market need and thus their revenue growth has not been able to meet the business needs. The value of the output has not been great enough to cover the cost of the inputs.
So how would should the business leaders react to this problem? You should want to increase the value of your product – tie it closer to customer needs – so you can entice customers to buy more, or possibly pay more per unit. Customers are always looking for products that fit their needs. ALWAYS. When a business's products don't fit customer needs they quit buying – or they buy something else.
What did GM do? Announced it intended to sell or close (possibly bankrupt) what should be its most interesting and exciting business units – Saab, Saturn, Hummer and Pontiac. Why? So it can try to "save" Chevrolet, Buick, Cadillac and GMC. That's because we all know how much we want to own a Chevy. That's what every American from age 16 to 34 wants – a Chevy. And because all those people from 30 to 55 strive at work to put a Buick in their garage. And people from 45 to 75 dream about owning a Cadillac. And GMC – primarily a truck brand – is the market leader. I am, of course, being sarcastic. Young people mostly find Chevrolet an anachronism. People building families are buying Japanese and Korean cars. Upscale has become Mercedes and BMW – or Lexus and Acura. And everyone knows that Ford (the only American car company not asking for bailout money) leads in trucks with its famous F series. Anyone with half an eye on the marketplace knows the brands GM is keeping are the ones with the least valuable future!
When want GM most needs innovation, but it is selling the places where innovation is supposed to breed. Pontiac once meant "muscle car" – the place where GM ceated the GTO. All performance was the Pontiac – with a big engine and barely enough metal to cover it. Americans still want performance – and Pontiac is a division that could give America the kind of 4-cylinder turbo-charged all wheel drive performance that has young people flocking to Japanese dealerships. Saturn was a brand with loyal customers who would buy no other American car except a Saturn. Customers that wanted efficient cars with no fuss dealer made Saturn an overnight success 20 years ago. Saturn was launched less than 30 years ago by a Chairman intent upon creating a car company that could compete toe-to-toe with the Asian companies and win! Saturn re-designed everything from manufacturing to parts use, distribution and even fixed pricing. Hummer may seem out of step today, but it brought to customers a unique vehicle line that smacked of "look at me buddy" – no matter the sex of the driver. And while 12mpg military-looking vehicles may not be today's fit, when you look at the industrial-designed boxy Scion (a stereo on wheels college kids call them) you can see there is a market for the right kind of car in that segment. And Saab appealed to buyers who wanted technology ("started by pilots" don't forget) and European styling. There has always been a market for the technology leader and European design in America. These are the brands that GM most needs to unleash with creativity and independence to regain growth and market success!
But, alas, GM has systematically tried to breed innovation out of these divisions – and their sales results have shown the outcome. Cumulatively, they account for only 17% of GM revenues. So GM says "shut them down." When what GM should do is kill the most boring brand in all the industry – Chevy – and put its money squarely behind driving new products out of the divisions that are best positioned to give Americans what they want! GM is still trying to Defend its past – the once proud brands that are now aged and worn out – when it needs to reinvigorate itself.
The leaders at GM "just don't get it" – to use a popular phrase. They keep trying to keep GM the company it was in 1955, when sales and profits were going up, up, up. The world has dramatically changed, and they are unable to recognize the type of change needed if the company is to survive. Investors are right to lose faith in GM, because there is no reason to have faith in these leaders. With the country's unemployment at very high levels, and the economy very weak, now is when we need leaders able to move their companies toward new solutions that meet future needs, can compete effectvely against global competitors, are able to Disrupt markets in order to adapt, and maintain White Space that will evolve their Success Formula year after year in order to remain competitive. Just the opposite of what we see proposed by the leaders at GM.
Ironically, the big losers from GM's failure will not be these leaders. The Board members at GM, and the top executives, will not lose their homes or cars if GM fails. The employees – from low-level vice-presidents to directors, managers, plant managers, supervisors, accountants, assembly-line workers and salespeople – will be ones losing their homes, health insurance, pension and cars. And the vendor companies will have their managers and employees on the unemployment line. Taxpayers will have to pay for that unemployment – possibly in welfare payments if the economy around Michigan, Ohio, Indiana and Pennsylvania collapses. Taxpayers will end up paying for the care given to pensioners who lose their only means of support (the 80 year old pensioners will not be rejoining the work force, so who will pay for their groceries, housing and care?). Taxpayers will end up paying for health care for those thousands of workers who lose coverage due to company failure.
The cost of failure is high, but will largely be born by investors who bought bonds 10, 20 or 30 years ago, suppliers and employees of GM that find themselves with mortgaged houses no one wants because there is no work within 100 miles of any kind, and American taxpayers that will have to rescue the pensioners and families that have no hope of recovery or finding another job. So why is the Board of GM still in place? Why is Mr. Waggoner still CEO? With the stock at $1.56/share, and all plans for innovation being jettisoned, why are the same people being asked to develop a rescue plan for one of the world's largest employers?
by Adam Hartung | Feb 16, 2009 | Uncategorized
About 30 years ago I was in business school studying Japanese business practices. As the country transitioned from the 1970s to the 1980s, Americans were scared to death that Japan was going to take over America economically. The Japanese auto invasion was in full swing, and American auto company leaders were begging for government help to stem the tide of the onslaught from Japan. It wasn't just car companies begging for help, the steel companies were in line as well. It seemed all American manufacturers were claiming the needed support from predatory offshore pricing by Japanese manufactureres. Many Americans, still remembering WWII, were sure this was Japan's second attack on the USA way of life.
As I studied Japanese practices, I asked my father about the country. He was a WWII Navy vet, serving on a battleship in the Pacific, and his opinion was that Japanese would do anything to win. He spoke with reverance about how Japanese would sacrifice their lives as Kamikaze in an effort to win the war. And as I learned about Japanese business leaders, I learned that they felt so compelled to succeed that when things went wrong they felt compelled to commit suicide – often using a form called hari kari. I learned that cultural pressure to do the right thing for Japan was so strong that Japanese leaders would kill themselves to "do the right thing" by societal standard.
It was crystal clear then, as it is now, that America and Japan had very different standards for its leaders. Today, America's auto companies are of no economic value. To survive they are demanding help from the American government (read article here.) But none of the leaders are committing suicide, or even appear close to considering it, for the demise of their companies and the difficulties on their employees, suppliers, investors or the American citizens they ask for help. In fact, none have even recommended they may have erred and need to be replaced. They keep their past bonuses, and continue working. What's surprising, is that they even seem to be negotiating for themselves – as now the discussion involves what will happen to them as well as the bondholders and employees —- as if the payroll and bonuses of management is equal to the repayment of bond holders that invested their money 30 years ago in the company!!!
Yet, the American administration seems content to allow this sort of negotiation. There are no cries for the leadership in these companies to resign. In fact, the promised "car czar" that would make sure the industry is really restructured to be competitive has been dropped (read article here). And the car company management keeps negotiating – putting bondholders, equity holders, vendors, the American pension fund guarantee organization (ERISA), the unemployment compensation system and the healthcare systems of Michigan and Ohio at risk. Why management even has a voice in this negotiation is unclear – given they created this crisis. Why they are leading this negotiation is doubly questionable. While some people seemed paranoid about "socialism", is it better to have the fox negotiatiing access to the hen house? As mentioned earlier, in other societies it would be questioned why they are still alive. (I am not recommending that the auto leaders should commit suicide nor that their lives be threatened – but isn't it surprising that these leaders which led these companeis to the brink of failure are still employed in these positions? Shouldn't forced resignation for failure be part of this discussion?)
Few Americans would disagree with the desire to maintain a viable and strong American auto industry. The costs of failure – to health care, to unemployment compensation and to pension costs – would be economically devastating in the midst of a return to the Great Depression. But why are these leaders being asked to create the solution? If they could not create viable and strong companies when times were relatively good, why would we expect them to save the industry now?????
America's auto leaders have Locked-in to an industry model that does not work. They have allowed offshore competitors to grow and succeed despite considerable government assistance with measures to protect their pricing. Even with government help, and a lower valued dollar to help American manufacturing, these leaders could not develop a Success Formula that was viable. Meanwhile, Japanese manuracturers came to America and opened plants which made products Americans wanted, and at prices Americans would pay. Clearly the Success Formula the American auto leaders kept trying to Defend & Extend was not viable. Yet, we are asking them to develop a solution for the future – and one that puts management's compensation on the table as part of the discussion?
America once led the world in shipbuilding. Liberty Ships were a big part of winning WWII. But today there is only one shipbuildinger left on shore, and it survives only via economic protection. If we allow leaders who failed to control the negotiation, we cannot expect a viable new solution to emerge. These leaders have been blaming the old problems for 4 decades, but unwilling to Disrupt and implement White Space for just as long. If we are to build a viable industry, doesn't it make sense we will take a different leadership team to negotiate the solution as well as implement it. If you won't ask these leaders to hold your wallet – if you won't lend them more money to bail out their problems – why are we allowing them to lead the negotiation to develop a new industry? Isn't it time to find someone who can replace them with a new solutoion?
by Adam Hartung | Feb 11, 2009 | Uncategorized
The newscasters around Chicago have been lit up with indignity the last 2 days. Forbes magazine released its in-house study of Americ'as most miserable cities, and ranked Chicago 3rd – behind Stockton, CA and Memphis, TN (read article here). As you might expect, even though Chicago has long had the nickname "2nd City", Chicago's journalists and leaders have been none too happy with this positioning as the most miserable large city. The reaction has been pure defensiveness – pointing out the relatively low real estate values, the large opportunities for arts, major colleges (including Northwestern and University of Chicago, as well as Loyola, DePaul, University of Illinois and several others in the SMSA), beautiful summer weather, multiple historically leading professional athletes (such as Michael Jordan), on, and on, and on. There are a lot of good things to talk about in Chicago.
But, this is the kind of reaction many businesses have when they hear about various problems seen through the eyes of an outsider (like an analyst, or a consultant, or maybe a customer). Companies, and certainly Chicago, knows what works – and feels comfortable about doing more of what works, with minor tweaks where necessary. Thus, the desire to defend the Success Formula is great. But, smart companies know that this kind of input is extremely valuable, and well worth spending time looking at because it offers the opportunity for changes that can make you more competitive. Negative feedback is an opportunity to identify weaknesses in your Success Formula, and give you the chance to Disrupt previous practices and use White Space to develop new and better solutions!
The facts Forbes puts forward are unassailable as facts. That Chicagoans mostly know these facts and are willing to live with them is the issue worth discussing.
- Yes, it can be quite cold in winter – and frankly there's nothing Chicago can do about that one. Just talk about how much nicer it is in the summer than most of the U.S.
- And the Cubs haven't won a world series – but does that really make a city miserable? I'm not sure their's anything the city can do about this. (Especially with the Sox winning the series just a few years ago? And that long-term domination in basketball held by the Bulls? And the Bears were in the Super Bowl just 3 years ago – even if they didn't win.)
- That Forbes noted Chicago has the highest sales tax in the country is worth talking about. The sales tax increase was very controversial in Chicago, implemented by the county board rather than the city, and perhaps that is a debate worth re-opening. There are no easy answers to tax questions, but being #1 in any tax category is not a good thing and perhaps should be reconsidered.
- Unemployment is an issue that Chicago can do something about. The area has long loved its association with manufacturing – but that passion has hurt the city as top engineering graduates in electronics, IT, biotech and other fields leave the state for jobs in other markets. Chicago has done far less than many other cities to support high-tech business growth, and has paid a steep price as start-ups regularly find they must "move to the coast" to raise money.
- For many years Chicago bragged about its great train service and well-designed highways to move people around efficiently and cheaply. But lack of funding has caused service costs to escalate faster than inflation, while quality has deteriorated. You still can't find "reverse commute" trains most hours of the day on major suburban train lines, and service dramatically declines during non-rush hour times — and heaven help you stay late for dinner in the city as you'll find no service at all late at night to get you back home. Meanwhile, the inner city buses and trains are notorious for being off schedule. And the highways have been underfunded with cheap asphalt roading for so many years that there are no major roads which don't suffer from significant pothole damage slowing traffic. Commuting in Chicago is no better than other major cities today, and in many cases worse.
- Corruption has plagued the city (and state) since long before Al Capone had a major say in how the government worked and the behavior of local police. If you've been around Chicago a long time, you sort of get used to it – and that alone is an incredible statement. When businesses look for a headquarters location, or people look for a place to live, they don't want to wonder how much "palm-greasing" is required to get things done. That the spotlight is again shining on Chicago as a corruption center may be something that is hard to accept – but it is an image (and a reality) that must be dealt with.
Any one of these items justifies a Disruption in the government of Chicago, Cook County and Illinois. I remember when Miami and Dade County were places you feared being arrested – expecting to possibly be beaten to death. But Florida Disrupted several of its "good old boy" practices, recruited for businesses like Disney to come into the area, and transformed itself from a southern backwater for retirees into a vibrant economy with strong links to international markets. With proper Disruption, and efforts at trying new things, Illinois can improve. But it won't as long as the city, county and state (and its citizens) prefer to Defend & Extend past practices rather than Disrupt them. The former governer was a disapointment not just because his antics made national news, but because he promised to be a reformer — and turned out to be anything but!
Chicagoans should heed this report from Forbes and see how it can be used to improve what is already a pretty darn great place to live and work. Chicago can be better. By asking to host the Olympics Chicago entered the competitive world stage. To stay on that stage, and to raise in the rankings, the city will have to do more than the Olympics – it will have to listen to its competitors/distractors, and use Disruptions to implement White Space where it can improve.
Now – on to a rebuttal of Forbes: (Hey, I do live in and love Chicago – and you can't let him simply get away with cheap shots!)
- Let's not forget that Forbes magazine has long called itself "The Capitalist Tool". The publisher, Steve Forbes, is a strong conservative and two-time presidential candidate on the Republican ticket. That the magazine has an agenda is clear. That the agenda is at odds with the highly democratic Chicago area should also be clear. That Mr. Forbes is no cheerleader for Mr. Obama is well known, and attacking Obama's home is something of an unfair shot on the home of a politician Forbes does not like.
- While the Chicago sales tax is high, there are items (such as foodstuffs) that are not taxed or very lowly taxed. To the sales tax is not across the board. Additionally, the Illinois income tax is a flat tax – a favorite scheme of Mr. Forbes who has not been able to implement such a scheme in his home state of New York. When looking at taxes you have to compare them all – and the income tax in Illinois is quite favorable. Low state taxes are the biggest reason why city taxes in Chicago are higher. Look at total taxation cost – not just the sales tax.
- Property taxes are capped in Chicago. And far from the highest in the USA. A big part of the reason the sales tax was increased in 2008.
- Workers in Illinois public service jobs – from teachers to firemen – receive a great pension which is state tax free.
- Most of the corruption referred to in the Forbes article relates to state positions – not city of Chicago positions. Mayor Daly has dramatically attacked corruption as Mayor (as did his predecessors) and the city itself is far less corrupt than it used to be. Forbes mixed apples with oranges in the discussion of corruption, labeling the city with blame for what were mostly problems with state and county politicians.
- Some great reformers have been very successful in Illinois. The former governor was imprisoned for behaviors taken as Secretary of State, before he became governor. His replacement as Secretary of State (Jesse White) has reformed the office in ways that have exceeded almost all citizen expectations. The Illinois Secretary of State office is now a model for all states – and for citizens it is one of the most pleasant bureaucracies imaginable. It is extra-ordinarily efficient, and everything is above-board.
- A brief listen to the television show "Hardball" and you'll quickly be reminded that "pay for play" exists in all cities – New York is not immune. The country watched the resignation of New York's governor, for soliciting prostitutes even while a "law and order" candidate, just as it watched the recent debacle in Illinois. It would appear that the creation of this new category, and its metric, look to hamper those who attack corruption (by measuring enforcment). Since New York's governor resigned, his practices don't make it into the Forbes measuring system. Because corruption is prosecuted in Chicago/Illinois, rather than swept under the rug with back-door deals, Chicago just might be less corrupt than many other large cities – the Forbes metric is questionable. And one can't wonder if the category and the metric weren't selected specifically by Forbes to salatiously take advantage of recent news events and impune the new President in a back-handed way.
- While it is cold in January (this year was horrible – the 10th worst on record) Chicagoans love to call anybody in St. Louis, Miami, Charlotte, Washington, Dallas, Houston, Phoenix or Las Vegas between May and September. While they are inside, air conditioned and fearful of heat stroke Chicagoans enjoy day-after-day of beautiful outdoor weather. When it's cold, put on a sweater. By the way, in sweaters you don't look as fat! There are good things about cold.
- So the Cubs don't win the World Series - who cares? The team still sells out game after game. While you are a spectator in most major league ballparks, at Wrigley you are a participant. It's an experience in yesterday to watch balls lost in the outfield ivy, creating a double-by-rule – or to see people on rooftops across the street watching the game. Few teams can sport the loyalty of Cubs fans, during a losing season, even when their home team is winning. What was attendance at Marlins or Texans games the last quarter of last season?
Come to Chicago – it's a GREAT city. Full of warm and gracious people who are ready to make you welcome if you're on a visit, or looking to relocate. From Northwest Indiana to the southeast corner of Wisconsin, the people of Chicago are from every city and state in the USA, and from every country abroad. Every religion is practiced, and honored. And Chicagoans love a place where everyone can get along with their neighbor. All of us will take Chicago over New York City every day of the year – and Mr. Forbes should be careful lest someone takes the time to start pointing out the weaknesses of life in Manhattan!
by Adam Hartung | Feb 4, 2009 | Uncategorized
About a year or so ago the conventional wisdom was that we were headed for a recession (the government wasn't yet saying we were in a recession already). Building on that theme, advisors were recommending investors should buy stocks like Kraft (chart here) and Sara Lee (chart here). After all, these companies make basic foodstuffs, and even in a recession people have to eat! So investors should be thrilled to own stock in companies with brands like Velveeta, Mac-N-Cheese, Oscar Meyer, Maxwell House and Jimmy Dean.
Once again, conventional wisdom didn't quite work out. Today Kraft (the world's #2 food manufacturer) announced a 72% profit plunge (read article here). Sara Lee profits fell to a loss – so you could say they fell 100%+ (read article here).
Both companies were in trouble back when the conventional wisdom said "buy." Sara Lee has been in a freefall ever since it changed CEOs five years ago. Back then the new CEO decided to "refocus" Sara Lee by selling its apparel business (Hanes and Champion) along with other assets. That effort continues, as the company recently sold its foodservice coffee business and some international businesses. The CEO was successful selling assets, but the money is now gone and all investors have is a smaller and less profitable Sara Lee. Her effort at "focus" did a good job of "focusing" Sara Lee right down the Swamp toward the Whirlpool. What was once a great consumer products company is now a mere industry afterthought that nobody pays attention to, and has wiped out 2/3 of investor value along the way.
Kraft was formerly a division of Altria (which used to be called Phillip-Morris – you know – cigarettes). During the early- and middle-2000s management sold growth busineses (like Altoids) in order to "focus on core products" like Velveeta. The CEO said that he saw no reason to spend money on risky new products, when he could maximize value by spending more money on Velveeta ads. If there was ever an example of a process designed to yield a specific result, any analysis that gave preference to Velveeta ads over new products was one clearly designed to Defend & Extend the past.
After spinning out on its own, analysts were all aglow about how a new Kraft CEO would take this venerable company into dramatic profit growth. But that hasn't quite worked. Rather, lacking any new product launches Kraft profits have been stagnant. Last year, the blame was placed on escalating commodity prices eating into margins. Now, with profits bouncing off the floor, the claim is that because the company raised prices last year to reclaim cost increases it has driven down sales! Of course we don't know exactly how bad things are at Kraft, because the company decided to claim substantial "restructuring costs" this quarter hiding the true business margins. We just know things are pretty bad.
Conventional wisdom is based on, at worst, myth – and, at best, what worked in the past, although no one is sure why. Following conventional wisdom can be successful only so long as current conditions are like past conditions.
But, this economic downturn isn't like any previous downturn. There have been dramatic shifts in global competitiveness and the value of resources. And, the companies being discussed are dramatically different than they were in previous recessions. Both Kraft and Sara Lee are companies that systematically shed all their growth businesses to raise cash in an effort to Defend & Extend old businesses. Both company's leadership manipulated the financial statements to make the company look better in past quarters (and years) thus reducing opportunities to now hide those ongoing weaknesses. Simply, things aren't like they used to be in the marketplace, or in the competitiveness of these companies. No one should be expecting them to have improved results. As the old markets weaken and shift, these companies become even weaker.
Both could take a different course. They could revitalize their futures by stopping Defend & Extend practices designed to over-invest in outdated brands and products. They could obsess about competitors to identify new growth opportunites. They could Disrupt old practices and procedures to allow new innovations to flourish. And they could open White Space where managers are given permission to do things new and different and given the resources to develop a new Success Formula. Both companies could be successful. But first they have to stop believing in the past, in their conventional wisdom, and focus again on future growth.
by Adam Hartung | Feb 3, 2009 | Uncategorized
Do you remember when Merck (chart here) got clobbered? Merck was a high-flying pharmaceutical company, but in 2004 we heard that one of its "blockbuster" products, Vioxx, which was for arthritis relief, was causing heart attacks. The stock dropped more than 50%. But then, over the next couple of years, the stock slowly recovered. And a year ago the company took a nearly $500M accounting charge related to the Vioxx problems. But today, Merck announced it was profitable again and shareholders should feel better (see article here).
I think most investors can see through this. The huge write off last year was a classic financial machination designed to create profits this year – regardless of the real results. The company essentially "pulled forward" the accounting for a wide range of costs into a single quarter in order to keep those costs from appearing in future quarters. Thus, the current quarter is without those costs – making it a "slam dunk" to beat the previous results.
Merck's leaders would like investors to believe the company is profitable, thus a safe investment. But reality is that Merck missed the biologics business just as Pfizer did. It's blockbuster products are off or coming off patent, and despite enormous R&D expenditures there aren't any replacements at hand. Sales of highly promoted products (Zetia, Vytorin and Gardasil) are down 16% to 26%. Profits, highly manipulated by accounting rules, do not tell the story of a company that is badly stuck in the Swamp trying to do what it has always done – but producing declining results. Merck hit a growth stall, and like 93% of companies falling into this trap there is no sign the company will grow even at a consistent 2% again.
On the other hand, Amazon (see chart here) shows much smarter management sense. The New York Times reported early in 2009 that book sales last year fell 8% (article here). If Amazon had acted like Merck, it would be announcing a big write-off, and resturcturing, to deal with the horrible decline in book sales! But the decline in the old product (books) doesn't mean people don't have a thirst for information (just like people don't have a desire for better disease management in Merck's market). Google searches and articles read on the internet have skyrocketed. Increasingly, it appears people simply don't want to pay for a printed book. The want to read things on on their computer, or phone, or listen to them on the treadmill while working out or commuting. The demand is still there, but the format or medium is changing.
And that is where Amazon appears to be doing something very special. After launching the digital Kindle book reader in December, 2007, it appears the company may have sold upwards of 500,000 units in 2008 (read article here). According to the article, that would be 32% more units than iPod sold in its first year! Apparently, Kindle units sold out in both holiday seasons.
This is an example of a company creating a growth strategy in what appears to be a declining market. Amazon could remain stuck in the world of traditional books. And, Kindle is probably just a technology footnote on the road to more advanced and popular digital reading (or listening). But Kindle is in the market, and in pretty big numbers. If a small company had launched Kindle to those kinds of numbers, it would be a NASDAQ darling!! Amazon is in the market, learning, selling and making money. If the market keeps transitioning, Amazon is well positioned to succeed.
Smart management teams don't ride their business model too long. They launch new solutions before the demand is clear, and before the solution is clear. Before profits go to heck, and financial machinations become the norm, they make changes trying to get back into the Rapids. The set up White Space with new projects to learn, and regain growth. Merck leaders could take a lesson from Amazon – and quickly get into the solutions that will drive growth in the next 10 years.
by Adam Hartung | Jan 29, 2009 | Uncategorized
In the late 1990s Dell's value exploded (see chart here). From a share-adjusted price of $2.00, value exploded 30X in the internet boom from 1997 to 2000. People loved Dell because it had a Success Formula completely aligned with market conditions at the time. Dell had eschewed R&D, offering products which were combinations of off-the-shelf components. Offering a huge variety of a limited product line – PCs and laptops – Dell focused on how to take orders fast and deliver the product fast. While other companies put energy into product development, Dell put its resources into supply chain optimization at a time when internet use was exploding and the technology was becoming pretty much generic.
Since peaking, Dell's value has declined 8 3% -from about $100/share to $10. On the slippery slope of decline, value fell more than 60% since September. Dell was so focused on executing its Success Formula it missed some important market shifts. First, competitors were able to copy Dell's early advantages and provide customers lower prices. Second, customers moved away from wanting the highest growing PC products (servers) on the Dell technology standard products from Microsoft – moving increasingly to Linux solutions. And third, customers simply quit buying PCs and laptops at old growth rates. They are much more willing to keep products longer, rather than switch every year or so, and focus has moved to Blackberries and other mobile products – away from the products Microsoft offered. As a result of these market shifts, Dell's relentless focus on execution provided continuously declining marginal returns. Doing more of what it always did led to declining value at Dell.
Now the rumor is Dell will be launching a mobile phone (read article here). But a quick look shows there has been no change in the Dell Success Formula. The company is still trying to sell a product with no technology added by Dell – using instead off-the-shelf technology from Google and (surprise) Microsoft. Like it did in PCs, Dell looks to copy leading competitive products – this time targeting the Apple iPhone. It appears Dell thinks it can use its now long-in-the-tooth supply chain "strength" (which looks a lot less competitive advantaged than before) to take "me too" products to market in hopes customers will jump at their "standardized" distribution approach.
Only now isn't the 1990s, and mobile phones aren't anything like PCs and laptops. There are many low cost distribution avenues for mobile phones that get products into customers hands really, really cheap and really, really fast. And customers aren't looking for "standard" products, instead showing a very high affinity for new gadgets and bells (just ask Motorola that hung onto its market leading RAZR too long instead of bringing out new products). And thirdly, supply chain issues were important in PCs and laptops largely because most were bought by corporations – not individuals. But mobile phones are not a corporate IT purchase. Individuals by mobile phones.
In a different environment, isn't it surprising Dell would think its old Success Formula could produce good results? When things change, doing more of what you used to do well isn't likely to bring back old returns. Businesses have to change their Success Formulas to meet new and emerging market needs. Dell has to dramatically change its Success Formula if it hopes to regain competitiveness – not just put another me-too product into its old Locked-in processes. Even if Mr. Dell has returned as the CEO.
by Adam Hartung | Jan 7, 2009 | Uncategorized
So, in 1900, who had:
- the richest country in the world
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the largest military
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the center for world business & finance
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the world's strongest education system
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the world center for innovation and invention
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the currency used as the world standard of value
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the highest standard of living?
England.
My, how things changed in the last 100 years for this great country. I remember watching 1940s and 1950s movies with British actors, and they were full of "Stiff upper lip, old man" and similar phrases as England was portrayed as a country of people stiff as starch, tied to a long history of Victorian behavior and a sense of superiority belied by its loss of leadership in the world. America, with its larger physical size and population took the lead in agriculture, and later manufacturing. Slowly, America took the lead on all the measures mentioned above.
Now, England is facing additional crises. One of the oldest, most popular and largest retailers, Woolworth's, has gone bust and all stores are closing. As America's first lady shows off new half-million dollar china in the White House, the famous crystal and china maker Waterford Wedgewood is in the British equivalent of bankruptcy and may not survive. Housing mortgage approvals are down more than 70% this year as real estate values tumbled (despite Russion buying). So now the Bank of England is expected to cut the primary lending rate between banks to the lowest level ever since the creation of the central bank in 1694. (read article here) Yet, there are those who think this move unwise because they fear the British currency will fall versus the Euro and other currencies.
Stiff upper lip? Hold on and wait for things to get better without an historical rate cut? Bankers in England are already showing a great reluctance to make new loans, despite central bank prodding. These are the same bankers who have felt they should not agree to joining the European common market – and converting to the Euro currency – they seem willing to "go it alone" even if such actions crash the economy, kill businesses, jobs and the lifestyle of a few million residents in the United Kingdom.
What do Britain's economic leaders expect to happen? What was not so long ago an English colony, India, is rapidly becoming a global economic engine far more important than England. Serious change has happened over the last 100 years – and if England, its businesses and its people are to remain serious competitors they have to adapt to global changes. England may be a great place, but so are a lot of other places on the globe. Today, it's not about who you were – but who you are becoming. And it's unclear that the U.K. is becoming a stronger competitor able to deliver solutions to global customers that are superior and at a fair price (perhaps Guinness and single malt Scotch being the long-term exceptions).
The shifts in competition unleashed by digitization and globalization will not bypass England and the other U.K. countries. They must adapt to these changes if they want to maintain a lifestyle to which its citizens have become accustomed. Right now, what England needs all the adaptability it can muster to deal with global changes unlike any ever before seen. And lowering the interest rate to record levels will be just the first change in the old status quo if England is to remain a world competitor. Perhaps a Prime Minister with the last name Singh or Gupta is in the country's future?
by Adam Hartung | Jan 1, 2009 | Uncategorized
The #1 New Year's resolution is to lose weight. By far, it is the most common goal people set. That's why we see so many weight loss program ads on television from Christmas through January. Not surprisingly, however, achieving weight loss (especially long-lasting weight loss) is also by far the goal least achieved.
There's no magic to losing weight. You have to eat less, and exercise more. Yet, this is incredibly hard to achieve. Why? People focus on the result, rather than the necessary behavior change. If we try to maintain the same schedule, doing the same things, then we're not going to implement or maintain a weight loss program. To lose weight we have to focus on the behavior change, changes in routines, which creates opportunities for more exercise and less exposure to calories. Because weight loss is a RESULT of the behavior change. If we focus on doing the right things – such as taking the stairs instead of the elevator, exercising at lunch break instead of eating, and portioning food on our plate instead of helping ourselves from the family table – then weight loss happens.
But for most of us, changing behaviors is very hard. How will we find the time to exercise in an already busy schedule? How are we to eat less when we eat lunch with co-workers and dinner with our families? Lock-in to our routine is practically invisible – but it is that Locked-in routine which created the weight gain. Unless we change the routine - Disrupt the Lock-in – we won't be able behave differently.
For many of us this can be helped if we create a competition. If we challenge a family member or co-worker to "who can lose 20 pounds first", or "who can lose the most weight in 90 days" it helps us to focus on the necessary changes which will lead to weight loss. We see how the competitor behaved in the past, and recognize the changes we need to make. And we see the competitor's actions and steal ideas. Focusing on a competitor is very helpul at identifying behavioral and structural Lock-ins in our lives, and recognizing the necessary Disruptions that can lead to changes.
Of course, we all have to build our own unique new routine. This takes experimentation. Some arise earlier in order to exercise. Some switch from eating lunch to exercising at the noon break. Some start portioning their food onto their plates prior to sitting down, rather than eating "family style", in order to eat less. Others change their diets to eating more vegetables, or no carbohydrates. Successful weight loss involves giving ourselves permission to try new things (recognizing that others will very likely not be as keen on our changes) and dedicating resources to the effort – from time to money (possibly for gym fees or exercise equipment). Those who achieve long-lasting weight reduction always say they had to experiment, sometimes for weeks, before finding a new routine which they could Lock-in to that maintained exercise and proper nutrition.
Achieving the weight loss goal means (1) recgnizing we are Locked-in to a routine that must change if we want different results (2) select a competitive challenge to increase and maintain focus on change (3) Disrupt our old routine (4) create White Space to experiment with new behaviors until a new routine can be developed aligned with achieving and maintaining the weight loss goal. Don't focus on losing weight. Focus on changing behaviors which leads to the result of lower weight.
The same is true for businesses. Layoffs in reaction to a bad economy are like a crash, starvation diet. Because existing Lock-in isn't addressed, old behaviors aren't Disrupted, and White Space isn't deployed to develop new solutions to market challenges there is no real improvement in the business. Far quicker than expected, cost increases return. Competitive challengers create advantages by altering their behaviors. And the goal of improved business returns remains illusive. The 2009 New Year's resolution for businesses needs to be focused on changing old behaviors which will lead to the desired result – better profitability which can be maintained. When business leaders focus on Competitors, Disruptions and White Space improved profitability is the short- and long-term result.
by Adam Hartung | Dec 17, 2008 | Uncategorized
Steve Jobs is a Phoenix Principle leader. He's never afraid to Disrupt himself or his organization. He's always working to make sure new ideas are surfaced, and applied, and new markets developed. He keeps White Space alive, trying new products in new markets — unwilling to let himself or his organization become pigeonholed into narrow definitios that weaken revenues and returns. No wonder analysts, investors and employees want him at the helm of Apple.
But, no organization can survive long-term if it depends on a leader to maintain all Disruptions and White Space. Apple stock is down about 50% since the middle of this year, dropping 5% today (see chart here). This could be because Apple is ignoring the netbook marketplace – and possibly not introducing anything terribly knew this holiday season. Some think it's because there is a rumor that Mr. Jobs is in poor health because he's said he won't address the MacWorld trade show in December. His health has been something that has captured news attention since his bout with pancreatic cancer in 2006 (read more about Jobs and Apple's stock here.)
Apple's rise, fall and rise can largely be traced to its leadership by Mr. Jobs. But that's really too bad. Apple should move to institutionalize processes which would insure the company keeps Disrupting itself and implementing White Space. Even if Mr. Jobs is in great health, at some time he will leave Apple. And the company's employees, investors and vendors deserve the company to continue with the kind of performance it's seen since Mr. Jobs' return to the top spot.
Over at neighbor Silicon Valley tech company Cisco Systems Disruption has been institutionalized, rather than relying on Chairman John Chambers. At Cisco, the company works constantly to cannibalize and replace its own products. This policy keeps the company from resting on the laurels of good products, protecting them from competition and allowing the company to fall behind. Instead, product managers constantly work to either find replacement products or improve their products so they stay at the forefront of competition – or get out of the product line altogether. With this chronic product Disruption, they use White Space to find the replacement products growing revenues year after year.
Great Phoenix Principle leaders are good role models. But companies can't rely on them to keep the organization vital. Leaders leave. Too often, the organization then falls victim to Lock-in as Disruptions stop and White Space dries up. Defend & Extend management takes hold – as we saw at Apple when Steve Jobs was fired by John Scully in the 1980s. After his departure, the company focused entirely on the Macintosh and attempted to protect its share from the Wintel PC onslaught. Even though Mr. Scully tried to lead the company into the PDA market by championing the Newton, he was unsuccessful because he lacked Mr. Jobs Disruption skills (Mr. Scully was a corporate leader cut from a more traditional mold) and didn't know how to use White Space to get his product supported. As a result, the D&E managers at Apple rose up, had the Board fire Mr. Scully, and proceeded to focus on the Macintosh until it became a niche product and the company was in jeapardy of failure.
And that's what could happen again when Mr. Jobs leaves. That's why mentions of his health, or departure, draw so much press. Apple has not become an evergreen Phoenix Principle company, because it relies too strongly on its existing Phoenix Princple leader. There's time to change this – and that should be one of the highest priorities Mr. Jobs undertakes – long before he decides to leave.
