by Adam Hartung | Dec 15, 2008 | Uncategorized
Want a winner, regardless of market changes? Look at Illinois Tool Works (ITW) (see chart here).
ITW has grown, regardless of market shifts and economic changes, for over 20 years. And this troubled year, 2008, ITW has grown another 2.4 percent (see article here). While other big companies are seeing revenue declines of nearly 50% (look at Chrysler), and some are disappearing overnight (Lehman Brothers and Bear Sterns) it's a rare story to hear of a company growing these days. Yet, ITW keeps plugging along.
ITW is in a wide variety of businesses. The company has over 800 subsidiaries – and it doesn't even require they all use the same accounting system – much less adhere to a common "core". Businesses are expected to meet their forecasts, or change in order to meet them. Acquisitions help the company keep trying new things in new markets – constantly maintaining White Space. It's not important what market they're in, or what products they sell, or what technology they use. What's important is if the business is able to sell more product and meet profit targets while doing so.
That willingness to keep White Space wide open has served ITW well for over 2 decades – and is doing so now. Revenues keep growing, via acquisition and ongoing business, despite changes in markets around the world. ITW is avoiding the draconian downsizings we read about across the country, and is not harping about insufficient capital while pursuing sales globally. Instead of focusing on a core business, and watching that market disappear out from under it, ITW keeps itself firmly growing in a wide variety of businesses creating better results for employees, suppliers and investors.
Long term success comes from avoiding Creative Destruction. Focus is of no value when your focus becomes obsolete. Companies that focus eventually end up out of step with changed markets – and wondering how to save themselves. ITW avoids that problem by constantly entering new markets, and trying new business models. A company based on White Space has proven it can grow, even in an economy like this one.
by Adam Hartung | Dec 14, 2008 | Uncategorized
The stories of woe in the newspaper business have been dire for a while. But lately they've gotten worse, as Tribune Company filed for bankruptcy and rumors abound that The New York Times Company is looking to sell real estate in order to stay alive. Of course, selling an asset like buildings to subsidize a business like printing newspapers is not a good idea – robbing Peter to pay Paul only delays the day of reckoning. And in the meantime investors are robbed of value while employees are given false hopes of improved business conditions. As we've seen at GM, selling EDS, Hughes and GMAC to subsidize auto manufacturing has not helped management build a stronger company.
And speaking of Detroit, rumor now is that the Detroit Newspaper Partnership, which runs the Detroit Free Press for Gannett and Detroit News for MediaNews Group, will stop printing the newspaper for delivery except on Thursday, Friday and Sunday. Other days will be a single-copy purchase product, very limited. (Read about the changes here.)
The only thing suprising about this announcement is how long it took to happen! By far the highest cost of a newspaper is printing it. Second is delivering it to homes. With subscriptions falling, the economics of distribution have been worsening dramatically. You really want everyone to take the paper as you drive down a street – not one in 3 or one in 4. That creates a compelling reason to advertise, and the cost of distribution low. But the news organizations have been cutting costs of reporters, editors, copyeditors, graphic artists, page layout professionals – all the people who report and relay the news. And in the process, the product has gotten considerably worse. In all cities – not just Detroit.
Obviously, what people value is the news. Not the paper. Today, acquiring news is far faster and easier by checking on-line than reading a newspaper. Thus, newspaper subscribers have been dropping fast. Of those that continue subscribing, estimates range as high as 50% who only continue because they want the advertising inserts on Sunday. But increasingly those ads are being delivered directly to the mail box. As for browsing the news, almost everyone today has multiple options for keeping up with current events via CNN, Fox, MSNBC, CNBC, Fox Business and other television sources. Many businesses run these stations in the background during the workday, making current events very immediate and a lot easier to track than reading a day-old rendition via a paper.
Unfortunately, when we look for news on-line we find that the leading newspaper companies have not been good at taking their most valuable proposition to the distribution system people most want. There are no markets where the "newspaper" has the leading news website. People don't go to NYT.com, or ChicagoTribune.com or LATimes.com or even WSJ.com for most of their news. Readers get what they want faster and easier from superior sources that know not only how to find news, but how to post it fast and make their sites a lot more valuable. And learning how to have a valuable (and profitable) web site is not where these companies have invested their money the last 10 years. By trying to Defend & Extend the paper, they missed learning how to maintain their status as news distribution shifted on-line.
There's an old phrase in newspapers – "Don't bury the lead." It refers to writers spending too long on facts before getting to the "so what." Within these newspaper companies, they buried the value of their business. News was their business – not printing on paper. But Lock-in to old ways of doing business kept them focused on printing papers until…. well…. we see many shutting down and some declaring bankruptcy. Meanwhile, the demand for current news is growing faster than ever! The number of web searches for news articles, and news sites, and blogs keeps growing every month!
Back in Detroit, it's high time some newspaper group finally Disrupted itself and started focusing on what it needs to do, rather than what it want to do (and has always done). In Detroit, people are very worried. Business is terrible. Advertising has fallen off the proverbial cliff. It was only when facing extinction that these papers finally considered focusing on-line rather than focusing on print. It may be too late in Detroit. These organizations have not built strong capability, and they've run out of resources before trying to change. When you fall into the Whirlpool of failure, not much can save you.
But for other news companies, the time for Disruption is NOW. Everyone knows that newspapers are an inefficient news mechanism. Everyone knows that eventually they will be obsolete. Instead of leading the change to on-line, these companies have resisted – hoping they could Defend & Extend their models "another year or two." That is not a strategy – and the tactics rarely work. To be a vital competitor, businesses have to address market shifts by building future scenarios that take into account changes. And then Disrupt their old ways – create a pattern interrupt allowing themselves to fully realize that the future simply canNOT be like the past. Only after Disruption can White Space help develop a new Success Formula.
Let's hope many of struggling news organizations take the time now to Disrupt. If not, if they try to Defend & Extend much longer, they will disappear. And that will be terrible for all of us that depend on these local news groups to tell us what's happening in our towns, counties and states. Not only will investors be wiped out, but the fabric of our communities will be shattered if we lose these local reporters keeping us current about what's happening at the school board and city meetings – and we can't depend upon 15 second television bites to really inform us.
by Adam Hartung | Dec 3, 2008 | Uncategorized
For years I was a Merrill Lynch client. Largely because one of my high school buddies became a broker there when he graduated from college. When I finally had a few bucks to invest, I called my friend and became his client. In the 1980s, this was a sensible way to do business – and Merrill Lynch's fees were largely the same as everyone else because both the stock exchange and the SEC set client fees.
But, Charles Schwab started change in the brokerage business by launching a "discount broker" after the exchange and SEC deregulated rates. At the time, I told my friend that I was likely to switch. His response was to use a program offered at Merrill to lower his fees to match Schwab. Although this was fine for me, I pointed to him that it sounded like Merrill was ignoring the real impact of competition shifts.
Some years later, eTrade came along lowering fees for retail brokerage customers even more. Again I told my broker it looked like time I should move on. And again, he and Merrill lowered his fees and offered me on-line access to my account as well as research. I stayed with Merrill, but pointed out that it seemed like Merrill wasn't really addressing competition.
Every year, for more than 20 years, there have been changes happening in brokerage. And every year I talked to my friend about whether it made sense for him to keep doing business as usual. Every year he assured me that Merrill Lynch knew what it was doing, and he was comfortable staying at Merrill. As brokers failed or retired, he would "Buy their book" – meaning he would buy their list of names and accounts from them and then work to keep those clients at Merrill and with him. By doing this, he was able to Defend & Extend his commissions even while Merrill had its struggles. He even laughed to me about all the turnover at the district manager level (above him) and how every year fewer and fewer new brokers were able to survive. I would point out to him that perhaps he was taking a risk by remaining Locked-in to Merrill – but he said he was comfortable and had faith in a company as big as Merrill Lynch. "Merrill will never go away, so why should I" he would say.
Now, I'm no longer a client at Merrill Lynch. Guys like me weren't in their "sweet spot." Services kept being reduced, and fees went up. Merrill Lynch isn't even Merrill any more. Soon it's to become a division of Bank of America – if investors agree to the price. And my high school buddy? Well, his bonus is evaporating (read article here). His retirement, almost totally invested in Merrill stock, has seen dramatic reduction – and could go down even more. And he has developed no skills to do anything else. Nor does he understand the changes in financial services so he can position himself for his next position. He's hoping to keep hanging on – even as his benefits, pension, bonus and pay drop like the proverbial stone.
Merrill never escaped the Lock-in created years before deregulation. Merrill never came to grips with significant changes like discount brokerage, or on-line brokers. Worse, it ignored the growth of new competitors like independent financial advisors, and the explosion in broker services and competitive products offered via insurance agents and commercial bankers. Looking year-to-year, Merrill kept pushing brokers to find more clients, bigger clients and sell. And it ignored the aging of its clients, as well as the aging of its brokers. It ignored the fact that it was increasingly dependent upon fewer brokers with fewer accounts that were all at great competitive risk. Merrill was a sitting duck for competitors, that could compare rates and services against the old giant that kept looking weaker and more out of touch with retail clients.
And my buddy never addressed his personal Lock-in. He kept finding ways to stay at Merrill, and ignored the signs around him that Merrill was becoming a riskier place to work. He kept not only his job, but his pension tied to the company as he reinforced the value of his loyalty. But, in the end, he's now in a world of hurt. Even if he survives into some job at B of A, his income and pension are shredded. He could have seen it coming – but he preferred to remain Locked-in rather than look into the future and really discuss competition. And he never allowed any White Space in his life to consider doing anything other than work for Merrill Lynch.
We can laugh at Lock-in when we see it cause other companies to do foolish things. But when we work for a Locked-in company, we risk our future as well as its. As employees, we have to bring up issues to management above us - cause them to focus on the future and how things are likely to be different rather than merely an extension of the past. We owe it to bring our employers information about competitors – especially when our customers are pointing out changes on the horizon. And we should be willing to discuss how we could change things – how we can accept the need for Disruptions so we can open up to new opportunities. And we need to keep White Space in our lives so we are prepared to help our employers. But, in the end, if our employer remains Locked-in to D&E tactics we owe it to ourselves to prepare for market shifts by looking for other ways and places to be employed. When Lock-in hits home it can be exremely painful.
by Adam Hartung | Oct 29, 2008 | Uncategorized
The old story goes that once a there was a European village that was overrun by its mortal enemy. The enemy left without investigating one small area where all the blind people lived. Upon learning that their village was now gone, the remaining people found out that there had been a single survivor of the attack. He had lost one eye, and his vision was poor. Nonetheless, he was voted the new leader of the village. From this story comes the famous line, "In the land of the blind, the near-sighted one-eyed man is king." In other words, how good something looks has a lot to do with what it's being compared to.
That's about the only explanation for recent interest in Kraft (chart here), Procter & Gamble (chart here) and Kellogg's (chart here). About the only thing that makes these companies appear attractive is their equity values haven't been hammered like some other companies. But are these companies upon which we can expect growing revenues and profits that will generate more dividends for investors, more demand for suppliers and higher pay and more jobs for employees?
Investors have not shed these companies as fast as some others because the view has been that demand for their products is more recession-resistant. But one thing these companies have in common is limited growth. Kraft was recently placed on the Dow Jones Industrial average to replace AIG. Until recently, Kraft was a division of Altria (the old Phillip Morris cigarette company). As Kraft "repositioned" for spinning out it sold most of its growth businesses, including Altoids. The company refocused on its old-line businesses, like Velveeta, Oscar Meyer bologna, Ritz crackers and Kraft macaroni and cheese - none any kind of high-growth business and each with ample competition from other branded and store-branded products. Leadership planned to increase earnings by cutting costs in these old businesses. Now we hear profits are up! But that's because Kraft sold its Post cereal business, gathering another one-time asset sale gain. And the company keeps cutting heads (read article here). The company isn't bringing out new products, or developing new businesses. If the stock market wasn't crashing, who would care about Kraft's asset sales and headcount reductions as it tries to find profits without anything new.
P&G's profit is up 9%, but the company admitted sales growth will fall below forecast (read article here). Profits are up mostly because commodity prices have fallen. Its competition from store-brands is hurting sales, as competitive private label sales are up 8.4% this year. Kellogg's got on the Phoenix track with plenty of White Space under previous CEO Guitierez, but the current CEO has done nothing to maintain Disruptions and White Space. Sales are up 9%, but that's primarily due to raising prices driven by higher commodity costs. Frozen meal sales seem to benefit from people eating at home more – not any new products (read article here). That's not a long-term trend.
Are these companies poised for high growth? Well, do you see the companies doing extensive scenario planning to identify new business opportunities? Are they talking about fringe competitors that they are worried about, and need to address with new products?? Do you see them Disrupting their Lock-ins to historical products and markets? Attacking old sacred cows? Is there any discussion of White Space where they can develop new Success Formulas with more growth and higher rates of return? Or are these recent earnings announcements mostly discussions of how well they are trying to Defend & Extend the old Success Formulas in turbulent markets?
Before the bottom fell out of the stock market investors focused on growth opportunities. Now, with fear involved, they are looking for companies that appear less risky. If you want less risk, go buy bonds! Preferably government bonds! There is no such thing as a low-risk company. Doing more of the same, but at lower cost or charging higher prices, inevitably leads to competitive problems. There are no "defensive" companies because all companies are vulnerable to new competitors with new solutions that better meet customer needs. Those who like these consumer goods companies today are too narrow in their focus. They are ignoring other investment opportunities in companies outside the USA, or in other types of assets like bonds, tangible items like art, or commodities like gold. As U.S. equities have seen problems, short-term these consumer goods companies have had less equity problems. But that does not make them good investments. For high rates of return companies must be developing new Success Formulas that deal with current Challenges and allow for higher future rates of return.
You're not likely to come out a winner if you vote the one-eyed, short-sighted person (or company) king. Better to find another village.
by Adam Hartung | Oct 23, 2008 | Uncategorized
Odds are you don't know what a DN-01 is. And that's OK.
Think about my recent post on motorcycles. Even with gasoline prices down substantially, they are still about where they were a year ago – which is way higher than they were 5 years ago. So, the desire to obtain high gas mileage is still relavent. There are still people who would like the high gas mileage a motorcyle provides. So what do you suppose holds them back? Safety is an issue. But for many, it's "I don't know how to ride."
Very few Americans know how to drive a standard shift auto any longer. If you're under 30, the odds are that you've never even sat in a car with a clutch and a stick shift. And that's a problem if you go to buy a motorcycle, because they have standard transmissions. So, while learning to ride the motorcycle you not only have to learn how to manage a front brake and back brake, but how to work a clutch and shift a manual transmission. Now, that's a big hold up for a lot of people.
And that's where the DN-01 comes in (see link to DN-01 here). This new motorcycle from Honda (see chart here) has a transmission that doesn't need shifting. Formerly only possible on a small engine scooter, now Honda has a full-size motorcycle that can be ridden without thinking about shifting. If you think about that for a few minutes, you realize that opens the market to about 10x the previous number of possible customers. I've long extolled how Honda is a leader in using Disruptions and White Space to find new opportunities. Here again we see Honda taking the lead in finding a way to greatly expand the marketplace. Another example of White Space at work.
Compare this to Harley Davidson (see chart here). Most Harley motorcycles use the same technology they've used since the 1940s (albeit with minor modifications – but not a lot). Around the turn of the century Harley tried to update its customer base by launching a new motorcycle with an engine designed by Porsche of Germany. Even though it's been out since 2002, the V-Rod has not been a big seller (read about the V-Rod here). If you go into a Harley dealer and ask about this bike you'll likely be told "oh, the chick bike," in a derogatory way that only a Harley dealer could figure somehow talks down one of his own products. While this bike represented the next breakthrough in technology to move Harley forward, the company and its dealers have chosen to largely downplay it – and sales results keep falling.
Now compare Honda to Sony. Sony was long considered at the front edge of innovation. For years Sony was known for bringing forward solid state radios, solid state televisions, the walk man and the disk man. But in the late 1990s Akio Morita, long the company head, decided to retire. Throughout his career, Morita focused on new product development, testing and finding new markets for new technologies. But the Board replaced Mr. Morita with an MBA. Sony's new leader first reacted to stop all the wasted new product development at Sony in order to immediately raise profits. Then, he cut R&D and product development budgets in favor of acquisitions. Today, Sony is no longer the technology leader it once was.
Think about how Sony (see chart here) - which owned a recording studio as well as #1 position in consumer electronics – completely missed the MP3 music market. The new management's focus on profit, and Defending & Extending its past market position without investing in new development, left the company vulnerable to Apple and its Disruptive effort to change the music business. As a result, Sony's profits are now down 38% this year, and leading a recent drop in the entire Japanese stock market (see article here). Sony is worth less today than at any time since 1996!
Sony and Harley Davidson both Locked-in on what worked in the past. They tried to maintain sales on old products, and old product technologies. They tried to say that "brand" was what was important. That let new competitors come into their markets and find new customers, using new products. And that's exactly what Honda is doing. By Disrupting old notions about motorcycles (that they have manual transmissions, most recently) they create White Space for new products (and new businesses – like jet airplanes and robotics.) As an investor or employee, you're better off with the Disruptor than the D&E competitor every day.
by Adam Hartung | Oct 14, 2008 | Uncategorized
On Monday the Dow Jones Industrial Average jumped almost 1,000 points. Just as I was saying most investors should be selling equities. Do I wish I hadn’t said that? Well………no.
We’ve seen a lot of things change the last 8 years as globalization has impacted everyone. We saw a "crisis" in manufacturing as the offshore trends of the 1980s became a wholesale exodus of manufacturing from the developed to the developing world. We saw one of the largest white collar occupations in the developed world, IT services, undergo a crisis as everything from programming to data center management underwent wrenching change. Even the largest players shifted from EDS and Accenture to TCS and Infosys (both of which keep wracking up double digit quarterly growth along with 40% margins!) And more recently we’ve seen financial services start the shift from national to global as large American (and some large European) banks, insurance companies and investment banks are seeing their assets and reserves dwindle and governments are stepping in with quasi-nationalization programs.
There are still many industries that will see several more shifts. Today the "medical tourism" market is in its humblest beginnings – yet the trend toward people flying from the developed countries to less developed for everything from hip replacements to heart surgery is happening (read article here). And bio-engineering research has flourished outside the U.S. while domestic bans and grant-letting risk aversion has led to reductions in everything from stem-cell research to human application of bio-engineered products. Big changes are still in front of us. As are changes in who makes automobiles and airplanes – as well as who builds national or state infrastructure (in the USA and in the developed world) – and what brands remain leaders and which emerge.
So if the 900+ point jump in the DJIA made you more comfortable, it’s just the calm before the storm – or maybe the eye of the hurricane. More is coming. The jump did not indicate a "return to normal", but rather simply a daily reaction to events – in this case global action to shore up bank reserves with public money. From 1980 through 2000 was the greatest run in the history of American equities. It was possible to make money simply by purchasing index funds (baskets of equities) and holding them. But that era has passed. And things are going to change. Global market shifts cannot be ignored even by large American institutions – be they governmental (the SEC or FDIC), quasi-governmental (Freddie Mac and Fannie Mae) or non-governmental (Bear Sterns, Lehman Brothers, AIG, etc.). Now that the world has been populated with a large number of private equity funds and hedge funds, the landscape has changed for investors – in the USA and around the world.
Does that mean all equities will do poorly? Of course not. But only those who adjust to market shifts will do well. Johnson & Johnson has long been a company that uses internal Disruptions and maintains White Space to find opportunities for global growth. And we’re seeing that amidst the recent market problems J&J is announcing it will continue to grow sales and profits through its combination of consumer goods, medical devices and prescription drug products sold in the USA and around the world (read article here.) Meanwhile PepsiCo – one of the globe’s best known branded goods companies – announced it sees itself tied up in knots by fluctuating commodity prices and softening of beverage and snack sales. PepsiCo is expecting a profit problem, and is planning layoffs (read article here.) Even though Pepsi was the first soft drink company to globalize, it’s not adjusting fast enough and effectively enough to market shifts.
So, it will be up to investors to be a lot more careful about investing in the future. What used to portend high rates of return cannot be depended upon any longer. For many Americans, they will for the first time have to get a lot smarter about non-U.S. companies. And they will have to invest based upon future market positions – which could change rapidly – not based upon company legacies. Because overall, we can expect a lot of change among the market leaders as this shifting economy accelerates.
In the end, those businesses that spend a lot of time scenario planning the future will do better than those who try to focus on past "core" businesses. Those who obsess about competitors will do a lot better than those who obsess about "execution." Those who frequently Disrupt themselves in order to avoid Defending & Extending the past will do better than those who seek to reinforce Lock-in. And those who keep White Space alive with new projects that have the permission and resources to define a new Success Formula will do the best of all. And finding these companies will be harder and harder in a world where the private equity and hedge fund managers can create their own deals (like the recent Berkshire Hathaway investment in GE) than individuals will be able to do – because the investment banks are rapidly losing their positions as the brokers.
by Adam Hartung | Mar 31, 2008 | Uncategorized
It was around Christmas in 2005 when I was in an oversized van with 5 execs from a major U.S. newspaper touring India. We’d already traveled the disastrous roads of Mumbai and Chennai for a few days, and discussions of bad infrastructure, squalor and absolute poverty had grown tired. Looking for a new topic I commented, "you know, within a few years there will be hundreds – or thousands – of Americans coming to India for surgery and other medical treatments."
The group broke into hysterical laughter. But I persisted. "Look," I said, "health care costs in the U.S.A. are skyrocketing, many people are without or losing insurance benefits (or insured with many uncovered treatment options), and the population is aging. This all leads to expecting demand to outstrip what people can pay. At the same time, many of the best and brightest in India have gone to the U.S. for medical training and they are returning home. Think of all the folks – retirees, truck drivers, farmers and others – who will need hips, livers and heart surgery. They could come to India and get the procedure, plus 8 weeks of great therapy, for 10% of the U.S. cost."
I wanted to get the group to thinking about big themes. The world is always changing. We see the data, but we don’t use it. We don’t change our expectations for the future. And we don’t build our plans to meet the emerging future world. Instead, we rely on what has always been continuing to be. In this case, the emerging healthcare "crisis" in the U.S. is bound to lead to some unusual solutions – and we would be a lot better of if we plan for them.
Last Friday the front page of The Chicago Tribune had the lead "For big surgery, Delhi is dealing" (read article here). The article went on to discuss benefits of India-based medical care, a growing trend for Americans to use it, and how even insurance companies are considering programs for their insureds to take "medical vacations" in India for costly procedures and recovery.
The point isn’t that I got one right. Rather, we should re-evaluate how we do planning. Most of us, and our businesses, plan by obtaining information on the past and projecting it into the future. We love our Lock-ins, based on past economics, markets, competitors, products and services. We love to take for granted that the way things used to work is the way they will work in the future. It makes life easy, and allows us to laugh at the notion that Americans would fly to India for bypass or liver transplant surger. That’s fine as long as everything remains the same. But things change. And when underlying factors change, the future often comes out very different than the past.
We should plan by thinking out scenarios for the future. Start by identifying big themes – like rising healthcare costs in America, higher oil prices, instability in countries that produce lots of oil, increased use of grains for fuel rather than food, global sourcing of products and labor, aging population demographics in American and Europe, long term weather changes, etc. and then say "if these trends continue what will the world look like in 3, 5, 10 years?" Build scenarios. What if the price of diesel hits $12/gallon (that’s only a tripling from today – just one big bomb in Tehran or sunk tanker – which is what happened in the last 3 years as we went from $1.30 to $3.90/gallon)? What would happen to distribution systems, railroads, airplane travel, grocery cost, vacation destination hotels? Figure out scenarios, and then bring them back home to today. What does it mean for your business if these themes really happen?
Obviously, the impact of Google, Craig’s List, internet news sites and blogs on newspaper advertising has been huge. Far worse than any of my colleagues that fateful day were predicting. They were basing forecasts on historical models, and expectations that the business would come back as it always had. They were grossly underestimating just how far advertising rates could fall – and as a result they were not really considering radical changes in their Success Formulas. Just like they didn’t want to consider Americans flying to Delhi for surgery, they didn’t want to consider that newspapers might become a product needed by dramatically fewer readers – and less valuable to advertisers with many new options. Their plans were based on the past – not a potentially very different future. To avoid becoming obsolete, our planning must be based on planning for the future – not the past.
by Adam Hartung | Jun 26, 2007 | Uncategorized
All businesses and people Lock-in. Lock-in is beneficial at helping us to be productive. We work faster because Lock-in helps us use assumptions to move rapidly toward a goal, using a Success Formula as a guide. The goal of The Phoenix Principle is to help us be aware of and manage Lock-in, and find opportunities for new Success Formulas that can produce better results.
This was driven home to me just today. I was talking with a company in a very high transaction business. They outsource transactions for other businesses. In transitioning up a new customer the company agreed "to move 80% of volume to the offshore facility" by a certain date. When I read this I was anticipating they were in big trouble, because the company was considerably away from handling 80% of transactions in the new offshore facility.
When I asked the company President about this he looked at me and said "we transferred all the complex transactions offshore first. Once we get those set up the simple ones transfer easy and fast. We’re doing well over 80% of the work hours in our offshore facility, since complex transactions take many multiples of the work hours required by simple transactions." Bang! Was I Locked-in, or what? I jumped to volume = transactions. Volume didn’t mean transactions, but rather work hours! Imissed that not all transactions are equal.
I was reminded that we all have to be aware of how easily we Lock-in (myself included). We have to seek out input from others who don’t have our Lock-in and be open to really listen to that feedback. "Outsiders" can provide different interpretations of what we see with our own eyes – but unconsciously modify through the lenses of our Success Formula.
by Adam Hartung | Jun 12, 2007 | Uncategorized
Very little is really known by most managers and investors about how Boards of Directors operate. There is knowledge that Boards are the investor representatives, and that they have some legal authority to oversee management. But what a Board actually does, and how it operates, is largely unknown by the vast majority of us. But, every once in a while a glimpse is offered – usually through a lawsuit.
And that has been true of the Board at Hollinger International (now called the Sun Times Group). The Chairman/CEO and his CFO were sued for creating self-dealing agreements that looted the company of money, at shareholder expense. The suit took years to get to trial in Chicago, but now it is up (see article here). And testimony has been revealing about just how little a Board of Directors actully oversees management. Caught in the crossfire has been the former very popular governor of Illinois, Jim Thompson, who was on the Hollinger Board and chairman of its audit committee.
Testimony in this case, as in Tyco, Enron and WorldCom, has revealed that Boards are one of the more Locked-in work groups in business. Often, the Chairman invites people onto the Board not because they bring particular insight to the most critical issues of the company – but rather as a personal relationship or based upon fame. And rarely are Board members given all the information in the company. Rather, it is a management selected subset intended to aid the Chairman and CEO in achieving agreement to their desires. As a result, members, such as Governor Thompson, end up with lofty titles and responsibilities but little more than a rubber stamp to use in wielding their power. As a result, when the wrong things are happening the Board members, such as Governor Thompson, don’t ask sufficient questions, don’t know enough about what is happening, and agree to management actions which are unethical – and in Hollinger’s case – illegal. The bad news is that investors suffer. And, as in Governor Thompson’s case, a huge credibility loss for the Board member with a possible loss of his legal license and the balance of his career.
Congress passed the Sarbanes-Oxley act in an effort to Disrupt these Board work groups. The goal was, and remains, to change what happens on Boards, and between Boards and management, in order to improve the oversight given by Boards. Of course, management has had a thunderous negative reaction. Television programs, such as on the business channel CNBC, bring on executive after executive complaining that the effort and cost to implement SarbOx (as it is nicknamed) are hurting their business. Some even complain that SarbOx is driving them to delist as a public company and consider going private.
These complaints are not really about the cost of SarbOx. Rather, they are complaints about changing the Success Formula of Boards of Directors – something that the majority of CEOs do not want. There is no doubt that the SarbOx Disruption is good for holding Directors accountable to investors. As a result, SarbOx has resulted in more and better transparency into business finances and decisions. It has not hampered competitiveness, and the argument can well be made that competitiveness has improved due to better Board involvement.
Just as companies become Locked-in, so do work groups. Boards are no exceptions. Locked-in groups do not find it easy, or often desirable, to change. Yet, new Success Formulas for groups can lead to far better performance. And that is true for corporate Boards. New Success Formulas for work groups, as for companies, require Disruptions. And that is the role of SarbOx. Once more Chairmen and CEOs take these Disruptions to heart, and begin opening up White Space for their Boards to develop a new Success Formula, we will have far more valuable and productive Boards – leading to more valuable and productive management teams – and eventually more effective companies.
by Adam Hartung | Feb 28, 2007 | Uncategorized
On March 30, 2007 Kraft is planning to complete its spin-off from Altria (see full article here.) This long-anticipated transaction will allow Kraft to independently decide how to manage its product portfolio, and how to earn above average returns and grow. Should investors anticipate a change in management behavior leading to much better performance when Kraft becomes independent? Should we jump into this opportunity to buy shares before management creates abundant new value?
To expect Kraft to suddenly become more valuable would be like expecting your 1978 Plymouth Horizon to be declared a collectible and suddenly become worth a lot more money. Not likely.
For Kraft to be worth more the company needs to launch new products. It needs to move beyond Velveeta, Philadelphia Cream Cheese and DiGiorno pizza (its last major new product launch) to strike a chord with new customers in new market segments. And to do that the company needs to demonstrate it can manage White Space projects that will reach these new opportunities and redesign the outdated and firmly Locked-in Success Formula. Unfortunately, no such projects appear to be in the pipeline – at least none that anybody has reported. Instead, over the last few years Kraft has been selling businesses (such as Altoids) because it wanted to focus exclusively on large but slow growing market segments. The previous CEO even said he felt investing more in Velveeta advertising gave the company its greatest rate of return. Really.
Kraft can turn around. It wasn’t a decade ago that Kellogg’s was Locked-in to old business methods that had almost half of all volume given away in free offers. But a new CEO Disrupted Kellogg by changing the metrics for measuring performance and closing outdated manufacturing plants. He created White Space projects by opening a new R&D center and buying a new company (Keebler) just to get a new distribution system (store-door delivery rather than warehouse delivery) which he allowed to operate independently inside Kellogg. In just 2 years Kellogg went from big problems to big wins, and the company value jumped dramatically as the other parts of Kellogg migrated to a new Success Formula.
Kraft can’t save its way to prosperity. Its returns are dependent upon finding new markets. Until you see reports of Internal Disruptions by the new leadership – actual claims of needing to stop what they are doing and rethink – don’t expect any significant change. Until you see examples of White Space projects, don’t expect much improvement in results, or any improvement in growth —- or much increase in equity value.
