by Adam Hartung | Jul 10, 2013 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Television
Tribune Corporation finally emerged from a 4 year bankruptcy on the last day of 2012. Before the ink hardly dried on the documents, leadership has decided to triple company debt to double up the number of TV stations. Oh my, some people just never learn.
The media industry is now over a decade into a significant shift. Since the 1990s internet access has changed expectations for how fast, easily and flexibly we acquire entertainment and news. The result has been a dramatic decline in printed magazine and newspaper reading, while on-line reading has skyrocketed. Simultaneously, we're now seeing that on-line streaming is making a change in how people acquire what they listen to (formerly radio based) and watch (formerly television-based.)
Unfortunately, Tribune – like most media industry companies – consistently missed these shifts and underestimated both the speed of the shift and its impact. And leadership still seems unable to understand future scenarios that will be far different from today.
In 2000 newspaper people thought they had "moats" around their markets. The big newspaper in most towns controlled the market for classified ads for things like job postings and used car sales. Classified ads represented about a third of newspaper revenues, and 40% of profits. Simultaneously display advertising for newspapers was considered a cash cow. Every theatre would advertise their movies, every car dealer their cars and every realtor their home listings. Tribune leadership felt like this was "untouchable" profitability for the LA Times and Chicago Tribune that had no competition and unending revenue growth.
So in 2000 Tribune spent $8B to buy Times-Mirror, owner of the Los
Angeles Times. Unfortunately, this huge investment (75% over market
price at the time, by the way) was made just as people were preparing to
shift away from newspapers. Craigslist, eBay and other user sites killed the market for classified ads. Simultaneously movie companies, auto companies and realtors all realized they could reach more people, with more information, cheaper on-line than by paying for newspaper ads.
These web sites all existed before the acquisition, but Tribune leadership ignored the trend. As one company executive said to me "CraigsList!! You think that's competition for a newspaper? Craigslist is for hookers! Nobody would ever put a job listing on Craigslist." Like his compadres running newspapers nationwide, the new competitors and trends toward on-line were dismissed with simplistic statements and broad generalizations that things would never change.
The floor fell out from under advertising revenues in newspapers in the 2000s. There was no way Times-Mirror would ever be worth a fraction of what Tribune paid. Debt used to help pay for the acquisition limited the options for Tribune as cost cutting gutted the organization.
Then, in 2007 Sam Zell bailed out management by putting together a leveraged buyout to acquire Tribune company. Saying that he read 3 newspapers every day, he believed people would never stop reading newspapers. Like a lot of leaders, Mr. Zell had more money than understanding of trends and shifting markets. He added a few billion dollars more debt to Tribune. By the end of 2008 Tribune was unable to meet its debt obligations, and filed for bankruptcy.
Now, new leadership has control of Tribune. They are splitting the company in two, seperating the print and broadcast businesses. The hope is to sell the newspapers, for which they believe there are 40 potential buyers. Even though profits continued falling, from $156M to $89M, in just the last year. Why anyone would buy newspaper companies, which are clearly buggy whip manufacturers, is wholly unclear. But hope springs eternal!
The new stand-alone Tribune Broadcasting company has decided to go all-in on a deal to borrow $2.7B and buy 19 additional local television stations raising total under their control to 42.
Let's see, what's the market trend in entertainment and news? Where once we were limited to local radio and television stations for most content, now we can acquire almost anything we want – from music to TV, movies, documentaries or news – via the internet. Rather than being subjected to what some programming executive decides to give us, we can select what we want, when we want it, and simply stream it to our laptop, tablet, smartphone, or even our large-screen TV.
A long time ago content was controlled by distribution. There was no reason to create news stories or radio programs or video unless you had access to distribution. Obviously, that made distribution – owning newspapers, radio and TV stations – valuable.
But today distribution is free, and everywhere. Almost every American has access to all the news and entertainment they want from the internet. Either free, or for bite-size prices that aren't too high. Today the value is in the content, not distribution.
In the last 2 years the number of homes without a classical TV connection (the cable) has doubled. Sure, it's only 5% of homes now. But the trend is pretty clear. Even homes that have cable are increasingly not watching it as they turn to more and more streaming video. Instead of watching a 30 minute program once per week, people are starting to watch 8 or 10 half hour episodes back to back. And when they want to watch those episodes, where they want to watch them.
While it might be easy for Tribune to ignore Hulu, Netflix and Amazon, the trend is very clear. The need for broadcast stations like NBC or WGN or Food Network to create content is declining as we access content more directly, from more sources. And the need to have content delivered to our home by a local affiliate station is becoming, well, an anachronism.
Yet, Tribune's new TV-oriented leadership is doubling down on its bet for local TV's future. Ignoring all the trends, they are borrowing more money to buy more assets that show all signs of becoming about as valuable whaling ships. It's a big, dumb bet. Similar to overpaying for Times-Mirror. Some leaders just seem destined to never learn.
by Adam Hartung | Apr 11, 2013 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
The good folks at Wichita State (a final four contender as U.S. basketball fans know) and Purdue released their 2013 Airline Quality Rating. United Airlines came in dead last. To which United responded that they simply did not care. Oh my.
Interestingly, this study is based wholly on statistical performance, rather than customer input. The academics utilize on-time flight performance, denied passenger boardings, mishandled bags and complaints filed with the Department of Transportation. It does not even begin to explore surveying customers about their satisfaction. Anyone who flies regularly can well imagine those results. Oh my.
So how would you expect an innovative, adaptive growth-oriented company (think like Amazon, Apple, Samsung, Virgin, Neimann-Marcus, Lulu Lemon) to react to declining customer performance metrics? They might actually change the product, to make it more desirable by customers. They might hire more customer service representatives to identify customer issues and fix problems quicker. They might adjust their processes to achieve higher customer satisfaction. They might train their employees to be more customer-oriented.
But, United decidedly is not an innovative, adaptive organization. So it responded by denying the situation. Claiming things are getting better. And talking about how it is spending more money on its long-term strategy.
United doesn't care about customers – and really never has. United is focused on "operational excellence" (using the word excellence very loosely) as Messrs. Treacy and Wiersema called this strategy in their mega-popular book "The Discipline of Market Leaders" from 1995. United's strategy, like many, many businesses, is to constantly strive for better execution of an old strategy (in their case, hub-and-spoke flight operations) by hammering away at cutting costs.
Locked in to this strategy, United invests in more airplanes and gates (including making acquisitions like Continental) believing that being bigger will lead to more cost cutting opportunities (code named "synergies".) They beat up on employees, fight with unions, remove anything unessential (like food) invent ways to create charges (like checked bags or change fees), fiddle with fuel costs, ignore customers and constantly try to engineer minute enhancements to operations in efforts to save pennies.
Like many companies, United is fixated on this strategy, even if it can't make any money. Even if this strategy once drove it to bankruptcy. Even if its employees are miserable. Even if quality metrics decline. Even if every year customers are less and less happy with the product. All of that be darned! United just keeps doing what it has always done, for over 3 decades, hoping that somehow – magically – results will improve.
Today people have choices. More choices than ever. That's true for transportation as well. As customers have become less happy, they simply won't pay as much to fly. The impact of all this operational focus, but let the customer be danged, management is price degradation to the point that United, like all the airlines, barely (or doesn't – like American) cover costs. And because of all the competition each airline constantly chases the other to the bottom of customer satisfaction – each lowering its price as it mimics the others with cost cuts.
In 1963 National Airlines ran ads asking "is this any way to run an airline?" Well, no.
Success today – everywhere, not just airlines – requires more than operational focus. Constantly cutting costs ruins the brand, customer satisfaction, eliminates investment in new products and inevitably kills profitability. The litany of failed airlines demonstrates just how ineffective this strategy has become. Because operational improvements are so easily matched by competitors, and ignores alternatives (like trains, buses and automobiles for airlines) it leads to price wars, lower profits and bankruptcy.
Nobody looks to airlines as a model of management. But many companies still believe operational excellence will lead to success. They need to look at the long-term implications of this strategy, and recognize that without innovation, new products and highly satisfied new customers no business will thrive – or even survive.
by Adam Hartung | Nov 18, 2012 | Current Affairs, Defend & Extend, Food and Drink, In the Whirlpool, Leadership
Hostess Brands filed for liquidation this week. Management blamed its workforce for the failure. That is straightforward scapegoating.
In 1978 Dan White killed San Francisco's mayor George Moscone and city supervisor Harvey Milk. The press labeled his defense the "Twinkie Defense" because he claimed eating sugary junk food – like Twinkies – caused diminished capacity. Amazingly the jury bought it, and convicted him of manslaughter instead of murder saying he really wasn't responsible for his own actions. An outraged city rioted.
Nobody is rioting, but management's claim that unions caused Hostess failure is just as outrageous.
Founded in 1930 as Interstate Bakeries Co. (IBC) the company did fine for years. But changing consumer tastes, including nutrition desires, changed how much Wonder Bread, Twinkies, HoHos and Honey Buns people would buy — and most especially affected the price – which was wholly unable to keep up with inflation. This trend was clear in the early 1980s, as prices were stagnant and margins kept declining due to higher costs for grain and petroleum to fuel the country's largest truck fleet delivering daily baked goods to grocers.
IBC kept focusing on operating improvements and better fleet optimization to control rising costs, but the company was unwilling to do anything about the product line. To keep funding lower margins the company added debt, piling on $450M by 2004 when forced to file bankruptcy due to its inability to pay bills. For 5 years financial engineers from consultancies and investment banks worked to find a way out of bankruptcy, and settled on adding even MORE debt, so that – perversely – in 2009 the renamed Hostess had $670M of debt – at least 2/3 the total asset value!
Since then, still trying to sell the same products, margins continued declining. Hostess lost a combined $250M over the last 3 years.
The obvious problem is leadership kept trying to sell the same products, using roughly the same business model, long, long, long after the products had become irrelevant. "Demand was never an issue" a company spokesman said. Yes, people bought Twinkies but NOT at a price which would cover costs (including debt service) and return a profit.
In a last, desperate effort to keep the outdated model alive management decided the answer was another bankruptcy filing, and to take draconian cuts to wages and benefits. This is tanatamount to management saying to those who sell wheat they expect to buy flour at 2/3 the market price – or to petroleum companies they expect to buy gasoline for $2.25/gallon. Labor, like other suppliers, has a "market rate." That management was unable to run a company which could pay the market rate for its labor is not the fault of the union.
By constantly trying to defend and extend its old business, leadership at Hostess killed the company. But not realizing changing trends in foods made their products irrelevant – if not obsolete – and not changing Hostess leaders allowed margins to disintegrate. Rather than developing new products which would be more marketable, priced for higher margin and provide growth that covered all costs Hostess leadership kept trying to financial engineer a solution to make their horse and buggy competitive with automobiles.
And when they failed, management decided to scapegoat someone else. Maybe eating too many Twinkies made the do it. It's a Wonder the Ding Dongs running the company kept this Honey Bun alive by convincing HoHos to loan it money! Blaming the unions is simply an inability of management to take responsibility for a complete failure to understand the marketplace, trends and the absolute requirement for new products.
We see this Twinkie Defense of businesses everywhere. Sears has 23 consecutive quarters of declining same-store sales – but leadership blames everyone but themselves for not recognizing the shifting retail market and adjusting effectively. McDonald's returns to declining sales – a situation they were in 9 years ago – as the long-term trend to healthier eating in more stylish locations progresses; but the blame is not on management for missing the trend while constantly working to defend and extend the old business with actions like taking a slice of cheese off the 99cent burger. Tribune completey misses the shift to on-line news as it tries to defend & extend its print business, but leadership, before and afater Mr. Zell invested, refuses to say they simply missed the trend and let competitors make Tribune obsolete and unable to cover costs.
Businesses can adapt to trends. It is possible to stop the never-ending chase for lower costs and better efficiency and instead invest in new products that meet emerging needs at higher margins. Like the famous turnarounds at IBM and Apple, it is possible for leadership to change the company.
But for too many leadership teams, it's a lot easier to blame it on the Twinkies. Unfortunately, when that happens everyone loses.
by Adam Hartung | Sep 18, 2012 | Current Affairs, Defend & Extend, Food and Drink, In the Rapids, In the Whirlpool, Innovation, Leadership, Lifecycle
Apple is launching the iPhone 5, and the market cap is hitting record highs. No wonder, what with pre-orders on the Apple site selling out in an hour, and over 2 million units being presold in the first 24 hours after announcement.
We care a lot about Apple, largely because the company has made us all so productive. Instead of chained to PCs with their weight and processor-centric architecture (not to mention problems crashing and corrupting files) while simultaneously carrying limited function cell phones, we all now feel easily interconnected 24×7 from lightweight, always-on smart devices. We feel more productive as we access our work colleagues, work tools, social media or favorite internet sites with ease. We are entertained by music, videos and games at our leisure. And we enjoy the benefits of rapid problem solving – everything from navigation to time management and enterprise demands – with easy to use apps utilizing cloud-based data.
In short, what was a tired, nearly bankrupt Macintosh company has become the leading marketer of innovation that makes our lives remarkably better. So we care – a lot – about the products Apple offers, how it sells them and how much they cost. We want to know how we can apply them to solve even more problems for ourselves, colleagues, customers and suppliers.
Amidst all this hoopla, as you figure out how fast you can buy an iPhone 5 and what to do with your older phone, you very likely forgot that Kraft will be splitting itself into 2 parts in about 2 weeks (October 1). And, most likely, you don't really care.
And you can't imagine why I would even compare Kraft with Apple.
Kraft was once an innovation leader. Velveeta, a much maligned product today, gave Americans a fast, easy solution to cheese sauces that were difficult to make. Instant Mac & Cheese was a meal-in-a-box for people on the run, and at a low budget. Cheeze Whiz offered a ready-to-eat spread for canape's. Individually wrapped American cheese slices solved the problem of sticky product for homemakers putting together lunch sandwiches for school children. Miracle Whip added spice to boring sandwiches. Philadelphia brand cream cheese was a tasty, less fattening alternative to butter while also a great product for sauces.
But, the world changed and these innovations have grown a lot less interesting. Frozen food replaced homemade sauces and boxed solutions. Simultaneously, cooking skills improved. Better options for appetizers emerged than stuffed celery or something on a cracker. School lunches changed, and sandwich alternatives flourished. Across Kraft's product lines, demand changed as new technologies were developed that better fit customers' needs leading to revenue stagnation, margin erosion and an increasing irrelevancy of Kraft in the marketplace – despite its enormous size.
Apple turned itself around by focusing on innovation, becoming the most valuable American publicly traded company. Kraft eschewed innovation for cost cutting, doing more of the same trying to defend its "core," leaving investors with virtually no returns. Meanwhile thousands of Kraft employees have lost their jobs, even though revenues per employee at Kraft are 1/6th those at Apple. And supplier margins are a never-ending cycle of forced reductions as Kraft tries to capture their margin for itself.
Chart Source: Yahoo Finance 18 September, 2012
Apple's value went up because it's revenues went up. In 2007 Apple had #24B in revenues, while Kraft was 150% bigger at $37B. Ending 2011 Apple's revenues, all from organic growth, were up 4x (400%) at $108B. But Kraft's 2011 revenues were only $54B, including roughly $10B of purchased revenues from its Cadbury acquisition, meaning comparative Kraft revenues were $44B; a growth of (ho-hum) 3.5%/year.
Lacking innovation Kraft could not grow the topline, and simply could not grow its value. And paying a premium price for someone else's revenues has led to…. splitting the company in 2 in only 2 years, mystifying everyone as to what sort of strategy the company ever had to grow!
But Kraft's new CEO is not deterred. In an Ad Age interview he promised to ramp up advertising while slashing more jobs to cut costs. As if somehow advertising Velveeta, Miracle Whip, Philadelphia and Mac & Cheese will reverse 30 years of market trends toward different products which better serve customer needs!
Apple spends nearly nothing on advertising. But it does spend on innovation. Innovation adds value. Advertising aging products that solve no new needs does not.
Unfortunately for employees, suppliers and shareholders we can expect Kraft to end up just like Hostess Brands, owner of Wonder Bread and Twinkies, which recently filed bankruptcy due to 40 years of sticking to its core business as the market shifted. Industry leaders know this, as they announced this week they are using Kraft's split to remove the company from the Dow Jones Industrial Average.
Companies that innovate change markets and reap the rewards. By delivering on trends they excite customers who flock to their solutions. Companies that focus on defending and extending their past, especially in times of market shifts, end up failing. Failure may not happen overnight, but it is inevitable.
by Adam Hartung | Dec 1, 2011 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Travel
Airline company AMR, owner of popular American Airlines, filed bankruptcy this week. To which most people responded “again?” The reaction was less about AMR, which is having a first-time filing, and more about airline bankruptcies overall. People are simply used to airlines failing.
Most people are so used to everything about airlines sucking that news a major filed bankruptcy simply wasn’t surprising. What they cared most about were two questions: “Is my ticket any good?” and “Do I get to keep my frequent flyer miles?”
Conceptually, business is not hard to understand. Create a product or service that people want. Make it appealing enough so people will pay enough to cover costs and make a profit, allowing you to re-invest in growth and repay your investors. Pretty simple.
But AMR, like most airlines, simply doesn’t understand this concept. Yes, people want to fly. But ever since deregulation, service has become worse and worse. Ask anyone what they think of American (or United or Delta or any “major” airline) and answers are the same. They hate them.
- Pricing is incomprehensible. You may pay $800 for a ticket, and the person beside you $200 and the reason is completely unclear.
- There is never enough room on the plane for all the carry-on luggage, but that is free while the airline charges for checking bags. What they don’t want (carry-ons) is free, what they want (check your bags) requires you pay?
- You are charged for a checked bag, but if the bag is late, damaged or items stolen you have no recourse to the airline
- When planes are late or cancelled, nobody cares how much customers are inconvenienced. Literally. You have no recourse to bad, or failed, service.
- Planes are cramped and dirty, often looking well worn – or worn out.
- Every year planes are becoming smaller and less comfortable.
- The food is gone – or wildly expensive. And that little botttle of rum costs as much as a fifth at home.
- Empllyees appear uncaring at best, or simply rude. It’s like there are way too many customers, and not enough of them, so “PLEASE stay back and do what we tell you to do!”
This list could go on forever (readers, feel free to comment on your favorite stupid policy or practice of any airline.) Why? Because the airline’s leaders have completely lost track of what business is all about. In the rush to cut prices, trying to sell that last empty seat on that midnight feeder flight to Omaha, the entire industry has driven out all the customer satisfaction, and profitability. Everyone has learned that it doesn’t matter how much you pay, the experience is going to suck. So the industry has taught customers to be price sensitive, above all else.
Shortly after deregulation Robert Crandall became AMR’s Chairman. He was a notorious cost cutter. The Wall Street Journal ran a front page article highlighting his efforts to build American, highlighting how on a flight Mr. Crandall noticed that few customers were eating the 3 black olives on their salad. He claimed to go back to company managers and tell them to remove the olives, thereby saving (ostensibly) $700,000/year. Nobody would notice, he claimed, and money was saved.
And that’s been the trajectory for American ever since. Cut this, cut that. Shave costs everywhere, including employee pay, benefits and pensions. And after 30 years, the sum total is that not only are the olives gone – the whole meal has disappeared! Where working at an airline was once considered a great job (pilot, flight attendant, gate agent or baggage handler, ) today compensation has been cut and complicated (remember tiered compensation that has 2 people doing the same job, but at different pay just because of hire date?) so that employees are largely overworked, under-appreciated and constantly being pushed by management one direction, while pulled by customers in another.
Where once we didn’t mind flying, maybe even enjoyed it,now everyone thinks of flying as the opportunity to learn what life is like as herded, and penned, livestock!
It has been a fallacy of “modern management” that leaders have a primary job to optimize the business – largely by limiting innovation and cutting costs. The famous business guru, Jim Collins (author of Good to Great,) actively advocates (IndustryWeek.com 11/29/2011) that businesses focus exactly on the kind of business optimization that has driven AMR to bankruptcy! His recommendations have inevitably lead businesses down a road of commoditization as they offer less and less to customers, and fall into vicious price wars. Ineveitably a market shift happens that undercuts their ability to compete at all!
Great companies do not fall into this trap. They constantly add customer value, utilizing new technology and business processes to improve performance. They grow revenues, rather than focus on cutting costs.
Think about how Google has made doing research easier, and placing internet advertisements. Or how Apple has improved personal music and mobile information access. Or how Whole Foods has delivered more organic and tasty products. Or how Amazon has made access to books, periodicals and much of retailing a better experience. These companies have seen their market capitalization explode as they eschewed optimization in favor of innovation to make things better – not just cheaper. Where AMR’s value went from $40/share to zero the last 5 years, you would have had big gains in these companies that focused on innovation and delivering better customer results.
Chart Source Yahoo 1 December, 2011
AMR’s leaders, and airline industry analysts, can try to put perfume on this bankruptcy pig by saying it is a “strategic action” taken to re-align costs (CuriousCapitalist.com.) That’s code for union-busting, in yet one more effort to ignore the real problem of no innovation. Rather than actually improve the airline this is more of the same old strategy – cut more olives (cost,) chasing the spiral yet further down toward even worse performance.
It’s time to be honest. AMR’s bankruptcy is a failure. Leadership’s inability to address customer needs well enough to price at a profit. Gimmicks like loyalty programs, bag charges, reservation fees, change fees, seat location fees and drink charges merely obscure the fact that the leaders cannot profitably run an airline! Their service is so poor that they cannot charge enough to cover costs. Continuing to cut costs, further hindering service, is NOT the answer in a service industry!
It certainly is prossble to make money in service industries. Most do. It is even possible to make money as an airline – just look at Southwest (which has made more profit than all its [much larager] competitors combined.) And the first step is for AMR to recognize that its strategy for 30 years is wrong! The company needs to end the cost-price spiral and introduce some innovation! Change the game AMR, or you’ll forever remain a crappy company for investors, customers and employees.
