by Adam Hartung | Oct 27, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Web/Tech
Summary:
- We like to think of "mature" businesses as good
- AT&T was a "mature" business, yet it failed
- "Maturity" leads to inward focus, and an unwillingness to adjust to market shifts
- Microsoft is trying to reposition itself as a "mature" company
- Despite its historical strengths, Microsoft has astonishing parallels to AT&T
- Growth is less risky than "maturity" for investors, employees and customers
Why doesn't your business grow like Apple or Google? Is it because you think of your business, or the marketplace you serve, as "mature?" Quite a euphanism, maturity. It sounds so good. How could being "mature" be bad? As children we strive to be "mature." The leader is usually the most "mature" person in the group. Those who like good art have "mature" taste. Surely, we should want to be "mature." And we should want our businesses to reach "maturity" and have "mature" leaders who don't take unnecessary risks. Once "mature" the business should be safe for investors, employees, suppliers and customers.
That was probably what the folks at AT&T thought. When judge Greene broke up AT&T in 1984 the company had a near monopoly on long-distance. AT&T was a "mature" company in a "mature" telephone industry. It appeared as though all AT&T had to do was keep serving its customers, making regular improvements to its offering, to perpetually maintain its revenue, jobs and profitability. A very "mature" company, AT&T's "mature" management knew everything there was to know about long distance – about everything related to communications. And due to its previous ownership of Bell Labs and Western Union, it had deep knowledge about emerging technologies and manufacturing costs allowing AT*T to make "mature" decisions about investing in future markets and products. This "mature" company would be able to pay out dividends forever! It seemed ridiculous to think that AT&T would go anywhere but up!
Unfortunately, things didn't work out so well. The "mature" AT&T saw its market share attacked by upstarts MCI and Sprint. As a few "early adopters" switched services – largely residential and other very small customers – AT&T was unworried. It still had most of the market and fat profits. As these relatively insignificant small users switched, AT&T reinforced its world's largest billing system as an incomparable strength, and reminded everyone that its "enterprise" (corporate) offerings were still #1 (anybody remember AT&T long distance cards issued by your employer for use at pay phones?).
But unfortunately, what looked like an unassailable market position in 1984 was eventually diminished dramatically as not only homeowners but corporations started shifting to new offerings from competitors. New pricing plans, "bundled" products and ease of use encouraged people to try a new provider. And that AT&T had become hard to work with, full of rules and procedures that were impossible for the customer to comprehend, further encouraged people to try an alternative. Customers simply got fed up with rigid service, outdated products and high prices.
Unexpectedly, for AT&T, new markets started to grow much faster and become more profitable than long distance voice. Data services started using a lot more capacity, and even residential customers started wanting to log onto the internet. Even though AT&T had been the leader (and onetime monopolist – did you know broadcast television was distributed over an AT&T network?) with these services, this "mature" company continued to focus on its traditional voice business – and was woefully late to offer commercial or residential customers new products. Not only were dial-up offerings delayed, but higher speed ISDN and DSL services went almost entirely to competitors.
And, much to the chagrin of AT&T leaders, customers started using their mobile phones a lot more. Initially viewed as expensive toys, AT&T did not believe that the infrastructure would be built quickly, nor be robust enough, to support a large base of cellular phone users. Further, AT&T anticipated pricing would keep most people from using these new products. Not to mention the fact that these new phones simply weren't very good – as compared to land-line services according to the metrics used by AT&T. The connection quality was wildly inferior to traditional long distance, and frequently calls were completely dropped! So AT&T was slow to enter this market, half-hearted in its effort, and failed to make any profits.
Along the way a lot of other "non-core" business efforts failed. There was the acquisition of Paradyne, an early leader in modems, that did not evolve with fast changing technology. New products made Paradyne's early products obsolete and the division disappeared. And the acquisition of computer maker NCR failed horribly after AT&T attempted to "improve" management and "synergize" it with the AT&T customer base and offerings.
AT&T had piles and piles of cash from its early monopoly. But most of that money was spent trying to defend the long distance business. That didn't work. Then there was money lost by wheelbarrow loads trying to enter the data and mobile businesses too late, and with little new to offer. And of course the money spent on acquisitions that AT&T really didn't know how to manage was all down the proverbial drain.
Despite its early monopoly, high cash flow, technology understanding, access to almost every customer and piles of cash, AT&T failed. Today the company named AT&T is a renamed original regional Bell operatiing company (RBOC) created in the 1984 break-up — Southwestern Bell. This classically "mature" company, a stock originally considered "safe" for investing in the "widow's and orphan's fund" used up its money and became obsolete. "Mature" was a misnomer used to allow AT&T to hide within itself; to focus on its past, instead of its future. By being satisfied with saying it was "mature" and competing in "mature" markets, AT&T allowed itself to ignore important market shifts. In just 25 years the company that ushered in mass communications, that had an incredibly important history, disappeared.
I was struck today when a Reuters story appeared with the headline "Sleepy in Seattle: Microsoft Learns to Mature." There's that magic word – "mature." While the article lays out concerns with Microsoft, there were still analysts quoted as saying that investors didn't need to worry about Microsoft's future. Investors simply need to change their thinking. Instead of a "growth" company, they should start thinking of Microsoft as a "mature" company. It sounds so reassuring. After all:
- Microsoft has a near monopoly in its historical business
- Microsoft has a huge R&D budget, and is familiar with all the technologies
- Microsoft has piles and piles of cash
- Microsoft has huge margins in its traditional business – in fact profits in operating systems and office automation exceed 100% of the total because it loses billions of dollars in other things like Bing, MSN and its incredibly expensive foray into gaming systems (xBox)
- Markets won't shift any time soon – say to this new "cloud computing" – and Microsoft will surely have products when they are needed if there is a market shift
- While home users may buy these new smartphones, tablets and some Macs, enterprise customers will keep using the technology they've long purchased
- Microsoft is smart to move slowly into new markets, it shouldn't cannibalize its existing business by encouraging customers to change platforms. Going slow and being late is a good thing for profits
- Although Microsoft has been late to smartphones and tablets, with all their money and size surely when they do get to market they will beat these upstarts Apple and Google, et. al.
Sure made me think about AT&T. And the fact that Apple is now worth more than Microsoft. Made me wonder just how comfortable investors should be with a "mature" Microsoft. Made me wonder how much investors, employees and customers should trust a "mature" CEO Ballmer.
Looking at the last 10 years, it seems like there's a lot more risk in "mature" companies than in "growth" ones. We can be almost certain that Apple and Google, which have produced huge returns for investors, will grow for the next 3 years, improving cash flow and profitability just by remaining in existing new markets. But of course both have ample new products pioneering yet more new markets. And companies like NetApp look pretty safe, building a fast-growing base of customers who are already switching to cloud computing – and producing healthy cash flow in the emerging marketplace.
Meanwhile, the track record for "mature" companies would leave something to be desired. One could compare Amazon to Circuit City or Sears. Or just list some names: AT&T, General Motors, Chrysler, Xerox, Kodak, AIG, Citibank, Dell, EDS, Sun Microsystems. Of course each of these is unique, with its own story. Yet….
by Adam Hartung | Oct 13, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in
Summary:
- Many large, and leading, companies have not created much shareholder value the last decade
- A surprising number of very large companies have gone bankrupt (GM) or failed (Circuit City)
- Wal-Mart is a company that has generated no shareholder value
- The Wal-Mart disease is focusing on executing the business's long-standing success formula better, faster and cheaper — even though it's not creating any value
- Size alone does not create value, you have to increase the rate of return
- Companies that have increased value, like Apple, have moved beyond execution to creating new success formulas
Have you noticed how many of America's leading companies have done nothing for shareholders lately? Or for that matter, a lot longer than just lately. Of course General Motors wiped out its shareholders. As did Chrysler and Circuit City. The DJIA and S&P both struggle to return to levels of the past decade, as many of the largest companies seem unable to generate investor value.
Take for example Wal-Mart. As this chart from InvestorGuide.com clearly shows, after generating very nice returns practically from inception through the 1990s, investors have gotten nothing for holding Wal-Mart shares since 2000.
Far too many CEOs today suffer from what I call "the Wal-Mart Disease." It's an obsession with sticking to the core business, and doing everything possible to defend & extend it — even when rates of return are unacceptable and there is a constant struggle to improve valuation.
Fortune magazine's recent puff article about Mike Duke, "Meet the CEO of the Biggest Company on Earth" gives clear insight to the symptoms of this disease. Throughout the article, Mr. Duke demonstrates a penchant for obsessing about the smallest details related to the nearly 4 decade old Wal-Mart success formula. While going bananas over the price of bananas, he involves himself intimately in the underwear inventory, and goes cuckoo over Cocoa Puffs displays. No detail is too small for the attention of the CEO trying to make sure he runs the tightest ship in retailing. With frequent references to what Wal-Mart does best, from the top down Wal-Mart is focused on execution. Doing more of what it's always done – hopefully a little better, faster and cheaper.
But long forgotten is that all this attention to detail isn't moving the needle for investors. For all its size, and cheap products, the only people benefiting from Wal-Mart are consumers who save a few cents on everything from jeans to jewelry.
The Wal-Mart Disease is becoming so obsessive about execution, so focused on doing more of the same, that you forget your prime objective is to grow the investment. Not just execute. Not just expand with more of the same by constantly trying to enter new markets – such as Europe or China or Brazil. You have to improve the rate of return. The Disease keeps management so focused on trying to work harder, to somehow squeeze more out of the old success formula, to find new places to implement the old success formula, that they ignore environmental changes which make it impossible, despite size, for the company to ever again grow both revenues and rates of return.
Today competitors are chipping away at Wal-Mart on multiple fronts. Some retailers offer the same merchandise but in a better environment, such as Target. Some offer a greater selection of targeted goods, at a wider price range, such as Kohl's or Penney's. Some offer better quality goods as well as selection, such as Trader Joe's or Whole Foods. And some offer an entirely different way to shop, such as Amazon.com. These competitors are all growing, and earning more, and in several cases doing more for their investors because they are creating new markets, with new ways to compete, that have both growth and better returns.
It's not enough for Wal-Mart to just be cheap. That was a keen idea 40 years ago, and it served the company well for 20+ years. But competitors constantly work to change the marketplace. And as they learn how to copy what Wal-Mart did, they can get to 90%+ of the Wal-Mart goal. Then, they start offering other, distinctive advantages. In doing so, they make it harder and harder for Wal-Mart to be successful by simply doing more of the same, only better, faster and cheaper.
Ten years ago if you'd predicted bankruptcy for GM or Chrysler or Circuit City you'd have been laughed at. Circuit City was a darling of the infamous best seller "Good To Great." Likewise laughter would have been the most likely outcome had you predicted the demise of Sun Microsystems – which was an internet leader worth over $200B at century's turn. So it's easy to scoff at the notion that Wal-Mart may never hit $500B revenue. Or it may do so, but at considerable cost that continues to hurt rates of return, keeping the share price mired – or even declining. And it would be impossible to think that Wal-Mart could ever fail, like Woolworth's did. Or that it even might see itself shredded by competitors into an also-ran position, like once powerful, DJIA member Sears.
The Disease is keeping Wal-Mart from doing what it must do if it really wants to succeed. It has to change. Wal-Mart leadership has to realize that what made Wal-Mart once great isn't going to make it great in 2020. Instead of obsessing about execution, Wal-Mart has to become a lot better at competing in new markets. And that means competing in new ways. Mostly, fundamentally different ways. If it can't do that, Wal-Mart's value will keep moving sideways until something unexpected happens – maybe it's related to employee costs, or changes in import laws, or successful lawsuits, or continued growth in internet retailing that sucks away more volume year after year – and the success formula collapses. Like at GM.
Comparatively, if Apple had remained the Mac company it would have failed. If Google were just a search engine company it would be called Alta Vista, or AskJeeves. If Google were just an ad placement company it would be Yahoo! If Nike had remained obsessed with being the world's best athletic shoe company it would be Adidas, or Converse.
Businesses exist to create shareholder value – and today more than ever that means getting into markets with profitable growth. Not merely obsessing about defending & extending what once made you great. The Wal-Mart Disease can become painfully fatal.
by Adam Hartung | Jun 29, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in, Science
I weighed in late on the Gulf Coast disaster – and my impressions of British Petroleum. I wanted to be thoughtful, as the ramifications of this will be with us for decades. Compared to the hurricane that wrecked New Orleans this situation is far worse. Many more businesses are being shut down, the ecological disaster is far worse, and the clean-up will take much longer – even though New Orleans is far from a full recovery from hurricane Katrina. And there was lots (lots) of finger-pointing going around. It is going to take a lot of money and energy to deal with this mess – and lots of blame-laying (lawsuits) are inevitable
But I'm always the guy looking forward, and that's why my Forbes article, "BP's Only Hope for Its Future," focused on what BP needs to do now to recapture the more than $100B of lost value its investors have suffered – not to mention out-of-pocket cash costs still rolling up.
There is a raging debate about what investors can expect, as typified by the SeekingAlpha.com article "Where is BP Headed: $70 or $0?" Unfortunately, most of these articles focus on 2 factors: (a) what are the estimates of cash out to fix the mess and legal battles compared to historical cash inflows from revenues, and (b) contrarians typically think no situation is ever as bad as it initially looks so surely BP is worth more than it's currently depressed value.
Addressing the latter first, I'd recommend investors look at GM, Chrysler, Lehman Brothers and Circuit City. Things definitely can get worse. Problems created across years of sticking to an outdated Success Formula, remaining Locked-in to following historical best practices, wiped out their investors. Things can definitely get worse for BP. It will not be acceptable for the company to remain focused on "business as usual" hoping to "weather the storm" and allow "things to get back to normal." That scenario is a death sentence. We haven't yet seen what new regulations, taxes and restrictions – nor the eventual cost of 20 years of dead seas charged to BP and its industry brethren – will cost. BP has to make changes if it wants to regain growth – and most likely if it wants to survive.
And this leads to item (a). Nobody knows the long-term costs chargeable to BP. Nor do we know what the future cash inflows will look like. We don't know the brand impact. Nor do we know how changes in regulations or industry practices will hurt cash flowing in the door. It's the inability of the past to predict the future that makes efforts at cash flow planning mute. Lots of number crunching isn't the answer – it's understanding that the assumptions could well be seriously changing. There are more unknown variables than known right now. Which makes it all the more important BP realize it must change it's Success Formula to make sure it not only avoids another disaster, but finds a way to profitably grow in the aftermath of this event and its changes on the industry.
Many are calling for firing the CEO, as 24×7 Wall Street does in "BP Can Deny CEO Departure Story; But Fate Already Set." I call this the hero and goat syndrome. Americans like to think that the CEO should be lionized as a hero when results are good, and blamed as a goat when results are bad. Unfortunately companies rely on lots more than CEOs (despite their pay) for results. The problems at BP are with the Success Formula – now some 100 years old – and the inability of the total management team to attack old Lock-ins in order to develop something new. As my last blog pointed out, even HBR doubted there was any reality in the "Beyond Petroleum" headline.
BP must attack its historical ways of doing business. This isn't just a short-term crisis. The Gulf disaster is the result of pushing an old Success Formula too far. Of going into deeper and deeper water, at greater and greater risk, for less and less yield in order to keep finding oil. Unfortunately BP seems to be viewing this not as an example of what happens when marginal economics keeps you doing the same thing, over and over, even as returns decline. Too bad, because this is the kind of event that highlights a serious change is needed in BP's future direction.
I was impressed with a Harvard Business School Working Knowledge survey result in "How Do You Weigh Strategy, Execution and Culture in An Organization's Success?" Respondents overwhelming voted that success requires managing "culture." And that is largely what BP now needs to do. The Beyond Petroleum strategy was clearly enunciated, but execution remained focused on the old direction because the culture did not change. And that's what attacking Lock-ins and implementing White Space is designed to do – move an organization's culture forward by addressing behaviors, decision-making structures and old cost models.
When I was a boy I'd see a tree show foliage problems and my father would say "we might as well cut it down, that tree is dead." I'd be shocked, the tree looked fine. But my father, a farmer, knew that the roots had been damaged. We were just seeing the slow process of death, that might take a year or two. Fortunately, BP isn't a tree. And although its Success Formula roots are in trouble, unlike a tree they can be changed. Let's hope the Board takes action to make changes quickly so BP's future doesn't remain completely imperiled.
For more on using Disruptions to address problems listen to my radio Interview "Disrupt to Win." Or listen to a short podcast on how to "Drive Innovation by Disrupting the Status Quo." Or read my CIOMagazine column on how to "Use Disruptions to Move Beyond Legacy" in thinking and planning.
by Adam Hartung | Mar 3, 2010 | General, In the Rapids, Leadership, Openness, Web/Tech, Weblogs
Guy Kawasaki contacted me a couple of weeks ago, asking me to write a short piece for him. I was happy to do so, and he published it at the BusinessInsider.com War Room as "10 Ways to Stay Ahead of the Competition." Fortunately for me, the article was also picked up at IBMOpenForum.com with the alternate title "How to Stay Ahead of the Competition." Full explanations of each bullet are at both locations (although the graphics are outstanding at Business Insider so I prefer it.)
- Develop future scenarios
- Obsess about competitors
- Study fringe competitors
- Attack your Lock-ins
- Seek Disruptions
- Don't ask customers for insight
- Avoid Cost Cutting
- Do lots of testing
- Acquire outside input
- Target competitors
Blog followers know that this program has now worked for many companies who want to grow in this recession. The reason it works is because
- You focus on the market, not yourself
- You avoid Lock-in blindness by avoiding an over-focus on existing products, services and customers
- You use outside input, from advisers and competitors to identify market shifts that can really hurt you
- You put a competitive edge into everything you do. Competitors kill your returns, not yourself.
- You use market feedback rather than internal analysis guide resource allocation
Of course this works. How can it not? When you are obsessed about markets and competitors and you let it direct your flow of money and talent you'll constantly be positioned to do what the market values. You'll have your eyes on the horizon, and not the rear view mirror.
The biggest objection is always my comment about "don't ask customers for insight." So many people have been indoctrinated into "always ask the customer" and "the customer is always right" that they can't imagine not asking customers what you ought to do. Even though the evidence is overwhelming that customer feedback is usually wrong, and more likely destructive than beneficial.
Just remember, IBMs best customers (data center managers) told them the PC was a stupid product, and IBM dropped the product line 6 years after inventing the PC business. DEC's customers kept asking for more bells and whistles on their CAD/CAM systems, then dropped DEC altogether for AutoCad ending the company. GM customers kept asking for bigger, faster more comfortable cars – improvements on previous models – then moved to imports with different designs, better gas mileage and better fit/finish. Circuit City customers asked for more in-store assistance, then took the assistance across the street to buy from cheaper Best Buy stores. The stories are legend of failed companies who delivered what the customer wanted, and ended up out of business.
Enjoy the links, and thanks to Guy for publishing this short piece. Follow these 10 steps and any business can stay ahead of the competition.
by Adam Hartung | Jan 25, 2010 | Current Affairs, Leadership, Lifecycle
We all love awards and lists. Who doesn't like being rewarded for their accomplishments. At the same time, we have acquired a strong taste for lists "The best…" Another verification of success. But both can be harbingers of potential problems – and even destruction.
Ben Bernanke became Time magazine's "Man of the Year" and now he's at some risk of losing his job (see 24/7WallStreet.com "In Not Bernanke, Who?" Think about the list of Great Companies that appear in books, like Good to Great, only to end up in big trouble – like Circuit City and Fannie Mae. Why does it seem those who top awards and lists end up shortly struggling?
Too often businesses, and business people, "win" by doing more of the same. They work hard to optimize their Success Formula. They get really committed to practicing what they do (remember Outliers by Malcolm Glaldwell and his recommendation to practice, practice, practice?) They get better and better. And in fields like sports and music, where the rules are well understood and the approach is clear, this often works. And as long as they keep practicing top athletes and musicians often remain near the top of competitors.
But we have to recognize that most of the time those "at the top" in business have emerged within a given market. Then they are knocked off by a shift. Like Ed Zander of Motorola being named #1 CEO in 2004, only to be fired within 2 years as RAZR sales toppled. Like Sun Microsystems perfecting Unix servers for an emerging client/server technology market that became saturated and shifted to PC servers. Like Michael Dell (and Dell Corporation) which emerged when lower cost made supply chain efficiencies critical for PCs, before the PC market became saturated and iPhones plus Blackberries started dominating the landscape. Or WalMart which also used a new supply chain to grow the emerging discount retailing sector, only now it is laying off 10,000 employees as it shuts Sam's stores across the country. These companies created a Success Formula and honed it quarter after quarter to maximize performance in a high growth environment. But the market shifted.
In business the rules are not "set". There is no written music to
perform. Instead, the market is highly dynamic. New competitors
emerge, new ways of competing emerge, new technologies emerge and new
solutions emerge. The market keeps changing. Suddenly, what worked last year isn't successful any more. When the market shifts, the previous winner becomes the new goat. That optimized business starts to look like the world's best wrestler, only to be obsolete when a flood occurs making swimming the new, necessary skill. Being last year's best is impossible to repeat because the market shift makes the old approach less valuable – possibly obsolete.
"Best practices" are usually little more than copying last year's list topper. In the 1990s everyone wanted to copy product development practices at Sun, and supply chain practices at Dell. But both led to horrible returns when demand for servers and PCs diminished. Best practices are almost guaranteed to be a solution developed to late, and applied even later, to solve previous years' problems. They aren't forward looking, and not designed to meet the needs 2 years into the future.
Business success isn't about topping a list. And, to a great degree, the Outlier approach (as is a hedgehog concept) is very risky. If you spend 10,000 hours doing something, only to see the value for that something go away, what good was it? Remember when Cobol writers were in demand? Being the world's best at something in business can cause you to be optimized on the past and inflexible to market change.
Business success requires adaptability. And that requires a focus on future markets. It requires the ability to constantly Disrupt your approach, to build capability in many different areas and markets. It requires skill at establishing and operating White Space projects to learn about new markets and shifts – the ability to know how to test and then understand the results of those tests. In business adaptability trumps optimization, because you can be sure that things will change – markets will shift – and the highly optimized find themselves behind the shift and struggling.
