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 | Apr 4, 2013 | Disruptions, In the Rapids, Innovation, Leadership, Web/Tech
The iPad is now 3 years old. Hard to believe we've only had tablets such a short time, given how common they have become. It's easy to forget that when launched almost all analysts thought the iPad was a toy that would be lucky to sell a few million units. Apple blew away that prediction in just a few months, as people demonstrated their lust for mobility. To date the iPad has sold 121million units – with an ongoing sales rate of nearly 20million per quarter.
Following very successful launches of the iPod (which transformed music from CDs to MP3) and iPhone (which turned everyone into smartphone users,) the iPad's transformation of personal technology made Apple look like an impenetrable juggernaut – practically untouchable by any competitor! The stock soared from $200/share to over $700/share, and Apple became the most valuable publicly traded company on any American exchange!
But things look very different now. Despite huge ongoing sales (iPad sales exceed Windows sales,) and a phenomenal $30B cash hoard ($100B if you include receivables) Apple's value has declined by 40%!
In the tech world, people tend to think competition is all about the product. Feature and functionality comparisons abound. And by that metric, no one has impacted Apple. After 3 years in development, Microsoft's much anticipated Surface has been a bust – selling only about 1.5million units in the first 6 months. Nobody has created a product capable of outright dethroning the i product series. Quite simply, there have been no "game changer" products that dramatically outperform Apple's.
But, any professor of introductory marketing will tell you that there are 4 P's in marketing: Product, Price, Place and Promotion. And understanding that simple lesson was the basis for the successful onslaught Samsung has waged upon Apple in 2012 and 2013.
Samsung did not change the game with technology or product. It has used the same Android starting point as most competitors for phones and tablets. It's products are comparable to Apple's – but not dramatically superior. And while they are cheaper, in most instances that has not been the reason people switched. Instead, Samsung changed the game by focusing on distribution and advertising!
Chart courtesy Jay Yarrow, Business Insider 4/2/13 and Horace Dediu, Asymco
The remarkable insight from this chart is that Samsung is spending almost 4.5 times Apple – and $1B more than perennial consumer goods brand leader Coca-Cola on advertising! Simultaneously, Samsung has set up kiosks and stores in malls and retail locations all over America.
Can you imagine having the following conversation in your company in 2010?:
"As Vice President of Marketing I propose we take on the market leader not by having a superior product. We will change the game from features and function comparisons to availability and awareness. I intend to spend more than anyone in our industry on advertising – even more than Coke. And I will open so many information and sales locations that our products will be as available as Coke. We'll be everywhere. Our products may not be better, but they will be everywhere and everyone will know about them."
Samsung found Apple's Achilles heel. As Apple's revenues rose it did not keep its marketing growing. SG&A (Selling, General and Administrative) expense declined from 14% of revenues in 2006 to 5% in 2012; of course aiding its skyrocketing profits. And Apple continued to sell through its fairly limited distribution of Apple stores and network providers. Apple started to "milk" its hard won brand position, rather than intensify it.
Samsung took advantage of Apple's oversight. Samsung maintained its SG&A budget at 15% of revenues – even growing it to 24% for a brief time in 2009, before returning to 15%. As its revenues grew, advertising and distribution grew. Instead of looking back at its old ad budget in dollars, and maintaining that budget, Samsung allowed the budget to grow (to a huge number!) along with revenues.
And that's how Samsung changed the game on Apple. Once America's untouchable brand, the Apple brand has faltered. People now question Apple's sustainability. Some now recognize Apple is vulnerable, and think its best times are behind it. And it's all because Samsung ignored the industry lock-in to constantly focusing on product, and instead changed the game on Apple.
Something Microsoft should have thought about – but didn't.
Of course, Apple's profits are far, far higher than Samsung's. And Apple is still a great company, and a well regarded brand, with tremendous sales. There are ongoing rumors of a new iOS 7 operating system, an updated format for iPads, potentially a dramatically new iPhone and even an iTV. And Apple is not without great engineers, and a HUGE war chest which it could use on advertising and distribution to go heads up with Samsung.
But, at least for now, Samsung has demonstrated how a competitor can change the game on a market leader. Even a leader as successful and powerful as Apple. And Samsung's leaders deserve a lot of credit for seeing the opportunity – and seizing it!
by Adam Hartung | Mar 29, 2012 | Current Affairs, Disruptions, Innovation, Leadership, Lock-in, Openness, Transparency
No businessperson thinks the way to solve a business problem is via the courts. And no issue is larger for American business than health care. Despite all the hoopla over the Supreme Court reviews this week, this is a lousy way for America to address an extremely critical area.
The growth of America's economy, and its global competitiveness, has a lot riding on health care costs. Looking at the table, below, it is clear that the U.S. is doing a lousy job at managing what is the fastest growing cost in business (data summarized from 24/7 Wall Street.)
While America is spending about $8,000 per person, the next 9 countries (in per person cost) all are grouped in roughly the $4,000-$5,000 cost — so America is 67-100% more costly than competitors. This affects everything America sells – from tractors to software services – forcing higher prices, or lower margins. And lower margins means less resources for investing in growth!
American health care is limiting the countries overall economic growth capability by consuming dramatically more resources than our competitors. Where American spends 17.4% of GDP (gross domestic product) on health care, our competitors are generally spending only 11-12% of their resources. This means America is "taxing" itself an extra 50% for the same services as our competitive countries. And without demonstrably superior results. That is money which Americans would gain more benefit if spent on infrastructure, R&D, new product development or even global selling!
Americans seem to be fixated on the past. How they used to obtain health care services 50 years ago, and the role of insurance 50 years ago. Looking forward, health care is nothing like it was in 1960. The days of "Dr. Welby, MD" serving a patient's needs are long gone. Now it takes teams of physicians, technicians, nurses, diagnosticians, laboratory analysts and buildings full of equipment to care for patients. And that means America needs a medical delivery system that allows the best use of these resources efficiently and effectively if its citizens are going to be healthier, and move into the life expectancies of competitive countries.
Unfortunately, America seems unwilling to look at its competitors to learn from what they do in order to be more effective. It would seem obvious that policy makers and those delivering health care could all look at the processes in these other 9 countries and ask "what are they doing, how do they do it, and across all 9 what can we see are the best practices?"
By studying the competition we could easily learn not only what is being done better, but how we could improve on those practices to be a world leader (which, clearly, we now are not.) Yet, for the most part those involved in the debate seem adamant to ignore the competition – as if they don't matter. Even though the cost of such blindness is enormous.
Instead, way too much time is spent asking customers what they want. But customers have no idea what health care costs. Either they have insurance, and don't care what specific delivery costs, or they faint dead away when they see the bill for almost any procedure. People just know that health care can be really good, and they want it. To them, the cost is somebody else's problem. That offers no insight for creating an effective yet simultaneously efficient system.
America needs to quit thinking it can gradually evolve toward something better. As Clayton Christensen points out in his book "The Innovator's Prescription: A Disruptive Solution for Health Care" America could implement health care very differently. And, as each year passes America's competitiveness falls further behind – pushing the country closer and closer to no choice but being disruptive in health care implementation. That, or losing its vaunted position as market leader!
Is the "individual mandate" legal? That seems to be arguable. But, it is disruptive. It seems the debate centers more on whether Americans are willing to be disruptive, to do something different, than whether they want to solve the problem. Across a range of possibilities, anything that disrupts the ways of the past seems to be argued to death. That isn't going to solve this big, and growing, problem. Americans must become willing to accept some radical change.
The simple approach would be to look at programs in Oregon, Massachusetts and all the states to see what has worked, and what hasn't worked as well. Instead of judging them in advance, they could be studied to learn. Then America could take on a series of experiments. In isolated locations. Early adopter types could "opt in" on new alternative approaches to payment, and delivery, and see if it makes them happy. And more stories could be promulgated about how alternatives have worked, and why, helping everyone in the country remove their fear of change by seeing the benefits achieved by early leaders.
Health care delivery, and its cost, in America is a big deal. Just like the oil price shocks in the 1970s roiled cost structures and threatened the economy, unmanagable health care delivery and cost threatens the country's economic future. American's surely don't expect a handful of lawyers in black robes to solve the problem.
America needs to learn from its competition, be willing to disrupt past processes and try new approaches that forge a solution which not only delivers better than anyone else (a place where America does seem to still lead) but costs less. If America could be the first on the moon, first to create the PC and first to connect everyone on smartphones this is a problem which can be solved – but not by attorneys or courts!
by Adam Hartung | Jan 30, 2012 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
For the last decade, Wal-Mart has been "dead money" in investor parlance. After a big jump between 1995 and 2000, the stock today is still worth less than it was in 2000. There has been volatility, which might have benefited some traders. But for most of the decade Wal-Mart's price has been lower. There has been excitement because recently the price has been catching up with where it was in 2002, even though there have been no real gains for long term investors.
Source: YahooFinance 1/30/12
What happened to Wal-Mart was the market shifted. For many years being the market leader with every day low pricing was a winning strategy. Wal-Mart was able to expand from town to town opening new stores, all pretty much alike, doing the same thing and making really good money.
Then competitors took aim at Wal-Mart, and found out they could beat the giant.
Eventually the number of towns that both needed, and justified, a new Wal-Mart (or Sam's Club) dried up. Wal-Mart reacted by expanding many stores, making them "bigger and better," even adding groceries to some. But that added only marginally to revenue, and even less marginally to profits.
And Wal-Mart tried exporting its stores internationally, but that flopped as local market competitors found ways to better attract local customers than Wal-Mart's success formula offered.
Other U.S. discounters, like Target and Kohl's, offered nicer stores with more varieties or classier merchandise – and often their pricing was not much higher, or even the same. And a new category of retailer, called "dollar stores" emerged that beat Wal-Mart's price on almost everything for the true price shopper. These 99 cent stores became really popular, and the fastest growing traditional retail concept in America. Simultaneously, big box retailers like Best Buy expanded their merchandise and footprint into more locations, dramatically increasing the competition against local Wal-Mart's stores.
But, even more dramatically, the whole retail market began shifting on-line.
Amazon, and its brethren, kept selling more and more products. And at prices even lower than Wal-Mart. And again, for price shoppers, the growth of eBay, Craigslist and vertical market sites made it possible for shoppers to find slightly used, or even new, products at prices lower than Wal-Mart, and shipped right into the customer's home. With each year, people found less need to buy at Wal-Mart as the on-line options exploded.
More recently, traditional price-focused retailers have been attacked by mobile devices. Firstly, there's the new Kindle Fire. In just one quarter it has gone from nowhere to tied as the #1 Android tablet
Source: BusinessInsider.com
The Kindle Fire is squarely targeted at growing retail sales for Amazon, making it easier than ever for customers to ignore the brick-and-mortar store in favor of on-line retailers.
On top of this, according to Pew Research 52% of in-store shoppers now use a mobile device to check price and availability on-line of products as they look in the store. Thus a customer can look at products in Wal-Mart, and while standing in the aisle look for that same product, or comparable, in another store on-line. They can decide they like the work boots at Wal-Mart, and even try them on for size. Then they can order from Zappos or another on-line retailer to have those boots shipped to their home at an even lower price, or better warranty, even before leaving the Wal-Mart store.
It's no wonder then that Wal-Mart has struggled to grow its revenues. Wal-Mart has been a victim of intense competition that found ways to attack its success formula effectively.
Then Wal-Mart implemented its "Shoot Yourself in the Head" strategy
What did Wal-Mart recently do? According to Reuters Wal-Mart decided to transfer its entire marketing department to work for merchandising. Marketing was moved from reporting to the CEO, to reporting into Sales. The objective was to put all the energy of marketing into trying to further defend the Wal-Mart business, and drive up same-store sales. In other words, to make sure marketing was fully focused on better executing the old, struggling success formula.
The marketing department at Wal-Mart does all the market research on customers, trends and advertising – traditional and on-line. Marketing is the organization charged with looking outside, learning and adapting the organization to any market shifts. In this role marketing is expected to identify new competitors, new market solutions that are working better, and adapt the organization to shifting market needs. It is responsible to be the eyes and ears of the organization, and then think up new solutions addressing these external inputs. That's why it needs to report to the CEO, so it can drive toward new solutions that can revitalize the organization and keep it growing with new market trends.
But now, it's been shot. Reporting to sales, marketing's role directed at driving same store sales is purely limiting the function to defending and extending the success formula that has produced lackluster results for 12 years. Marketing is no longer in a position to adapt Wal-Mart. Instead, it is tasked to find ways to do more, better, faster, cheaper under the leadership of the sales organization.
When faced with market shifts, winning companies adapt. Look at how skillfully Amazon has moved from book seller to general merchandise seller to offering a consumer electronic device.
Unfortunately, too many businesses react to market shifts like Wal-Mart. They hunker down, do more of the same and re-organize to "increase focus" on the traditional business as results suffer. Instead of adapting the company hopes more focus on execution will somehow improve results.
Not likely. Expect results to go the other direction. There might be a short-term improvement from the massive influx of resource, but long term the trends are taking customers to new solutions. Regardless of the industry leader's size. Don't expect Wal-Mart to be a long-term winner. Better to invest in competitors taking advantage of trends.
by Adam Hartung | Jan 10, 2011 | Defend & Extend, Disruptions, Innovation, Leadership, Web/Tech
Summary:
- Communication is now global, instantaneous and free
- As a result people, and businesses, now adopt innovation more quickly than ever
- Competitors adapt much quicker, and react much stronger than ever in history
- Profits are squeezed by competitors rapidly adopting innovations
- But many business leaders avoid disruptions, leading to slower growth and declining returns
- To maintain, and grow, revenues and profits you must be willing to implement disruptions in order to stay ahead of fast moving competitors
- Amidst fast shifting markets, greatest value (P/E multiple and market cap) is given to those companies that create disruptions (like Facebook, Groupon, Twitter)
All business leaders know the pace of competitive change has increased.
It took decades for everyone to obtain an old-fashioned land line telephone. Decades for everyone to buy a TV. And likewise, decades for color TV adoption. Microwave ovens took more than a decade. Thirty years ago the words “long distance” implied a very big cost, even if it was a call from just a single interchange away (not even an area code away – just a different set of “prefix” numbers.) People actually wrote letters, and waited days for responses! Social change, and technology adoption, took a lot longer – and was considered expensive.
Now we assume communications at no cost with colleagues, peers, even competitors not only across town state, or nation, but across the globe! Communication – whether email, or texting, or old fashioned voice calls – has become free and immediate. (Consider Skype if you want free phone calls [including video no less] and use a PC at your local library or school building if you don’t own one.) Factoring inflation, it is possible to provide every member of a family of 5 with instant phone, email and text communication real-time, wirelessly, 24×7, globally for less than my parents paid for a single land-line, local-exchange only (no long distance) phone 50 years ago! And these mobile devices can send pictures!
As a result, competitors know more about each other a whole lot faster, and take action much more quickly, than ever in history. Facebook, for example, is now connecting hundreds of millions of people with billions of communications every day. According to statistics published on Facebook.com, every 20 minutes the Facebook website produces:
- 1,000,000 shared links
- 1,323,000 tagged photos
- 1,484,000 event invitations
- 1,587,000 Wall posts
- 1,851,000 Status updates
- 1,972,000 Friend requests accepted
- 2,716,000 photos uploaded
- 4,632,000 messages
- 10,208,000 comments
Multiply those numbers by 3 to get hourly. By 72 to get daily. Big numbers! Alexander Graham Bell had to invent the hardware and string thousands of miles of cable to help people communicate with his disruption. His early “software” were thousands of “operators” connecting calls through central switchboards. Mark Zuckerberg and friends only had to create a web site using existing infrastructure and existing tools to create theirs. Rapidly adopting, and using, existing innovations allowed Facebook’s founders to create a disruptive innovation of their own! Disruption has allowed Facebook to thrive!
Facebook has disrupted the way we communicate, learn, buy and sell. “Word of mouth” referrals are now possible from friends – and total strangers. Product benefits and problems are known instantaneously. Networks of people arguably have more influence that TV networks! Many employees are likely to make more facebook communications in a day than have conversations with co-workers! Facebook (or twitter) is rapidly becoming the new “water cooler.” Only it is global and has inputs from anyone. Yet only a fraction of businesses have any plans for using Facebook – internally or to be more competitive!
Far too many business leaders are unwilling to accept, adopt, invest in or implement disruptions.
InnovateOnPurpose.com highlights why in “Why Innovation Makes Executives Uncomfortable:”
- Innovation is part art, and not all science. Many execs would like to think they can run a business like engineering a bridge. They ignore the fact that businesses implement in society, and innovation is where we use the social sciences to help us gain insight into the future. Success requires more than just extending the past – because market shifts happen. If you can’t move beyond engineering principles you can’t lead or manage effectively in a fast-changing world where the rules are not fixed.
- Innovation requires qualitative insights not just quantitative statistics. Somewhere in the last 50 years the finance pros, and a lot of expensive strategy consultants, led business leaders to believe that if they simply did enough number crunching they could eliminate all risk and plan a guaranteed great future. Despite hundreds of math PhDs, that approach did not work out so well for derivative investors – and killed Lehman Brothers (and would have killed AIG insurance had the government not bailed it out.) Math is a great science, and numbers are cool, but they are insufficient for success when the premises keep changing.
- Innovation requires hunches, not facts. Well, let’s say more than a hunch. Innovation requires we do more scenario planning about the future, rather than just pouring over historical numbers and expecting projections to come true. We don’t need crystal balls to recognize there will be change, and to develop scenario plans that help us prepare for change. Innovation helps us succeed in a dynamic world, and implementation requires a willingness to understand that change is inevitable, and opportunistic.
- Innovation requires risks, not certainties. Unfortunately, there are NO certainties in business. Even the status quo plan is filled with risk. It’s not that innovation is risky, but rather that planning systems (ERP systems, CRM systems, all systems) are heavily biased toward doing more of the same – not something new! Markets can shift incredibly fast, and make any success formula obsolete. But most executives would rather fail doing the same thing faster, working harder, doing what used to work, than implement changes targeted at future market needs. Leaders perceive following the old strategy is less risky, when in reality it’s loaded with risk too! Too many businesses have failed at the hands of low-risk, certainty seeking leadership unable to shift with changing markets (GM, Chrysler, Circuit City, Fannie Mae, Brach’s, Sun Microsystems, Quest, the old AT&T, Lucent, AOL, Silicon Graphics, Yahoo, to name a few.)
Markets are shifting all around us. Faster than imaginable just 2 decades ago. Leaders, strategists and planners that enter 2011 hoping they can win by doing more, better, faster, cheaper will have a very tough time. That is the world of execution, and modern communication makes execution incredibly easy to copy, incredibly fast. Even Wal-Mart, ostensibly one of the best execution-oriented companies of all time, has struggled to grow revenue and profit for a decade. Today, companies that thrive embrace disruption. They are willing to disrupt within their organizations to create new ideas, and they are willing to take disruptive opportunities to market. Compare Apple to Dell, or Netflix to Blockbuster.
Recent investments have valued Facebook at $50B, Groupon at $6B and Twitter at almost $4B. Apple is now the second most valuable company (measured by market capitalization). Why? Because they are disrupting the way we do things. To thrive (perhaps survive by 2015) requires moving beyond the status quo, overcoming the perceived risk of innovation (and change) and taking the actions necessary to provide customers what they want in the future! Any company can thrive if it embraces the disruptions around it, and uses them to create a few disruptions of its own.
