by Adam Hartung | May 8, 2015 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, In the Whirlpool, Leadership
McDonald’s just had another lousy quarter. All segments saw declining traffic, revenues fell 11%. Profits were off 33%. Pretty well expected, given its established growth stall.
A new CEO is in place, and he announced is turnaround plan to fix what ails the burger giant. Unfortunately, his plan has been panned by just about everyone. Unfortunately, its a “me too” plan that we’ve seen far too often – and know doesn’t work:
- Reorganize to cut costs. By reshuffling the line-up, and throwing out a bunch of bodies management formerly said were essential, but now don’t care about, they hope to save $300M/year (out of a $4.5B annual budget.)
- Sell off 3,500 stores McDonald’s owns and operate (about 10% of the total.) This will further help cut costs as the operating budgets shift to franchisees, and McDonald’s book unit sales creating short-term, one-time revenues into 2018.
- Keep mucking around with the menu. Cut some items, add some items, try a bunch of different stuff. Hope they find something that sells better.
- Try some service ideas in which nobody really shows any faith, like adding delivery and/or 24 hour breakfast in some markets and some stores.
Needless to say, none of this sounds like it will do much to address quarter after quarter of sales (and profit) declines in an enormously large company. We know people are still eating in restaurants, because competitors like 5 Guys, Meatheads, Burger King and Shake Shack are doing really, really well. But they are winning primarily because McDonald’s is losing. Even though CEO Easterbrook said “our business model is enduring,” there is ample reason to think McDonald’s slide will continue.
Possibly a slide into oblivion. Think it can’t happen? Then what happened to Howard Johnson’s? Bob’s Big Boy? Woolworth’s? Montgomery Wards? Size, and history, are absolutely no guarantee of a company remaining viable.
In fact, the odds are wildly against McDonald’s this time. Because this isn’t their first growth stall. And the way they saved the company last time was a “fire sale” of very valuable growth assets to raise cash that was all spent to spiffy up the company for one last hurrah – which is now over. And there isn’t really anything left for McDonald’s to build upon.
Go back to 2000 and McDonald’s had a lot of options. They bought Chipotle’s Mexican Grill in 1998, Donato’s Pizza in 1999 and Boston Market in 2000. These were all growing franchises. Growing a LOT faster, and more profitably, than McDonald’s stores. They were on modern trends for what people wanted to eat, and how they wanted to be served. These new concepts offered McDonald’s fantastic growth vehicles for all that cash the burger chain was throwing off, even as its outdated yellow stores full of playgrounds with seats bolted to the floors and products for 99cents were becoming increasingly not only outdated but irrelevant.
But in a change of leadership McDonald’s decided to sell off all these concepts. Donato’s in 2003, Chipotle went public in 2006 and Boston Market was sold to a private equity firm in 2007. All of that money was used to fund investments in McDonald’s store upgrades, additional supply chain restructuring and advertising. The “strategy” at that time was to return to “strategic focus.” Something that lots of analysts, investors and old-line franchisees love.
But look what McDonald’s leaders gave up via this decision to re-focus. McDonald’s received $1.5B for Chipotle. Today Chipotle is worth $20B and is one of the most exciting fast food chains in the marketplace (based on store growth, revenue growth and profitability – as well as customer satisfaction scores.) The value of all of the growth gains that occurred in these 3 chains has gone to other people. Not the investors, employees, suppliers or franchisees of McDonald’s.
We have to recognize that in the mid-2000s McDonald’s had the option of doing 180degrees opposite what it did. It could have put its resources into the newer, more exciting concepts and continued to fidget with McDonald’s to defend and extend its life even as trends went the other direction. This would have allowed investors to reap the gains of new store growth, and McDonald’s franchisees would have had the option to slowly convert McDonald’s stores into Donato’s, Chipotle’s or Boston Market. Employees would have been able to work on growing the new brands, creating more revenue, more jobs, more promotions and higher pay. And suppliers would have been able to continue growing their McDonald’s corporate business via new chains. Customers would have the benefit of both McDonald’s and a well run transition to new concepts in their markets. This would have been a win/win/win/win/win solution for everyone.
But it was the lure of “focus” and “core” markets that led McDonald’s leadership to make what will likely be seen historically as the decision which sent it on the track of self-destruction. When leaders focus on their core markets, and pull out all the stops to try defending and extending a business in a growth stall, they take their eyes off market trends. Rather than accepting what people want, and changing in all ways to meet customer needs, leaders keep fiddling with this and that, and hoping that cost cutting and a raft of operational activities will save the business as they keep focusing ever more intently on that old core business. But, problems keep mounting because customers, quite simply, are going elsewhere. To competitors who are implementing on trends.
The current CEO likes to describe himself as an “internal activist” who will challenge the status quo. But he then proves this is untrue when he describes the future of McDonald’s as a “modern, progressive burger company.” Sorry dude, that ship sailed years ago when competitors built the market for higher-end burgers, served fast in trendier locations. Just like McDonald’s 5-years too late effort to catch Starbucks with McCafe which was too little and poorly done – you can’t catch those better quality burger guys now. They are well on their way, and you’re still in port asking for directions.
McDonald’s is big, but when a big ship starts taking on water it’s no less likely to sink than a small ship (i.e. Titanic.) And when a big ship is badly steered by its captain it flounders, and sinks (i.e. Costa Concordia.) Those who would like to think that McDonald’s size is a benefit should recognize that it is this very size which now keeps McDonald’s from doing anything effective to really change the company. Its efforts (detailed above) are hemmed in by all those stores, franchisees, commitment to old processes, ingrained products hard to change due to installed equipment base, and billions spent on brand advertising that has remained a constant even as McDonald’s lost relevancy. It is now sooooooooo hard to make even small changes that the idea of doing more radical things that analysts are requesting simply becomes impossible for existing management.
And these leaders, frankly, aren’t even going to try. They are deeply wedded, committed, to trying to succeed by making McDonald’s more McDonald’s. They are of the company and its history. Not the CEO, or anyone on his team, reached their position by introducing a revolutionary new product, much less a new concept – or for that matter anything new. They are people who “execute” and work to slowly improve what already exists. That’s why they are giving even more decision-making control to franchisees via selling company stores in order to raise cash and cut costs – rather than using those stores to introduce radical change.
These are not “outside thinkers” that will consider the kinds of radical changes Louis V. Gerstner, a total outsider, implemented at IBM – changing the company from a failing mainframe supplier into an IT services and software company. Yet that is the only thing that will turn around McDonald’s. The Board blew it once before when it sold Chipotle, et.al. and put in place a core-focused CEO. Now McDonald’s has fewer resources, a lot fewer options, and the gap between what it offers and what the marketplace wants is a lot larger.
by Adam Hartung | Jun 28, 2013 | Current Affairs, Defend & Extend, In the Rapids, In the Whirlpool, Innovation, Leadership, Web/Tech
The last 12 months Tesla Motors stock has been on a tear. From $25 it has more than quadrupled to over $100. And most analysts still recommend owning the stock, even though the company has never made a net profit.
There is no doubt that each of the major car companies has more money, engineers, other resources and industry experience than Tesla. Yet, Tesla has been able to capture the attention of more buyers. Through May of 2013 the Tesla Model S has outsold every other electric car – even though at $70,000 it is over twice the price of competitors!
During the Bush administration the Department of Energy awarded loans via the Advanced Technology Vehicle Manufacturing Program to Ford ($5.9B), Nissan ($1.4B), Fiskar ($529M) and Tesla ($465M.) And even though the most recent Republican Presidential candidate, Mitt Romney, called Tesla a "loser," it is the only auto company to have repaid its loan. And did so some 9 years early! Even paying a $26M early payment penalty!
How could a start-up company do so well competing against companies with much greater resources?
Firstly, never underestimate the ability of a large, entrenched competitor to ignore a profitable new opportunity. Especially when that opportunity is outside its "core."
A year ago when auto companies were giving huge discounts to sell cars in a weak market I pointed out that Tesla had a significant backlog and was changing the industry. Long-time, outspoken industry executive Bob Lutz – who personally shepharded the Chevy Volt electric into the market – was so incensed that he wrote his own blog saying that it was nonsense to consider Tesla an industry changer. He predicted Tesla would make little difference, and eventually fail.
For the big car companies electric cars, at 32,700 units January thru May, represent less than 2% of the market. To them these cars are simply not seen as important. So what if the Tesla Model S (8.8k units) outsold the Nissan Leaf (7.6k units) and Chevy Volt (7.1k units)? These bigger companies are focusing on their core petroleum powered car business. Electric cars are an unimportant "niche" that doesn't even make any money for the leading company with cars that are very expensive!
This is the kind of thinking that drove Kodak. Early digital cameras had lots of limitations. They were expensive. They didn't have the resolution of film. Very few people wanted them. And the early manufacturers didn't make any money. For Kodak it was obvious that the company needed to remain focused on its core film and camera business, as digital cameras just weren't important.
Of course we know how that story ended. With Kodak filing bankruptcy in 2012. Because what initially looked like a limited market, with problematic products, eventually shifted. The products became better, and other technologies came along making digital cameras a better fit for user needs.
Tesla, smartly, has not tried to make a gasoline car into an electric car – like, say, the Ford Focus Electric. Instead Tesla set out to make the best car possible. And the company used electricity as the power source. By starting early, and putting its resources into the best possible solution, in 2013 Consumer Reports gave the Model S 99 out of 100 points. That made it not just the highest rated electric car, but the highest rated car EVER REVIEWED!
As the big car companies point out limits to electric vehicles, Tesla keeps making them better and addresses market limitations. Worries about how far an owner can drive on a charge creates "range anxiety." To cope with this Tesla not only works on battery technology, but has launched a program to build charging stations across the USA and Canada. Initially focused on the Los-Angeles to San Franciso and Boston to Washington corridors, Tesla is opening supercharger stations so owners are never less than 200 miles from a 30 minute fast charge. And for those who can't wait Tesla is creating a 90 second battery swap program to put drivers back on the road quickly.
This is how the classic "Innovator's Dilemma" develops. The existing competitors focus on their core business, even though big sales produce ever declining profits. An upstart takes on a small segment, which the big companies don't care about. The big companies say the upstart products are pretty much irrelevant, and the sales are immaterial. The big companies choose to keep focusing on defending and extending their "core" even as competition drives down results and customer satisfaction wanes.
Meanwhile, the upstart keeps plugging away at solving problems. Each month, quarter and year the new entrant learns how to make its products better. It learns from the initial customers – who were easy for big companies to deride as oddballs – and identifies early limits to market growth. It then invests in product improvements, and market enhancements, which enlarge the market.
Eventually these improvements lead to a market shift. Customers move from one solution to the other. Not gradually, but instead quite quickly. In what's called a "punctuated equilibrium" demand for one solution tapers off quickly, killing many competitors, while the new market suppliers flourish. The "old guard" companies are simply too late, lack product knowledge and market savvy, and cannot catch up.
- The integrated steel companies were killed by upstart mini-mill manufacturers like Nucor Steel.
- Healthier snacks and baked goods killed the market for Hostess Twinkies and Wonder Bread.
- Minolta and Canon digital cameras destroyed sales of Kodak film – even though Kodak created the technology and licensed it to them.
- Cell phones are destroying demand for land line phones.
- Digital movie downloads from Netflix killed the DVD business and Blockbuster Video.
- CraigsList plus Google stole the ad revenue from newspapers and magazines.
- Amazon killed bookstore profits, and Borders, and now has its sites set on WalMart.
- IBM mainframes and DEC mini-computers were made obsolete by PCs from companies like Dell.
- And now Android and iOS mobile devices are killing the market for PCs.
There is no doubt that GM, Ford, Nissan, et. al., with their vast resources and well educated leadership, could do what Tesla is doing. Probably better. All they need is to set up white space companies (like GM did once with Saturn to compete with small Japanese cars) that have resources and free reign to be disruptive and aggressively grow the emerging new marketplace. But they won't, because they are busy focusing on their core business, trying to defend & extend it as long as possible. Even though returns are highly problematic.
Tesla is a very, very good car. That's why it has a long backlog. And it is innovating the market for charging stations. Tesla leadership, with Elon Musk thought to be the next Steve Jobs by some, is demonstrating it can listen to customers and create solutions that meet their needs, wants and wishes. By focusing on developing the new marketplace Tesla has taken the lead in the new marketplace. And smart investors can see that long-term the odds are better to buy into the lead horse before the market shifts, rather than ride the old horse until it drops.
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 | Aug 12, 2010 | Defend & Extend, General, Leadership, Openness
Summary:
- Your view of today will be determined by your future success
- Conventional wisdom – often called “best practices” – will lead businesses to cut costs in today’s economy, leading to a vicious cycle of reductions and value destruction. “Best Practice” application does not improve results
- Winning companies don’t focus on past behavior, but instead seek out new markets where they can grow – Apple, Google, Virgin, etc.
To paraphrase Charles Dickens (A Tale of Two Cities) are these “the best of times” or “the worst of times?” Few new jobs are being created in the USA, its hard to obtain credit if you’re a borrower, but there’s very little return to saving, the stock market has been sideways for a decade, asset values (in particular real estate) have plummeted while health care costs are skyrocketing. Look in the rear view mirror at the last decade and you could say it is the worst of times.
But the answer doesn’t lie in the rear view mirror – the answer lies in the future. If you succeed in the next 2 years at achieving your goals, you’ll look back and say this was the best of times.
In “Do You Have the Postrecession Blues” at Harvard Business Review blogs the author tells of two shoe salespeople that show up in a remote African village. The first sends back the message “No one here wears shoes, will return shortly.” The second sends the message “No one here wears shoes, send inventory!”
The history of business education has been to teach managers, usually by studying historical case experiences, the “best practices” employed by previous managers. But BPlans.com tells us in an article headlined “The Bad News About Best Practices” that this is a lousy way to make decisions. “..most of the time, they won’t work for you or me. They worked for somebody, some time, in some situation, in the past.”
The New York Times deals with fallacious best practices recommendations in “From Good to Great… to Below Average.” Best selling Freakonomics author Steven Levitt points out that most business authors try to push somebody else’s Success Formula as the road to success. However, the most popular of these are really very inapplicable. Those held up as “the best practice” have most often ended up with quite poor results. So why should someone else follow them? Nine of eleven of Collins’ “great” companies did worse than average!
Best practices has led businesses to cut heads, slash costs, sell assets and in general weaken their businesses the last few years. Most leaders would prefer to believe that they have somehow improved the business by eliminating workers, the skills they bring and the function they perform. But the result is less marketing, sales, R&D, etc. How this ever became “best practice” is now a very good question. What company can you think about that “saved its way to success?” The cost cutters I think about – Sears, Scott Paper, Fannie Mae Candies, etc. – ended up a lot worse for their efforts.
These can be the best of times. Just ask the people at Apple Cisco Systems, Virgin and Google. These businesses are growing as if there’s no recession. Instead of “focusing on their core” business with defend & extend efforts to cut costs, they are entering new markets. They are going to where growth is. Amidst all the cost-cutting, best practice applying grief these are examples of success.
So will you continue to operate as if these are the worst of times, are are you willing to make these the best of times? You can grow if you use scenarios and competitor analysis to find new markets, embrace disruptions to attack Lock-ins that block innovation, and implement White Space teams that learn how to develop new markets for revenue and profit growth.
Postscript – entire Dickens’ quote: It was the best of times, it was the worst of times, it was the age of
wisdom, it was the age of foolishness, it was the epoch of belief, it
was the epoch of incredulity, it was the season of Light, it was the
season of Darkness, it was the spring of hope, it was the winter of
despair, we had everything before us, we had nothing before us, we were
all going direct to heaven, we were all going direct the other way – in
short, the period was so far like the present period, that some of its
noisiest authorities insisted on its being received, for good or for
evil, in the superlative degree of comparison only.
Post-postcript – I am trying a new format for the blog. Please provide your feedback. I’m dropping the bold enhancements, and replacing their intent with an introductory summary. Let me know if you like this better. And thanks to reader Jon Wolf for his specific recommendations for improvement.
by Adam Hartung | Jul 27, 2010 | Current Affairs, Leadership, Web/Tech
Leadership
Stop Focusing On Your Core Business
It has become the fast track to oblivion.
“Where Have All the Flowers Gone” was a 1960s antiwar hit for Peter,
Paul and Mary. The “flowers” meant soldiers dying in Vietnam. These days we might be tempted to sing,
“Where Have All the Mighty Corporations Gone?”
That is the first paragraph to my latest column for Forbes magazine. A laundry list of notable failures the last few years is driving home the point that “focus on your core” is insufficient to even survive – much less thrive! And don’t blame “the government” for these failures – as all were related to management decisions intended to keep the company “on track.” Instead, these leadership teams “doubled down” on the old Success Formula until there just wasn’t any more juice left in that orange!
On the other hand, Apple demonstrates the value of seeking out new markets. “The iPad is Already Bigger than the iPod — and Half as Big as the Mac” is the Business Insider article.
Silicon Alley Insider 7-21-10
By distinctly not focusing on its core, and instead entering new markets, Apple — and Google as well — keep right on growing. Ignoring the “Great Recession.”
So is your business strategy intended to have you keep doing more of the same? Hoping if you do more, better, faster, cheaper things will return to the sales and profit growth of an earlier time? Or are you entering new markets, putting out new solutions that meet emerging market needs? Are you planning for a past era to return, or for the emerging future? Do you use scenarios, or historical trend lines? If you are hoping to be glorious by focusing on your core, give this Forbes article a read. You just may decide to change course.
