by Adam Hartung | May 19, 2009 | Current Affairs, Defend & Extend, General, Leadership, Lock-in
Have you ever heard of a company paying an employee to die? Hard to figure out how that's "pay for performance." Yet, many companies have executive compensation agreements with "golden coffin" provisions which agree to pay the executive's estate substantial sums in the event that executive dies. I first heard about this with the company AM International, which I profiled in my book Create Marketplace Disruption. AM International's Chairman/CEO Merle Banta had a provision in his contract which continued his pay, and guaranteed his bonus, even if he died! This was somewhat remarkable, because during the years he led AM it went bankrupt twice (the last time ending the company), and he laid off thousands of employees. It was hard for the people at AM to understand why this provision existed, since they not only lost their jobs but also their pension fund when Mr. Banta put it all into a company ESOP that went under with the company,
This still goes on today. Probably a lot more than many of us guess. Today's headline "Golden Coffin proposal narrowly defeated at XTO" covers how some shareholders tried to kill the "pay to die" provision for company executives. The Chairman received $1.63M in salary, and $30M in bonus last year – and the Golden Coffin provisions for him are worth more than $90M!!! But I ask you, do you think XTO Energy did well because of the decisions made by Chairman Bob Simpson – or because oil prices spiked to record levels having nothing to do with the management team at all?
When you get paid to hammer nails, or insert rivets, or spot weld, or wash dishes piece pay can make sense. The harder and smarter you work, the more you get done and you can make more money. This is pure pay for performance.
But does this make sense for executives, or even most managers, in a modern corporation? According to its bio, XTO energy owns oil and gas reserves (some proven, some not) under the ground. No matter what management does, the value of those reserves goes up or down with the value of oil and gas. Why should an executive be rewarded if oil jumps to $150/barrel? Sure, his company can be very profitable, but did he have anything to do with it? A 5 year chart of XTO demonstrates that the value of the company is mostly tied to the value of its commodity asset (oil), and not much else.
And the same can be said for most companies. The current value is tied to many factors, including decisions made years before, as well as shifting markets. Companies are quick to point this out when "other factors" conspire to do the value poorly, and they pay executive bonuses anyway. But when the value goes up, there's a willingness to pass along a big chunk of that value to the executives as if they caused it. In reality, about the only thing an executive can do to affect value in the short term (meaning less than 2 or 3 years) is cut R&D, cut product development, cut marketing, cut sales expenditures, outsource functionality to low cost centers, sell assets and lay off employees. Most actions which pad the short-term bottom line but each of which can fatally doom the organization's future. Compensation that's tied to short-term results reinforces doing more of the same, Defending & Extending the company's past, and ignoring needs to invest in shifting the company along with dynamic markets.
Good management keeps its eyes on markets so the company keep can keep positioning itself for growth as markets change. Good management obsesses about competitors so it isn't caught off guard by current or emerging players that drive down returns. Good management disrupts the organization so it is able to shift with markets, rather than getting stuck in behaviors and decision making processes that become outdated and unable to create value. And good management maintains White Space where new products, services, operating practices, metrics and behaviors are tested in order to keep the company evergreen. But how do you tie compensation to these behaviors?
I recently had coffee with someone who worked at AM International when it was declining. He still remembers, painfully, how executive compensation was not linked to what the company needed to do to survive. He told me how later, after AM, he was working for a large manufacturer in central Michigan and he could not believe how every Director, V.P. and other management personnel tied every decision to maximizing their bonus. Eventually, he grew tired of the self-centered behavior and he's now an entrepreneur.
If we are to believe in pay for performance, management bonuses should lag by 1 to 5 years. Bonuses should be based on results – and the results of management decisions actually come to fruition over time. They aren't like pounding nails. This sounds absurd, but we all know that the real impact of executive decisions are seen years after the decision. If CEO incentive compensation for 2009 were tied to performance in 2012 or 2013 do you think the behavior and decisions of executives would change? Would they be more likely to focus on making decision that are for the business's long term health than trying to maximize short-term pay?
Those who've won the CEO lottery have done much better than those who have not. It's very hard to say we "pay for performance" when huge bonuses are paid to the departing chairman of GM, or the CEO who quit launching new products at Motorola to maximize Razr sales. Clearly, they were not paid for performance. And it's unimaginable how paying someone to die makes any sense. When compensation on the downside is guaranteed, and on the upside is maximized by short-term actions or market events not even tied to management decisions, the whole discussion of pay for performance becomes fairly absurd.
I was always struck that the founders of Ben & Jerry's Ice Cream came up with a formula that paid everyone based upon rank – and there was a set ratio between ranks. As a result, the CEO's pay could not go up unless the pay of a worker on the line went up. The inherent fairness was extremely hard to argue with. And it meant everyone did better, or worse, as markets shifted and they either shifted with them – or not. It would seem like the time has long come when we should reconsider exactly what we base pay upon. And when measuring performance is as complex, or time lagged, as management we need to rethink the entire concept. Maybe we should go back to compensating people for doing the right things, with most pay in salary, and tying people together for the long-term company interest.
by Adam Hartung | May 15, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle
"Chrysler delivers the bad news to 789 dealers" was yesterday's headline. Today the headline read "GM notifies dealers of shutdowns" as the company sent 1,100 dealers the notice they would no longer be allowed to stay in business. Thousands are losing jobs. Chrysler is bankrupt, and GM looks destined to file shortly. But wait a minute, GM was the market share leader for the last 50 years!! These big companies, in manufacturing, were supposed to be able to protect their business and become "cash cows." They weren't supposed to get beaten up, see their cash sucked away and end up with nothing!
About 30 years ago a fairly small management consultancy that was started as a group to advise a bank's clients hit upon an idea that skyrcketed its popularity. The fledgling firm was The Boston Consulting Group, and its idea was the Growth/Share matrix. It created many millions of dollars in fees over the years, and is now a staple in textbooks on strategic planning. Unfortunately, like a lot of business ideas from that era, we're learning from companies like GM and Chrysler that it doesn't work so well.
The idea was simple. Growth markets are easier to compete in because people throw money at the companies – either via sales or investment. So it's easier to make money in growing businesses. Market share was considered a metric for market power. If you have high share, you supposedly could pretty much dictate prices. High share meant you were the biggest, which supposedly meant you had the biggest assets (plant, etc.) and thus you had the lowest cost. So, low growth and low share meant your business was a dog. High growth and low share was a question mark – maybe you'd make money if you eventually get high share. High growth and high share was a star. And low growth but high share is a cash cow because you could dominate a business using your market clout to print money – or in the venacular of the matix – milk the money from this cow into which you put very little feed.
In the 1970s/80s, looking at the industrial era, this wasn't a bad chart. Especially in asset intensive businesses that had what were then called "scale advantages." In the industrial world, having big plants with lots of volume was interpreted as the way to being a low-cost company. Of course, this assumed most cost was tied up in plant and equipment – rather than inventory, people, computers, advertising, PR, viral marketing, etc. The first part of the matrix has held up pretty well; the last part hasn't. We now know that it's easier to make money in growth. But it doesn't turn out that share really gives you all that much power nor does it have a big determination in profitability.
We know that having share is no defense of profits. The assumption about entry barriers keeping competitors at bay, and thus creating a "defensive moat" around profits, is simply not true. Today, companies build "scale" facilities overnight. They obtain operating knowledge by hiring competitor employees, or simply obtaining the "best practices" from the internet. Distribution systems are copied with third party vendors and web sites. Even advertising scale can be obtained with aggressive web marketing at low cost. And so many facilities are "scale" in size that overcapacity abounds – meaning the competitor with no capacity (using outsourced manufacturing) can be the "low cost" competitor (like Dell.).
Thus, all markets are overrun with competitors that drive down profits any time growth slows. As GM learned, even with more than 50% share (which they once had) they could not stop competitors from differentiating and effectively competing. Not even Chrysler, with the backing of Mercedes, could maintain its share and profits against far less well healed competitors. When growth slows, the cash disappears into the competitive battles of the remaining players. Unfortunately, even new players enter the market just when you'd think everyone would run for the hills (look at Tata Motors launching itself these days wtih the Nano). Competitors never run out of new ideas for trying to compete – even when there's no growth – so they keep hammering away at the declining returns of once dominant players until they can no longer survive.
Competition exists in all businesses except monopolies, and threatens returns of even those with highest share. Today it might be easy to say that Google cannot be challenged. That is short-sighted. People said that about Microsoft 20 years ago – and today between Apple, Linux and Google Microsoft's revenue growth is plummeting and the company is unable to produce historical results. People once said Sears could not be challenged in retailing. Kodak in amateur photography. And GM in cars. Competitors don't quit when growth slows – until they go bankrupt – and even then they don't quit (again, look at Chrysler). High share is no protection against competition.
And thus, there is no "easy cash in the cow" to be milked. It all gets spent fighting to stay alive. Trying to protect share by cutting price, paying for distribution, advertising. And if you don't spend it, you simply vanish. Really fast. Like Lehman Brothers. Or Bennigans.
The only way to make money, long term, is to keep growing. To keep growing you have to move into new markets, new technologies, new services – in other words you have to keep moving with the marketplace. And that produces success more than anything else. It's all about growth. Forget about trying to have the "cash cow" – it's like the unicorn – it never existed and it never will.
by Adam Hartung | Apr 28, 2009 | Defend & Extend, In the Whirlpool, Innovation, Leadership
"Chrysler Avoids Bankruptcy as GM steps toward it" is the Marketwatch.com headline. According to the article, Chrysler has a deal to manage its debt while Ford has never been as close to the edge as its two brethren. But GM is trying to get bondholders to take a 60% value reduction AND exchange the bond value for equity value – which of course has no assurance and could easily go to zero. The bondholders are squawking, and it's unclear they will agree. Which would plunge GM into bankruptcy. Are the bondholders just greedy? Or do they see the chance of getting some of their money back better via liquidation?
Ford has some of the most popular and fuel efficient vehicles in the world. They just aren't sold in the USA. But they've long had high share in Europe, where Ford has built smaller cars with both diesel and gasoline engines that have met market needs. Now Ford is preparing to build and sell those cars in the USA, which would move them a lot closer to recent market shifts than the worn out Lincoln line and the renamed 500 (rebadged as Taurus under the guise of the name making all the difference.) These European cars offer an opportunity for Ford to Disrupt the U.S. market and regain a positive footing.
Meanwhile, Chrysler has some of the most innovative cars on the market. Its 300, Charger and Challenger cars use technology that allows V8 engines to shut off 4 when not needed – allowing them to achieve over 30 MPG in a "large" and "performance" format. Further, for those seeking safety and control, the 300 and selected other models are available in all wheel drive, which has been proven to be the #1 safety enhancer possible. And of great value in northern climates where foul weather (rain and especially snow or ice) makes driving treacherous. All included in dramatic styling that appeals to American consumer tastes.
But GM? "GM to focus on four keeper brands" is the MediaPost.com headline. Most GM innovation is concentrated in Pontiac, Hummer, Saturn and Saab. The first of these is to be closed down for sure, and the latter 3 either sold or closed. As the CEO says "the company will focus on four brands it defines as core: Chevrolet, Buick, Cadillac and GMC." Anytime the CEO of a failing company says he plans to save the place by "focusing on the core" and thereby cutting back to some aged part of the company RUN, RUN, RUN. The past is the past, and you NEVER regain it. Making these brands exciting is about as likely as making Holiday Inn a high-end hotel chain.
Think about it. Remember Izod with those alligators on the breast plate? Would you consider buying those shirts in Macy's? Or how about resurrecting Howard Johnson's as the place to stay and eat while traveling? Or shopping at KMart? Or taking instant photos on a Polaroid? When the market moves on, it's moved on. No business can recapture past profit levels by "focusing" on old brands and products that were once great. The clock never runs backward. T he market has shifted, and companies have to shift with it – not try to pretend "focusing on the core" will create profits simply because they are dedicated and focused.
It's Ford's offshore innovation that may save the company. It's Chrysler's engine, drive train and styling innovations that may save it. But GM is getting rid of anything that looks like innovation – and anything that might look like a Disruption or White Space. It has no hope of ever regaining market strength. It's plan is faulty, and won't work. Even if bondholders accept the swap of debt for equity, in short order GM sales will continue declining (as will profits), and there's no way bondholders can sell all that equity in order to recover their invested value in the bonds.
by Adam Hartung | Apr 12, 2009 | Uncategorized
At Buckley Brinkman's Blog he asks the question "Can the auto industry be saved?" His posting gives a great overview of the complexities. I like his overview that "there are no safe, and few reasonable investments in this space."
Today a lot of people are asking, "how GM could be leading an industry that fell so far? How could all those managers, over all those years, end up doing so poorly? How could the collective wisdom of the last 30 years brought to the industry, including not only management but the union leadership and all the vendors seemingly let an entire industry, with companies the world's largest, end up in such a soup?"
A key to understanding the answer is offered by the recent Newsweek article "Saturn was supposed to save GM. Instead GM Crushed Saturn." This article underscores the dramatic actions taken by GM Chairman Roger Smith in the early 1980s to transform a floundering General Motors – including buying EDS and Hughes aircraft. And the unprecendented creation of a new auto division with a new union agreement to change the direction of American auto manufacturing.
Over the next few years, Saturn came onto the market as a successful division. It had unprecedented employee satisfaction, unprecedented loyalty for an American car brand, and unprecedented support by its new dealers. But what Saturn did NOT have was the support of GM. Nor even the union that helped create it. As the Newsweek article further details, inside GM there was no support for Saturn outside the Chairman's office. Management continually pushed the corporation to rob Saturn of resources, and even shut down the new division. Meanwhile, a new union leader took over the UAW, and he pushed for changing work rules back to the previous, contentious and frustrating relationship. To which GM quickly agreed preferring consistency over something that worked better.
Although Chairman Smith was dramatic in creating Saturn, he did not Disrupt GM. He never challenged the other division heads to recognize that they could not succeed with old practices. Chairman Smith never moved to place an EDS leader in a top position. In fact, to the contrary, he went along with special action to repurchase the GM shares traded to Ross Perot and remove him from the Board, on the basis that Mr. Perot was too Disruptive to GM. The very benefits Mr. Smith desired was epitomized in Mr. Perot, who pushed hard for big changes in GM management practices. But Mr. Smith was unwilling to actually Disrupt the history and hierarchy of GM. And the same was true for Hughes leadership. Instead of taking action to put a Hughes executive in charge of GM, to lead the way for change, GM leaders were backwatered and ignored in the halls of Detroit.
When you are unwilling to Disrupt, desired changes never "stick." Even with all the resources of the GM Chairman's office, without Disruption the Locked-In GM organization was more powerful and even better resourced. What was supposed to be White Space which would change GM made no difference, because GM was not Disrupted. So the organization kept Defending & Extending its Success Formula created in the 1940s. It didn't take long for the un-disrupted GM leaders to sell of both EDS and Hughes, using the profits to subsize the car business. And they converted Saturn into nothing more than another faceplate on just another GM car – nothing special at all – and widely despised by leaders who always felt Saturn had operated outside the Success Formula so needed to be closed.
Now the Chairman of GM that asked for billions of taxpayer money to save the company, Mr. Wagoner, has been fired. His approach continued to be pushing the same old Success Formula that is so obviously out of step with current market needs. So the banker of last resort asked for him to leave. Which is not so out of the ordinary. Any executive that would ask for investment in the dire straights of GM would expect the investors to make changes in the executive suite. It happens all the time. But the problem seems to be that after pushing Mr. Wagoner out, the U.S. government representatives as bankers haven't proposed a new slate.
The only way to "save" GM will require a wholesale restructuring of the company. Never have so many forces worked so hard to preserve an out of date Success Formula – from management to unions to vendors. It will take somebody of great will, and uncommon acumen, to kill off Chevrolet and the out-of-date parts of GM that simply have no future value. Because now, even more than in the 1980s, what GM needs is an enormous Disruption. Something that will cause the company, from the executive suite to the factory floor, to stop and say "wow, things really are going to be different around here." Only after that sort of Disruption will White Space be able to develop a new future for GM. As we've already seen, trying to do "more of the same" without an enormous Disruption will not save GM - in fact will not even substantially change it.
by Adam Hartung | Apr 7, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Innovation, Leadership, Lock-in, Science
"GM, Segway unveil Puma urban vehicle" headlines Marketwatch.com. The Puma is an enlarged Segway that can hold 2 people in a sitting position. Both companies are hoping this promotion will create excitement for the not-yet-released product, thus generating a more positive opinion of both companies and establish early demand. Unfortunately, the product isn't anything at all like the iPod and the comparison is way off the mark.
The iPod when released with the iTunes was a disruptive innovation which allowed customers to completely change how they acquired, maintained and managed their access to music. Instead of purchasing entire CDs, people could acquire one song at a time. You no longer needed special media readers, because the tunes could be heard on any MP3 device. And your access was immediate, from the download, without going to a store or waiting for physical delivery. People that had not been music collectors could become collectors far cheaper, and acquire only exactly what they wanted, and listen to the music in their own designed order, or choose random delivery. The source of music changed, the acquisition process changed, the collection management changed, the storage of a collection changed – it changed just about everything about how you acquired and interacted with music. It was not a sustaining innovation, it was disruptive, and it commercialized a movement which had already achieved high interest via Napster. The iPod/iTunes business put Apple into the lead in an industry long dominated by other companies (such as Sony) by bringing in new users and building a loyal following.
Unfortunately, increasing the size of a product that has not yet demonstrated customer efficacy, economic viability or developed a strong following and trying to sell it through an existing distribution system that has long been decried as uneconomic and displeasing to customers is not an iPod experience. And that is what this GM/Segway announcement is trying to do.
Despite all the publicity when it was first announced, the Segway has not developed a strong following. After 7 years of intense marketing, and lots of looks, Segway has sold only 60,000 units globally – a fraction of competitive product such as bicycles, motorized scooters, motorcycles and mass transit. Segway has not "jumped into the lead" in any segment of transportation. It has yet to develop a single dominant application, or a loyal group of followers. The product achieves a smattering of sales, but the vast majority of observers simply say "why?" and comment on the high price. Segway has never come close to achieving the goals of its inventor or its investors.
This product announcement gives us more of the same from Segway. It's the same product, just bigger. We are given precious little information about why someone would own one, other than it supposedly travels 35 miles on $.35 of electricity. But how fast it goes, how long to recharge, how comfortable the ride, whether it can carry anything with you, how it behaves in foul weather, why you should choose it over a Nano from Tata or another small car, or a motorscooter or motorcycle — these are all open items not addressed.
And worse, the product isn't being launched in White Space to answer these questions and build a market. Instead, the announcement says it will be sold through GM dealers. This simply ignores answering why any GM dealer would ever want to sell the thing – given its likely price point, margin, use – why would a dealer want to sell Puma/Segways instead of more expensive, capable and higher margin cars?
Great White Space projects are created by looking into the future and identifying scenarios where this project – its use – can be a BIG winner that will attract large volumes of customers. Second, it addresses competitive lock-ins and creates advantages that don't currently exist and otherwise would not exist. Thirdly, it Disrupts the marketplace as a game changer by bringing in new users that otherwise are out of the market. And fourth it has permission to try anything and everything in the market to create a new Success Formula to which the company can migrate for rapid growth.
This project does none of that. It's use is as unclear as the original Segway, and the scenario in which this would ever be anything other than a novelty for perfect weather inner-city upscale locations is totally unclear. This product captures all the current Lock-ins of the companies involved – trying to Defend & Extend one's technology base and the other's distribution system – rather than build anything new. The product appears simply to be inferior in almost all regards to competitive products, with no description of why it is a game changer to other forms of transportation. And the project is starting with most important decisions pre-announced – rather than permission to try new things. And there is absolutely no statement of how this project will be resourced or funded – by two companies that are both in terrible financial shape.
The iPod and iTunes are brands that turned around Apple. They are role models for how to use Disruptive innovation to resurrect a troubled company. It's really unfortunate to see such wonderful brand names abused by two poorly performing companies without a clue of how to manage innovation. The biggest value of this announcement is it shows just how poorly managed Segway has been – given that it's partnering with a company that is destined to be the biggest bankruptcy ever in history, and known for its inability to understand customer needs and respond effectively.
