by Adam Hartung | Aug 13, 2010 | In the Whirlpool
Summary:
- GM is replacing its CEO and preparing to sell equity to the public
- Don’t buy the stock. GM will not be a market winner
“GM reports $1.3 billion in Q2 profits, Preps for Stock Sale” is the Detroit News headline. So, are you interested in buying some GM shares? If you do, can I interest you in a bridge I have for sale???
In addition to reporting 2 consecutive positive cash flow quarters, the CEO Ed Whitacre announced he’s leaving the post to be replaced by a different telecommunications executive, Don Akerson. Are you excited?
There are at least xx reasons NOT to buy GM shares:
- The company lost market share last year. It’s slide from dominance has not stopped. It has less than half the market share it had just 2 decades ago.
- GM lost $12.9 billion in the same quarter last year. There is no doubt the company brought forward costs last year to worsen the financials, thus making them look better than they should be now. Financial machinations are common in poorly performing companies, especially around bankruptcies
- The departing CEO, and the incoming CEO, are retired telecom execs. How many successful (meaning growing revenues profitably) telecom companies do you know? Now wait a minute…. right.
- To hit revenue targets GM increased fleet sales. Interpret that as chasing low-margin business for volume. It also means selling on price, not the desirability of the products to end users.
- GMs pension funds are underfunded to the tune of some $26 billion. When will they fulfill it?
GM hit a growth stall in the 1970s. Since then the company has steadily lost market share while watching profitability deteriorate to nothing. Fewer than 7% of companies ever consistently grow a mere 2% after a stall, and there’s nothing saying GM will be in that exceptional group.
GM downsized its exciting brands. Chevrolet is about as exciting as….. The big “hit” car is a re-release of the Camaro – a car that was successful way about 40 years ago. GM isn’t a leader in any new car segments, or new technologies.
GM has no White Space. It is run by retirees that really should go to Florida – year round. They keep trying to do what worked for their personal careers 30 years ago – and not what will make a company succeed today. There isn’t a single thing about GM that would make me want to own it.
Go buy Apple. There you get innovation, growth, new markets and a leader in several segments.
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 | Jun 24, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership
How widely do you plan for a different future? Do you think British Petroleaum's (BP's) engineers and managers knew there was a chance of a major problem coming from deep water drilling? It seems illogical to think they didn't know the chance existed. Yet, they seemed pretty ill-prepared for the problem. As did the federal government agencies and responders – as well as all the businesses that make a living out of cleaning up water-based oil spills. Critical-Thinking.com sums up the issue pretty succinctly in the article "What is Your Company's Deepwater Horizon?" According to the article, the problem at BP is one that lots of companies have; most businesses simply don't put enough effort into planning for worst case scenarios.
Actually, the problem is worse than that. Most companies only plan for one scenario – more of the same. Planning processes rarely do more than extend past performance. In today's fast paced, global, highly competitive world it would seem that is about the least likeliest scenario. But it's the one that dominates how businesses plan. That so many businesses have been turning for the worse, or failing, is testament to how smart people are let down by planning processes that simply don't consider alternatives strongly enough. Look at the old AT&T, Tribune Corp., GM, Sears, Lehman Brothers, Silicon Graphics, Sun Microsystems, NCR, RCA, Unisys, Zenith, International Harvester, Brach's Candy…..
But planning problems are even worse than this! The first order problem is simply thinking about the potential scenarios and planning for them. Like the military does before a campaign. Even though nobody knows what will happen, by planning for a range of contingencies any business can be far better prepared. But what about the contingencies – the outcomes – you don't think about? What about scenarios you don't want to think about?
According to the New York Times there's "The Anosognosic's Dilemma: Something's Wrong but You Don't Know What It Is." Have you ever been in a meeting and someone, usually from the outside – like a vendor – said "but what about this _______" and they describe something going really, really, wrong — completely not as anticipated? And then somebody, usually somebody that's been around the company a long time and has both stature and influence says "well, if that happens then we're all dead. All bets are off." And with that, the conversation ends. It was a scenario, regardless of probability, that he simply didn't want to consider. His position was basically "hey youngster, that's crazy talk so let's not honor it with discussion."
Now we have a whole different scenario planning problem. One where we know, and will admit there are things that could happen, but we don't know what they are. Where we are so locked-in to our existing thinking that we don't even see these scenarios. We don't know what we don't know, and we're not asking what we don't know. We can't visualize an outcome that is possibly very different.
This is called the Dunning-Krueger effect, for the two psychologists who discovered it (David Dunning and Justin Krueger of Cornell.) Basically, it says we ignore options. We lose the spark to explore options that don't seem obvious. We lock-in on the way we think about the problem so strongly that potential solutions which are on a different vector – come from a different source – are simply not even considered. As if they could never exist.
And that's why all organizations need outsiders. And not just customers – who are heavily biased toward a better, faster, cheaper status quo. The Dunning-Krueger effect means that all organizations need boards, lawyers, consultants, advisors, friends that don't have their lock-in. People that can come up with scenarios that don't have their lock-in. People that can come up with scenarios that your own organization would simply never consider. Like a drilling rig blowing up in deep water and leaving a spewing hole of crude oil that has to somehow be capped —- that could shut down drilling in a major oil producing area, fishing, and all sorts of other businesses. Possibly wreck part of the ecology for decades. And wipe out the company dividend and customer goodwill while looking for a solution.
by Adam Hartung | Jun 13, 2010 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
If your boss told you that he enjoyed your hard work, but he wanted to cut your pay 50% I bet you would feel – well – violated. Your hard work is just that; hard work. If you received $100,000 (or $50,000 or $250,000) for that work last year it would be hard to accept receiving some fractionally lower amount for that same work next year. Especially given that every year you are able to work smarter, better and faster at what you do. Because your execution constantly improves you'd expect to receive more every year.
But in reality, it doesn't matter how hard we work. What matters is the value of that work. It's why nearly incoherent ball players and actors make millions while skillful engineers barely make 6 figures. In other words, pay inevitably ends up being the result of not only the output – it's volume and quality – but what it is worth. And that the compensation is a marketplace result – and not something we actually control – is hard for us to understand.
Every years many pundits decry "excessive" executive pay. There is ample discussion about how an executive received a boat load of money, meanwhile the company sales or profits or customer performance was less than average, or possibly even declined. Of course the executives don't think they are overpaid. They say "I worked hard, did my job, did what I thought was best and was agreed to by my Board of Directors. I did what most investors and my peers would have expected me to do. Therefore, I deserve this money – regardless of the results. I can't control markets or their many variables (like industry prices, costs of feedstock, international currency values, or the loss of a patent or other lawsuit, an industrial accident, or the development of a competitive breakthrough technology) so I can't control the results (like total revenues, or total profits or the stock prices). Therefore I deserve to be compensated for my hard work, even if things didn't work out quite like investors, customers, employees or suppliers might have liked."
This answer is hard for the detractors to accept. To them, if top management isn't responsible for results, who is? Yet, shockingly, each time this happens investment fund managers that own large stock positions will be interviewed, and they will agree the executives are doing their jobs so they should get paid based up on their title and industry – regardless the results.
An example of this behavior was reported by Crain's Chicago Business in "Tribune's $43M Bonus Plan Lambasted by Trustee." Even though Tribune Corporation's leadership, under Sam Zell, took the company from profitable to bankruptcy, and even though they've been unable to "fix" Tribune sufficiently to appease bondholders and develop a plan to remain a going concern thus exiting bankruptcy, the management team thinks it should be paid a bonus. Why? Because they are working diligently, and hard. So, even though there really are no acceptable results, they want to get paid a bonus.
We all have to realize that our company sales and profits are a result of the marketplace in which we compete, and the Success Formula we apply. The combination can produce very good results sometimes; even for a prolonged period. Newspapers had a good, long profitable run. But markets shift. When markets shift, we see that the old Success Formula must change because RESULTS deteriorate. Slow (or no, or negative) growth in revenues and/or profits and/or cash flow is a clear sign of a market shift creating a problem with the Success Formula. When this happens, rewarding EXECUTION (or hard work) is EXACTLY the WRONG thing to do! Doing more of the same will only exacerbate bad results – not fix them
What's bad for the business, in revenues/profits/cash flow, must (of necessity) be bad for the employees. Not because they are bad people. Or lazy, or incompetent, or arrogant, or any of many other bad connotations. But because the results are clearly saying that the value has eroded from the Success Formula . Usually because of a market shift (like readers and advertisers going from newspapers/print to the internet). What we MUST reward are the efforts to change the Success Formula, to get back to growing. Not hard work. As much as we'd like to say that hard work deserves money – we all know that money flows to the things we value regardless of how hard we work.
I've long been a detractor of many executives – Brenda Barnes at Sara Lee has been a frequent victim of this blog. Whitacre of GM another. Steve Ballmer at Microsoft. That the Boards of these companies compensate these leaders, and the teams they lead, is horrific. It reinforces the notion that what matters is hard work, willingness to toe the line of the old Success Formula, willingness to remain Locked-in to industry or company traditions – rather than results. Results which give independent feedback from the marketplace of the true value of the Success Formula.
Let's congratulate the Tribune Trustee. For once, more attention is being paid to results than to "hard work" or "execution." Tribune – like General Motors – needs a wholesale makeover. An entirely new team of leaders willing to Disrupt old Lock-ins and use White Space to define a new Success Formula. Willing to move the resources in these companies, including the employees, back into growth markets. If more Boards acted like the Tribune Trustee we'd be a lot better off because more companies would grow and maybe we'd move forward out of this recession.
by Adam Hartung | Apr 15, 2010 | Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
Hi, two readings recently have really surprised me.
Firstly, Dawn Beaupariant from the public relations firm Waggener Edstrom contacted me regarding my Forbes column. I learned this firm is the PR agency for Microsoft. They took exception to my Forbes column ("Microsoft's Dismal Future"). But not because any facts were inaccurate.
Rather, it was their point of view that because OS 7 is now the largest selling OS of all time that demonstrated it was a successful product. Of course, when the television standard was changed in the USA to digital and everyone had to transition set-top boxes those also became big sellers. But it wasn't because everybody wanted the new product. More, it was the impact of a monopolist. We all know Microsoft has had a near monopoly in PC operating systems (even though every year it is losing share to Linux), so the fact that they can force people to use a new one on new machines, or upgrade, is less than an enthusiastic market endorsement of the product. For every "reviewer" who likes OS 7, there are 100 users saying "this gives me bells and whistles I don't need or want, and complicates my life. Can I simply keep my old product, or do my work on my smartphone?"
The Forbes column didn't debate whether Microsoft was likely to remain dominant in PC operating systems – that is a foregone conclusion. The issue is that markets are shifting away from PCs to mobile devices. And Microsoft has lost 2/3 its market share in mobile operating systems. And it is not developing a strong product. If people keep shifting from PCs to Blackberry's, iPhones and Androids – and PC sales start declining – in 10 years Microsoft could dominate PC OS sales (and Office applications) but it may not matter. Too bad the PR firm didn't get that.
Secondly, the PR firm claimed that Microsoft could put forward new products readily, leading to capturing dominant share in new markets. Their one claim that Microsoft had accomplished this was xBox. The PR person conveniently ignored the smartphone market, the Zune-style handheld market, the market for mobile applications (where Apple sold 2billion apps in its first 18 months), the search market (where Microsoft lags Google and would be nowhere without picking up Yahoo!'s declining business) and a host of other markets where Microsoft simply let the horse out of the barn.
To make matters worse, as Microsoft has invested to Defend the PC operating system and office products business, xBox is losing market share (exactly the point I made in the article – using the smartphone example instead)! According to IndustryGamers.com "PS3 'Steadily Increasing' Market Share Across the Globe" (Feb, 2010). Bad pick Dawn!
- The PS3 is dominant in Japan and Korea, and as of June 2008, has begun
to outsell the Xbox 360 in Europe. It is also steadily increasing its
market share in all other regions across the globe, including in the
North American market
- PS3 sales have been surging (44%
over the holidays) and SCEA senior vice president of Marketing and
PlayStation Network, Peter Dille, recently insisted that PS3
will eventually overtake Xbox 360
Most commenters have reflected my viewpoint, saying that they see Microsoft so horribly Locked-in to its old business that it is almost GM-like in its approach to new products and markets. Not a good sign. Those who defend Microsoft simply take the point of view that Microsoft is huge, has high share in PCs, and is very profitable in OS and Office Product sales. Wow, just like people defended GM was in the 1970s comparing to offshore competitors! These defenders completely miss the point that the marketplace is now rapidly shifting to new solutions, and the companies driving that shift with the most product are Apple, Google and Research in Motion (RIM)! Microsoft may look like Goliath, but it would be foolish to ignore the slings of new technology being brought to the battle by these David's with their smartphones, Chrome O/S, mail products, etc.
I was struck this week at the backward thinking offered on the Harvard Business Review blog posting "Is This Innovation Too Disruptive for My Firm." The author justifies companies sticking to their defensive positions, just as Microsoft is doing, simply because most companies fail at moving away from their "core." He seems very content to offer that since most companies can't really move into new markets well, so they might as well not try. Exactly what they are supposed to do as revenues dwindle in their "core" markets he never resolves! I guess he'd rather management simply not try to grow, and go down valiantly with the sinking ship.
Quite concerning is that he takes up the mantle of "core capability." He points out that most of the failures happen when companies move away from their "core" and therefore he recommends that all innovation remain close to the "core." His big argument is that this is lower risk. Well, Xerox remained close to core with laser printers – and how'd that work out for long-term value growth? Apple remained close to its Macintosh core and was almost bankrupt in 2000 before jumping into music and smartphones. Polaraoid stayed close to its core of instant film photography, and Kodak stayed close to its similar core. Now one is erased from the marketplace and the other is a no-growth inconsequential competitor.
Analogies are risky, but here goes. For the HBR author, his arguement isn't a lot different than "Over the last 200 years we've noticed that ships which sail out past the horizon often never return. Therefore, we recommend you never sail beyond the horizon. Clearly, this is risky and returns are uncertain – so don't do it. Ever. Very likely, there is nothing out there you will ever capture of value." Sort of sounds like those who wouldn't back Columbus – good thing he finally convinced Queen Isabella to give him 3 ships.
In 2008 and 2009 we've seen many great companies driven to bad returns. Layoffs abound. Growth has disappeared. Listen to HBR, and behave like Microsoft, and you'll never grow again. In 2010 we need a different approach – a different solution. Companies must realize that focusing on "core" capabilities, customers and markets has rapidly diminishing returns these days. You cannot succeed by focusing on Defending your business – even if it is a near-monopoly like PC operating systems! Why not? Because markets rapidly shift to new solutions that obsolete your products and even when you have high share, and high margins, sales can disappear really fast (like Xerox machine sales or amateur film sales – and probably laptop sales). If you aren't putting a big chunk of resources into GROWING in new marketplaces, by using White Space teams to drive that learning and growth, you will eventually become an historical artifact.
