by Adam Hartung | Mar 2, 2011 | Books, Defend & Extend, eBooks, In the Rapids, In the Swamp, Innovation, Leadership, Lock-in
What separates business winners from the losers? A lot of pundits would say you need to be efficient, cost conscious and manage margins. Others would say you need to be really good (excellent) at something – much better than anyone else. Unfortunately, that sounds good but in our fast-paced, highly competitive world today those platitudes don’t really create winners. Success has much more to do with the ability to shift. And to create shifts.
Think about Amazon.com. This company was started as an on-line retail channel for books most stores would not stock on their shelves. But Amazon used the shift to internet acceptance as a way to grow into selling all books, and eventually came to dominate book sales. Not only have most of the small book stores disappeared, but huge chains like B. Dalton and more recently Borders, were driven to bankruptcy. Amazon then built on this shift to expand into selling lots more than books, becoming a force for selling all kinds of products. And even opening itself to become a portal for other on-line retalers by routing customers to their sites, and even taking orders for products shipped from other e-tailers.
More recently, Amazon has taken advantage of the shift to digitization by launching its Kindle e-reader. And by making thousands of books available for digital downloading. By acting upon market trends, Amazon has shifted quickly, and has caused shifts in the market where it participates. And this shifting has been worth a lot to Amazon. Over the last 5 years Amazon’s stock has risen from about $30/share to about $180/share – about a 45%/year compounded rate of return!
Chart source: Yahoo Finance
In the middle to late 1990s, as Amazon was just starting to appear on radar screens, it appeared like Sears would be the kind of company that could dominate the internet. After all Sears was huge! It was a Dow Jones Industrial Average (DJIA) member that had ample resources to invest in the emerging growth market. Sears had a history of pioneering markets. It had once dominated retail with its catalogs, then became a powerhouse in free standing retail stores, then led the movement to shopping malls as an anchor chain, and even used its history in lending to develop what became Discover card, and had once shown its ability to be a financial services company and even an insurer! Sears had shifted with historical trends, and surely the company would see that it could bring its resources to the shifting retail landscape in order to remain dominant.
Unfortunately, Sears went a different direction, prefering to focus on defending its current business model. As the chain struggled, it was dropped from the DJIA. Eventually a financier, Edward Lampert, used his takeover of bankrupt KMart (by buying up their bonds) to take over Sears! Under his leadership Sears focused hard on being efficient, controlling costs and managing margins. Extensive financial rigor was applied to Sears to improve the profitability of every line item, dropping poor performers and closing low margin stores. While this initially excited investors, Sears was unable to compete effectively against other retailers that were lower cost, or had better merchandise or service, and the value has declined from about $190/share to $80; a loss of about 60% (at its recent worst the stock fell to almost 30 – or a decline of 84% peak to trough!)
Chart Source: Yahoo Finance
Meanwhile the world’s #1 retailer, Wal-Mart, has long excelled at being the very best at supply chain management, and low-price leadership in retailing. Wal-Mart has never varied from its original business model, and in the retail world it is undoubtedly the very best at doing what it does – buy cheap, sell cheap and run a very tight supply chain from purchase to sale. This excited some investors during the “Great Recession” as customers sought out low prices when fearing about their jobs and future.
But this strategy has not been able to produce much growth, as stores have begun saturating just about everywhere but the inner top 30 cities. And it has been completely unsuccessful outside the USA. As a result, despite its behemoth size, the value of Wal-Mart has really gone nowhere the last 5 years. While there has been price gyration (from $42 low to $62 high) for long-term investors the stock has really gone nowhere – mired mostly around $50.
Chart Source: Yahoo Finance
Investors in Amazon have clearly fared much better than Sears or Wal-Mart
Chart Source: Yahoo Finance
Too often business leaders spend too much time thinking about what they do. They think about costs, margins, the “business model” and execution. But success really has less to do with those things than understanding trends, and capitlizing on those trends by shifting. You don’t have to be the lowest cost, or most efficient or even the most passionate. What works a lot better is to go where the trends are favorable, and give customers solutions that align with the trends. And if you do this early, before anyone else, you’ll have a lot of time to figure out how to make money before competitors try to cut your margins!
Recognize that most “execution” is about preserving what happened in the past. Trying to do things better, faster and cheaper. But in a rapidly changing world, new competitors change the basis of competition. Amazon isn’t a better classical bookseller, or retailer. It’s a company that leveraged trends – market shifts – to take advantage of new technologies and new ways of people shopping. First for books and then other things. Later it built on trends toward digitization by augmenting the production of electronic publications, which is destined to change the world of book publishing altogether – and even has impact on the publishing of everything from periodicals to manuals. Amazon is now creating market shifts, which is changing the fortunes of others.
For investors, employees and suppliers you are better off to be with the company that shifts. It has the ability to grow with the trends. And the faster you get out of those companies which are stuck, locked-in to their old business model and practices in an effort to defend historical behaviors, the better off you’ll be. Despite the P/E multiples, or other claims of “value investing,” to succeed you’re a lot better off with the company that’s finding and building on trends than the ones managing costs.
by Adam Hartung | Aug 5, 2010 | Current Affairs, In the Whirlpool, Lifecycle, Lock-in, Web/Tech
“Blame Piles Up in Tribune Cos. 2007 Buyout” is the Chicago Tribune headline. After months of research the bankruptcy judge has released a court ordered report on the transaction that left Tribune Corporation insolvent. Apparently, lots of people were aware that ad demand was falling like a stone. And that there was little hope it would recover. But selling executives shopped for a valuation company until they found one willing to say that management’s projections were plausible. Of course, they weren’t. The transition from print to digital was well along, and the projections were never going to happen.
What’s more startling is the hubris of Sam Zell to close the deal. Apparently he too had doubts about the forecasts, but he went ahead and borrowed all that money to close. That he would ignore all the market signals, and plenty of opportunities to obtain outsider input on the likely continued demise of newspaper ads, shows he wanted to close. He wanted to control Tribune Corporation. Even if it would cost him $300m.
Success Formulas are very powerful. And successful entrepreneurs often have them so locked-in that there’s no other consideration. Success, and personal fortunes, causes them to ignore external data, and external opinions, when they fly in the face of their historical Success Formula. They want to apply it to a new business, and they are ready to go! So damn the torpedos! Full speed ahead!
It’s too bad that our hero worship of successful entrepreneurs too often leaves them insufficiently challenged. Unfortunately, a lot of people got hurt in the calamity that is now the Tribune Corporation bankruptcy. Employees have lost pay, benefits and jobs. Chicagoans have seen the paper get even smaller, and the amount of local news coverage decline. And the city’s reputation has certainly not benefited.
As much as people despise consultants, it would seem that Mr. Zell would have been a lot smarter to ask some bright strategists what the future was for the newspaper before abetting the close of such an onerous, and destructive, transaction. Outsiders, including consultants, are valuable at pointing out the range of potential outcomes – not just the one that fits your Success Formula. That’s why successful organizations use outsiders to help develop scenarios and study competitors, as well as design Disruptions and establish White Space projects. Outsiders can help overcome Lock-in to historical assumptions, biases, prejudice and viewpoints in order to reduce failures and improve success.
And this is some advice hopefully Leonard Riggio will heed. “Barnes & Noble Considering Sale of Company; Possible Buyers Include Founder Leonard Riggio” is the Chicago Tribune headline. Barnes & Noble as an acquisition looks a lot like Tribune did 3 years ago. Product sales (printed books) are in a free-fall as people choose alternative products – especially digital books and journals. Books themselves are struggling to avoid obsolescence as digital publishing makes shorter format more valuable in many instances. Brick and mortar shops focused on printed material – from bookstores to magazine/news stands – have been failing for 10 years – and in fact overall brick and mortar retail across the board has declined the last 4 years as internet retailing has grown. The leading competitor (Amazon) has led the transition to digital, and is competing with an enormously successful tech company (Apple) for the future of digital publishing. Barnes & Noble may have a fledgling product, but it’s about as competitive as a junior leaguer compared to someone on the Yankees!
The Success Formula of Barnes & Noble, as created by the original founder, is obsolete. And B&N is not in the game for where the marketplace is headed. Just because he knew the business once, years ago, gives the founder no leg-up on resurrecting the company. Contrarily, his background is a decided negative as he’s likely to attempt a “throwback” strategy. Since the world goes forward, never backward, those simply don’t work. We could expect lots of store closings, layoffs and inventory reductions – but the future of publishing has radically changed and will continue doing so, and B&N has little input on that outcome. Amazon, Apple and Google (the largest purveyor of digital words through its search engine) are the giants in this game and B&N will get crushed.
And the city of Milwaukee should consider hiring some consultants, as should Harley Davidson. “In Quest for Lower Cost Harley-Davidson Considers Leaving Milwaukee after 107 years” reports Chicago Tribune. Harley would like subsidies, from its workers (unions) as well as the city and state, to keep from moving its factories. But Harley’s problems are far worse than hourly wages for plant workers, and everyone needs to be careful not to get sucked into a Tribune Corp. deal of trying to save a floundering ship.
Harley Davidson’s product has been largely unchanged for a very long time. Despite all the hoopla about tattooed customers, for 30 years competitors Honda, Suzuki, Kawasaki and Yamaha have been innovating and running circles around Harley. Their businesses have grown. Not only by dramatically expanding their motorcycle products, but adding ATVs, snowmobiles, boat engines, automobiles, electric generators, yard equipment and a raft of other products (Honda even makes a commercial airplane!) They have brought in millions of new customers, while Harley’s customer base is eroding – largely dying off as the average age of buyers has risen to well over 50!!
While competitors have pushed forward with new technology and products, and developed new markets and customers, Harley has tried standing still. So, its now an historical anachronism. Interesting to look at, and with some intriguing niches, but not really important to the industry. Should Harley disappear nobody in the motorcycle business will really notice, because almost every competitor now has a Harley-inspired v-twin motorcycle they can sell. Few people realize that most dealers make more money selling jackets and other Harley-Licensed gear/apparel than motorcycles! Harley’s days have been numbered since they let the v-Rod, a motorcycle with a Porsche engine, languish in dealer showrooms – allowing their “customers” to keep them locked-in to aging technology at ever rising prices (they typical Harley prices for over 2x the price of a comparable Japanese produced motorcycle.) Harley should have paid more attention to competitors a long time ago (instead of deriding them as “rice burners”) and a lot less attention to those very loyal – but diminishing in numbers – dealers and end-use customers.
All 3 of these companies, Tribune, Barnes & Noble and Harley-Davidson have great pasts. But the risk is thinking that means anything about the future. Tribune was fatally harmed by adding debt to a company that needed to refocus on new internet markets, then continuing to try to keep the old Success Formula operating. Barnes & Noble is the last prominent brick and mortar book retailer, but there is little reason to think there will be a need for them in just 5 years. And Harley-Davidson every year appeals to a smaller group of buyers in a niche market with aged technology and a tiring brand. In all cases, caveat emptor! (Let the buyer beware!) Before accepting any management forecasts, it would be a good idea to get some external opinions!
by Adam Hartung | Aug 2, 2010 | Current Affairs, In the Swamp, Innovation, Leadership, Web/Tech, Weblogs
Things are tough for the printed word these days. Not for writing, or demand for information. That is doing great – with more volume than ever! But the issue is “printed” material. Clearly, the format is changing. But are business leaders changing with it?
The Los Angeles Times reported “Amazon.com Says It’s Selling 80% More Downloaded Books Than Hardcovers.” This is a big switch. Clearly Kindles are making a big difference as people are buying a lot less paper, and reading a lot more bits. Do you remember when your colleagues all said “I want a book, I don’t want to read looking at a screen?” Do you remember when businesspeople actually printed their emails? Clearly a sentiment gone by the wayside.
Accuracy in Media reported “U.S. Newspaper Circulation Dropped 30% Since ’07.” And it’s a global phenomenon, with the U.K. down 25%, Greece 20%, Italy 18% and Canada 17%. Fully 2/3 of major countries are seeing newspaper demand decline. No wonder Tribune Corporation, publisher of The Chicago Tribune, Los Angeles Times and Baltimore Sun, as well as others, is having such a hard time emerging from bankruptcy. Every month this looks more like the buggy whip business. Can you really expect the company to survive?
Amidst this backdrop, magazines have a dire future. I can remember when browsing magazines was the norm, and trade magazines arrived in my inbox daily. Often 60 or 100 page affairs. No longer. Magazines have disappeared like rain in the Sahara. Their savior is supposedly to go digital, but according to TwistedImage.com magazine leaders are at a loss how to proceed. In “The Media Disruption Within” Mitch Joel describes how a panel of magazine publishers are approaching the industry change mostly with despair that the internet is here – and no concerted effort to define a new model. Lock-in was prevalent as they kept hoping for a return to the good old days for print publishers, which we know is never going to happen.
So today the New York Post reported “Mag Publishers, Apple in Subscription App Scrap.” Most of us can acquire newspapers for an iPad issue by issue – but subscriptions aren’t possible. The magazine fears it will be the big loser – and rightfully so. If Apple controls the subscription and delivery, why couldn’t it repackage? Where would Apple stop, and what value would the magazine actually deliver? Since iTunes changed music buying, how many people buy albums? It would require the editors and publishers be really sharp to know their market – something most gave up a long time ago when they turned to focusing on narrow content for their “core product” and trying to maintain their “core competency.” Neither of which are very “core” any more.
We all want news that’s exactly what we want, and we’ll simply go to Google to get it. Who published it isn’t nearly as important to readers any more. Nor is the packaging. Pretty soon Amazon via Kindle, Apple via iPad, and we can expect a Google tablet to do the same, can start packaging up the chapters of various books for readers giving them just what they want. And with that they can link off to source articles from newspapers and magazine archives – or to current events. The role of publisher will get a lot less clear, as writers and editors can go directly to the electronic distributor with content.
Into this fray is an interesting new approach reported by CNBC.com, “Rupert Murdoch’s New Digital Game Changer?” The claim is that News Corp. is preparing an all-new interactive product designed just for on-line and mobile users. It wouldn’t be a re-treaded newspaper. Text, photo and video designed just for the medium. Now that would be the right way to go about preparing for 2020. Unfortunately, the way News Corp. handled MySpace.com doesn’t give us a lot of comfort this will be a truly White Space project. But if it is, it might just be the start of toward the product which will be journalism in 2020.
If you’re in publishing you have no choice but to get White Space going. The intermediaries – from the tech companies to new-age publishers like HuffingtonPost.com – are moving forward. The business as it used to be is gone. But the demand for news – for content – is bigger than ever. It will require a new business model. A new Success Formula. And this is clearly a case of change or die. The world will never again be as it previously was.
Even if you don’t think of yourself as a publisher – you probably are. Do you put out customer literature – like user or repair manuals? Do you put out sales literature? Do you communicate with investors or industry analysts? If so, how do you “publish” your material? Paper? Packaged pdf? In today’s world, an advantage can be created by moving quickly to what’s new.
Today there are a plethora of luxury automobiles on the market. These beautifully high tech luxury machines have manuals that can run 500+ pages! It is impossible to figure out how anything works by trying the manual! Why don’t manufacturers of $60,000+ cars have a Kindle (or iPad) built into the console? Those cost less than a set of brake pads today, they can be updated automatically, and are interactive.
Are you thinking about how you could use a $100 device to make life easier for your customers and supply chain partners? Or are you printing? If you’re printing, what’s your budget? How much would you save if your salespeople, customers, etc. were given a Kindle? Or iPad? Can you afford not to be thinking differently about your future?
by Adam Hartung | Apr 19, 2010 | Current Affairs, Disruptions, In the Rapids, In the Whirlpool, Lock-in, Web/Tech
Is news dying, or are newspapers dying? That's a critical question. Most of us know the demand for news is not dying – and if you needed reinforcement a recent McKinsey & Company study verified that the demand for news has increased (McKinsey Quarterly "A Glimmer of Hope for Newspapers"). And a lot of the increase comes from people under 35 who are escalating their news demands. Of course, most of this increase is coming from the web and mobile media.
Too often, however, we don't see our business growing. Instead, Lock-in to old definitions make us think our business is shrinking when it is actually doing the opposite! And that's the Re-invention Gap. Manufacturers of small printing presses said demand was declining in the 1970s, when in fact demand for copies was exploding. Only the explosion was from xerography instead of presses. So A.B. Dick and Multigraphics, small offset press manufacturers, went out of business when demand for the output of their product was exploding! The market shifted, but it kept growing, and they missed the shift.
Today we see this behavior in most news publishers. Those who print newspapers and magazines are talking about how horrible business is. Only the demand for news is growing more quickly than ever. It's just not demand for print, which arrives too late for many customers. And because print is too slow a distribution method for these customers, advertisers are abandoning print as well. But only if you're Locked-in to printing do you say the market is horrible. Because with demand for news growing, if you reposition yourself to serve the growing part of the market you should say business is great!
Tribune Corporation, owner of The Chicago Tribune newspaper is still in bankruptcy. And its future relies entirely on how well it will serve the needs of on-line news readers. According to Crain's Chicago Business, in "Former Sports Editor Bill Adee Steers Chicago Tribune's On-line Strategy" print advertising revenues fell by 9% versus last year in the most recent quarter. And according to a quoted investment banker, nobody would have much interest in the value of a print newspaper. That business is destined to keep declining.
But simultaneously the volume of on-line ads tripled! And that's what a business has to do to cross its Re-invention Gap. It has to move from the old business into the new business – from the declining elements of its business into the growth elements.
What most businesses do wrong is try to apply their old business model to the new business. The old Success Formula has Lock-ins to metrics, schedules, processes, frequent decisions, decision-makers, strategic plans, etc. which the leadership tries to apply to the new business. For example, most newspapers are used to selling ads for several thousand dollars, based upon the number of subscribers. These are pretty large price points. But on-line, ads are sold per page view or per click. Now we're talking pennies sometimes. And to make money, you have to get a lot of views. Likewise, newspapers work on a 24 hour cycle of news accumulation and publishing, whereas the internet is 24×7 with the opportunity to change headlines and what's reported continuously. If a newspaper tries to apply the old Success Formulas related to sales, pricing and editorial process they fail.
And that's why crossing the re-invention gap requires a big Disruption. You have to get the organization to understand that while you are managing the old business, it is destined to eventually go under. So you have to be prepared to Disrupt the Lock-ins, to discover a new way to do the business. And that can only happen if there is a White Space team dedicated to building a business the way the new marketplace will pay for it. Totally separated from the old business. And exactly the opposite of what Tribune is doing by placing the team in the middle of the old newsroom!
At Tribune, one of the big problems is not only the ad pricing model and news scheduling, but the fact that the leadership is still trying to drive content like they did at the newspaper. Over a decade ago Tribune took a direction of accumulating less news on its own, and as a result it republished lots of content. But now on the internet republishing (or content aggregation as it is called on-line) is far less valuable because readers can go to the source. There are thousands and thousands of aggregators – making competition intense and profits negligible. Why page view a Chicago Tribune web page that's feeding info from the New York Times or Marketwatch or MSNBC when you can go directly to the New York Times or Marketwatch or MSNBC and get it yourself – possibly with other interesting sidebars? Succeeding in the new market requires developing an entirely new Success Formula – which Tribune Company has not done. It's still trying to find that magical "leverage" which will allow it to preserve its "history" (its old Success Formula) while tiptoeing into the new marketplace.
I don't know any newspaper or magazine publisher that has really attacked its Lock-ins, really Disrupted, or set up a true White Space team to explore how to make money in the growing new news market. News Corp. had the chance when it bought MySpace.com, but failed as it destroyed the MySpace business by "helping" its leadership. This market requires understanding how to get the news and report it cheaply and very fast, to computer and mobile device users. That is necessary to obtain the traffic which would be valuable to advertisers. And simultaneously the new team must package ad sales so as to maximize revenues from page views. Most are far too reliant on single ad sales, and not effectively linking the right ads to the right pages to generate more click-throughs as well as views.
Re-invention Gaps emerge because we let Lock-in blind us to growth opportunities. We define the business around the Lock-ins (such as printing a newspaper) rather than defining it around what the market wants (news.) Then when revenues stumble, starting a growth stall, the energy goes into preserving the old Success Formula (and its Lock-ins) first with cost cuts, and later with efforts to "synergize" or "leverage" the old Success Formula into the new market. And this never works. The growing part of the market is entirely different, and requires developing an entirely new Success Formula. That's why even in growing markets businesses fail, unless they commit to Dis
rupting the Lock-in and using White Space to move back into the growth Rapids.
by Adam Hartung | Apr 5, 2010 | Books, Current Affairs, Defend & Extend, In the Swamp, Lifecycle, Weblogs
Do you read more today, or less than you did 10 years ago? For most of us, the answer is more. Our ever present access to email and texting means we watch less TV, and pick up more from reading. Of course, we read a lot less paper than we used to – books are falling more out of favor every year – and the plight of newspapers and magazines is rocky. For traditional book publishers like Random House, Pearson, et.al. as well as periodical publishers like Tribune Corporation or News Corp. there is a lot of concern about survivability. But it's not because we're reading less. It's because the market has shifted, and people are reading differently.
What should a publisher focus upon? Words. Content. A recent Harvard Business School web discussion "HBS Cases: iPads, Kindles, and the Close of a chapter in Book Publishing" highlights that the role of a publisher is to find really good stuff that people want to read. The author, former CEO of Random House, points out that a publisher's job is to edit content into the format which makes it easiest to understand and digest. A good publisher aids us in our seeking knowledge, or enjoyment. But most publishers have completely lost sight of that goal, instead focusing on printing. Books, magazines and newspapers. Keep the presses busy, and the old supply chain filled.
In the business lifecycle we start with the Wellspring of ideas. When something catches hold, we enter the Rapids of growth. That's great, because growth is a fun place to be. But when markets start shifting then things go flat. We think slowness is our fault, so we work harder at what we've always done – but the cause is a market shift so the hard work makes little difference. We drift into the Swamp, where we are so overwhelmed with all the problems from no to negative growth that we forget what our original purpose was (we get so busy fighting alligators and killing mosquitoes that we forget the mission was to drain the swamp!) Eventually resources are depleted and we slide into the Whirlpool of failure.
Publishers are now in the Swamp. Cutting costs, focusing on "big deals" (like bidding wars to publish a book by a celebrity like Sarah Palin), and spending all kinds of time dealing with the supply chain. As the HBS article explains, while iPad and Kindle represent an opportunity for incremental growth – and new revenue – by feeding people content when they want it where they want it and how they want it – the publishers are in a pitched battle to slow electronic publishing. The publishers are trying to Defend & Extend their old process of printing, and distributing, paper. They want to defend their old Success Formula. And in doing so, they've completely lost sight of the opportunity digital publishing offers!
A paper published on the University of Missouri web site "What Happens When Newspapers Cut Back on Marketing Investments? An Empirical Analysis" is extremely enlightening. With ad spending down, in an effort to "save" the business, they are cutting editorial. Yet, this is creating a vicious cycle of decline (a Whirlpool is emerging.)
- Newsroom cuts are the most costly on revenue. More than cutting sales or distribution, cutting content led to the greatest loss. Duh! Of course. Readers are there for content – not for ads or distribution! Talk about forgetting your purpose.
- The bigger the cuts, the impact on revenues gets progressively worse! Remember what I said about creating a whirlpool? When you cut what people want, you hasten demise.
- Newsroom cuts are most costly on profit. Not only does revenue decline, but of all cost cuts the content cutting not only takes away readers – but quickly advertisers as well. Advertisers depend on content to draw people to their ads. Otherwise all you have is an ad tabloid – remember?
My book publisher is Pearson. Eighteen months ago I proposed that we take Create Marketplace Disruption and turn it into 16 short stand-alone mini-books. People could then buy just part of the book, as it suits their needs. Sell these for $1 or $2 each strictly as electronic downloads. That idea flew about as far as the famed dodo. Financial Times Press sells books I was reminded. No interest in this other wacky idea I proposed.
But I'm confident that for most of you, the idea of nice short readings – like say a blog – is a lot more appealing than digesting a 225 page book. People don't want less words, they just want things differently. That's why I do public speaking and workshops – because many of us don't want all the detail of the book and appreciate receiving the content in another format.
So, do you know what direction your market is headed? Are you moving forward to meet emerging needs and preferences? Or are you trying to defend & extend the way you've historically done business? For most publishers, the current direction spells disaster – failure. Learn from their mistakes, Disrupt your approach and find some White Space to learn how you can make money and grow!
