by Adam Hartung | Mar 9, 2010 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
One of the worst impacts of Defend & Extend Management is the placement of a bullseye on your business. Take for example Microsoft. When everyone knows what software Microsoft is going to release, they start targeting it for hacking and otherwise spoiling. Likewise, competitors can predict Microsoft's moves and launch products that compete alternatively – such as Firefox and recently Chrome have done in Browsers. And has cloud computing using mobile devices. As leaders take actions to Defend & Extend the Success Formula the business becomes predictable, and much easier to attack.
And that's now a big problem for WalMart. Advertising Age is now discussing this problem at the world's largest retailer in "Stuck-in-middle Walmart Starts to Lose Share." As WalMart kept promoting, over and over and over, its message of "low price" (how many "rollback" ads did you see on television with images of falling price signs?) a single position was drummed home.
But while WalMart did this, smaller and more nimble competitors like Dollar General have actually been able to undercut WalMart on price – sucking away customers. Additionally, changes to improve margins in WalMart stores, and some redesigned stores, have caused prices to go up at WalMart making the company no longer the price leader! In several categories Target has beaten WalMart in professional pricing surveys! What happens when WalMart, with its concrete floors, limited merchandise and lowly paid employees is no longer the price leader?
Unfortunately, not everybody wants low price – especially all the time. And smart competitors like Target have been figuring out how to beat WalMart on specific items, while also offering a better shopping experience. While WalMart keeps trying to cut prices on the backs of vendors, thus not being the favorite customer of most, Target and others have been smarter about making deals which offered more win/win opportunities. They took specific aim at weaknesses in WalMart's strategy, and are now ruining WalMart's day by beating WalMart selectively while simultaneously offering more! WalMart made it possible by signaling its strategy and tactics so clearly. A result of Defend & Extend management.
WalMart would like to move away from being strictly low price. As the article details, the company has implemented a "project impact" intended to upgrade stores and make them more merchandise and experience competitive. However, this has raised prices and confused shoppers. If WalMart isn't "low price" what is it? Again, when management is all about Defend & Extend then customers aren't able to understand behavior that is different from doing more of what was always done.
WalMart's move to upgrade stores is laudable. But the company cannot implement a change through the traditional store operations. Phoenix Principle companies know that good new ideas cannot survive as part of the existing D&E business. Confused customers, unhappy and confused management and conflicts with historical metrics (like pricing and margin metrics) simply makes the new idea "out of step" with the Success Formula. And as Lock-ins (like "we are low price") are violated discomfort leads to resentment and a desire to get back to old ways of doing business. People start asking for a "return to the core of what made us great." For these reasons, "project impact" is not succeeding and has no real chance of succeeding.
WalMart is in trouble. It's growth has slowed as competitors are figuring out other ways to compete. Ways WalMart cannot follow. Competitors are picking apart the WalMart strategy, and siphoning off revenue and profit. Walmart is stuck in the Swamp, with no idea how to regain growth because the old approach has rapidly diminishing returns and the new approach is not viable in the organization.
To succeed, WalMart needs to apply The Phoenix Principle to "project impact." It must first develop its future scenario, and start spreading that message throughout WalMart and analysts. Otherwise, confusion will remain dominant. Secondly, WalMart must be honest with employees, customers, vendors and analysts about changing competition and how WalMart must change to remain competitive. It must talk less about WalMart and more about competitors and market shifts. Thirdly, WalMart has to be willing to Disrupt itself. Instead of all the incessant "rah rah" about the great "WalMart way" of doing things top management has to start saying that it is going to attack some lock-ins. It is going to force some changes. Then, "project impact" needs to be implemented in White Space. It needs to report outside the existing WalMart operations, have its own buyers, merchandisers, employees (maybe even allowing a union!). It needs permission to violate old Lock-ins in order to develop a new Success Formula, and the resources committed to really do the implementation – including testing and changing.
WalMart is Locked-in and its Defend & Extend Management approach is not good news for investors, vendors or employees. We can see that competitors, from on-line to the traditional Target, are taking shots at the bullseye Walmart has so proudly worn. Market shifts are happening. But WalMart is not establishing White Space to develop a new solution, and as a result the leadership is confusing everybody about "What is WalMart"? The company doesn't need to go back to its old ways – instead it really needs to apply The Phoenix Principle. But so far, D&E Management seems to be leading.
by Adam Hartung | Jun 8, 2009 | Current Affairs, General, Leadership, Lifecycle
Unless you have a lot of time to research stocks, you probably invest in a fund. Funds can be either an index, or actively managed. People like index funds because you aren't relying on a manager to have a better idea. Index funds can only own those stocks on the index. Like the S&P index fund – it can only own stocks in the S&P 500. Nothing else. Interestingly, the Dow Jones Industrial Average is considered an index fund – even though I don't know what it indexes. And that is important if you are an investor who benchmarks performance against the Dow. It's even more important if you invest in the Dow (or Diamonds – the EFT for the Dow Industrials).
GM is now off the Dow ("What does GM bankruptcy mean for Index Funds?"). Because it went bankrupt, the editors at Dow Jones removed it. But it wasn't long ago that the editors removed Sears and Kodak. But not because these companies filed bankruptcy. Rather, the Dow Jones editors felt these companies no longer represented American business. So the Dow is a list of 30 companies. But what companies is up to the whim of these Dow editors. Sounds like an active management (judgement) group (fund) to me.
Go back to the original DJIA and you get American Cotton Oil, American Sugar, Distilling & Cattle Feed, Leclede Gas Light, Tennesse Coal Iron and Railroad and U.S. Leather. Household names – right? As the years went buy a lot of companies came and went off the list. Bethlehem Steel, Honeywell, International Paper, Johns-Manville, Nash Motor, International Harvester, Owens-Illinois, Union Carbide — get the drift? These may have been successful at some time, but the didn't exactly withstand "the test of time" all that well. Even some of the recent appointments have to be questioned – like Home Depot and Kraft which have had horrible performance since joining the elite 30. You also have to wonder about the viability of some aging participants, like 3M, Alcoa and DuPont. So the DJIA may be someone's guess about some basket of companies that they think in some way represents the American economy – but it's definitely subject to a lot of personal bias.
Like any basket of stocks, when the DJIA is lagging market shifts, it is not a good place to invest. And the editors are greatly prone to lagging. Like their holdings in agriculture and basic commodities years ago, through holding big industrial companies in the 1990s and 2000s. And the over-weighting of financial companies at the turn of the century when they were merely using financial machinations to hide considerable end-of-value-life problems. When the DJIA is holding companies that are part of the previous economy, you don't want to be there.
The Dow should not be a lagging indicator. Rather, given its iconic position, it should hold the "best" companies in America. Not extremely poorly performing mega-bricks – like GM. GM should have been dropped several years ago. And you should be concerned about the recent appointment of Kraft. And even Travelers.
Those companies that will do well are going to be good at information, and making money on information. So who's likely to fall off (besides Kraft)? DuPont, which has downsized for 2 decades is a likely candidate. Caterpillar is laying off almost everyone, and cutting its business in China, as it struggles to compete with an outdated industrial Success Formula. Bank of America has shown it is disconnected from understanding how to compete globally as it has asked for billions in government bail-out money. And the hodge-podge of industrial businesses, none of which are on the front end of new technologies, at United Technologies makes it a candidate — if people ever recognize that the company would quickly disintegrate without massive U.S. government defense spending. Even 3M is questionable as it has slowed allowing its old innovation processes to keep the company current in the information age.
Adding Cisco was a good move. Cisco is representative of the information economy – as are Verizon, AT&T (which was SBC and before renameing, GE, HP, Intel, IBM, Microsoft, Merck and Pfizer (if they transition to biologics from old-fashioned pharmaceutical manufacturing ways – otherwise replace them with Abbott). But all those other oldies – like Walt Disney (sorry, but the web has forever changed the marketplace for entertainment and Walt's folks aren't keeping up with the times), Boeing (are big airplanes the wave of the future in a webinar age?), Coke (they've kinda covered the world and run out of new ideas), P&G (anybody excited about Swiffer variation 87?), and Wal-Mart – which couldn't recognize doing anything new under any circumstances.
As an investor, you want companies that can grow and create a profit. And that's increasingly not the DJIA – even as it slowly adds a Microsoft, Intel and Cisco. You want to include companies in leadership positions like Google and Apple. Their ability to move forward in new markets by Disrupting their Lock-ins and using White Space to launch new projects in new markets gives them longevity. As an investor you don't want the "dogs" – so why would you want to own DuPont, et.al.?
Investors may have been stung by overvaluations in technology companies during the 1990s. But that was the past. What matters now is future growth ("Technology on the comeback trail"). And that can be found by investing in the future – not what was once great but instead what will be great. Invest for the future, not from the past. And that can be found outside the DJIA. Unless the Dow editors suddenly change the portfolio to match the shift to an information economy.
(For additional ideas about recomposing the DJIA, see my blog of 3/12/09 "Dated Dow")
