by Adam Hartung | Jan 10, 2011 | Defend & Extend, Disruptions, Innovation, Leadership, Web/Tech
Summary:
- Communication is now global, instantaneous and free
- As a result people, and businesses, now adopt innovation more quickly than ever
- Competitors adapt much quicker, and react much stronger than ever in history
- Profits are squeezed by competitors rapidly adopting innovations
- But many business leaders avoid disruptions, leading to slower growth and declining returns
- To maintain, and grow, revenues and profits you must be willing to implement disruptions in order to stay ahead of fast moving competitors
- Amidst fast shifting markets, greatest value (P/E multiple and market cap) is given to those companies that create disruptions (like Facebook, Groupon, Twitter)
All business leaders know the pace of competitive change has increased.
It took decades for everyone to obtain an old-fashioned land line telephone. Decades for everyone to buy a TV. And likewise, decades for color TV adoption. Microwave ovens took more than a decade. Thirty years ago the words “long distance” implied a very big cost, even if it was a call from just a single interchange away (not even an area code away – just a different set of “prefix” numbers.) People actually wrote letters, and waited days for responses! Social change, and technology adoption, took a lot longer – and was considered expensive.
Now we assume communications at no cost with colleagues, peers, even competitors not only across town state, or nation, but across the globe! Communication – whether email, or texting, or old fashioned voice calls – has become free and immediate. (Consider Skype if you want free phone calls [including video no less] and use a PC at your local library or school building if you don’t own one.) Factoring inflation, it is possible to provide every member of a family of 5 with instant phone, email and text communication real-time, wirelessly, 24×7, globally for less than my parents paid for a single land-line, local-exchange only (no long distance) phone 50 years ago! And these mobile devices can send pictures!
As a result, competitors know more about each other a whole lot faster, and take action much more quickly, than ever in history. Facebook, for example, is now connecting hundreds of millions of people with billions of communications every day. According to statistics published on Facebook.com, every 20 minutes the Facebook website produces:
- 1,000,000 shared links
- 1,323,000 tagged photos
- 1,484,000 event invitations
- 1,587,000 Wall posts
- 1,851,000 Status updates
- 1,972,000 Friend requests accepted
- 2,716,000 photos uploaded
- 4,632,000 messages
- 10,208,000 comments
Multiply those numbers by 3 to get hourly. By 72 to get daily. Big numbers! Alexander Graham Bell had to invent the hardware and string thousands of miles of cable to help people communicate with his disruption. His early “software” were thousands of “operators” connecting calls through central switchboards. Mark Zuckerberg and friends only had to create a web site using existing infrastructure and existing tools to create theirs. Rapidly adopting, and using, existing innovations allowed Facebook’s founders to create a disruptive innovation of their own! Disruption has allowed Facebook to thrive!
Facebook has disrupted the way we communicate, learn, buy and sell. “Word of mouth” referrals are now possible from friends – and total strangers. Product benefits and problems are known instantaneously. Networks of people arguably have more influence that TV networks! Many employees are likely to make more facebook communications in a day than have conversations with co-workers! Facebook (or twitter) is rapidly becoming the new “water cooler.” Only it is global and has inputs from anyone. Yet only a fraction of businesses have any plans for using Facebook – internally or to be more competitive!
Far too many business leaders are unwilling to accept, adopt, invest in or implement disruptions.
InnovateOnPurpose.com highlights why in “Why Innovation Makes Executives Uncomfortable:”
- Innovation is part art, and not all science. Many execs would like to think they can run a business like engineering a bridge. They ignore the fact that businesses implement in society, and innovation is where we use the social sciences to help us gain insight into the future. Success requires more than just extending the past – because market shifts happen. If you can’t move beyond engineering principles you can’t lead or manage effectively in a fast-changing world where the rules are not fixed.
- Innovation requires qualitative insights not just quantitative statistics. Somewhere in the last 50 years the finance pros, and a lot of expensive strategy consultants, led business leaders to believe that if they simply did enough number crunching they could eliminate all risk and plan a guaranteed great future. Despite hundreds of math PhDs, that approach did not work out so well for derivative investors – and killed Lehman Brothers (and would have killed AIG insurance had the government not bailed it out.) Math is a great science, and numbers are cool, but they are insufficient for success when the premises keep changing.
- Innovation requires hunches, not facts. Well, let’s say more than a hunch. Innovation requires we do more scenario planning about the future, rather than just pouring over historical numbers and expecting projections to come true. We don’t need crystal balls to recognize there will be change, and to develop scenario plans that help us prepare for change. Innovation helps us succeed in a dynamic world, and implementation requires a willingness to understand that change is inevitable, and opportunistic.
- Innovation requires risks, not certainties. Unfortunately, there are NO certainties in business. Even the status quo plan is filled with risk. It’s not that innovation is risky, but rather that planning systems (ERP systems, CRM systems, all systems) are heavily biased toward doing more of the same – not something new! Markets can shift incredibly fast, and make any success formula obsolete. But most executives would rather fail doing the same thing faster, working harder, doing what used to work, than implement changes targeted at future market needs. Leaders perceive following the old strategy is less risky, when in reality it’s loaded with risk too! Too many businesses have failed at the hands of low-risk, certainty seeking leadership unable to shift with changing markets (GM, Chrysler, Circuit City, Fannie Mae, Brach’s, Sun Microsystems, Quest, the old AT&T, Lucent, AOL, Silicon Graphics, Yahoo, to name a few.)
Markets are shifting all around us. Faster than imaginable just 2 decades ago. Leaders, strategists and planners that enter 2011 hoping they can win by doing more, better, faster, cheaper will have a very tough time. That is the world of execution, and modern communication makes execution incredibly easy to copy, incredibly fast. Even Wal-Mart, ostensibly one of the best execution-oriented companies of all time, has struggled to grow revenue and profit for a decade. Today, companies that thrive embrace disruption. They are willing to disrupt within their organizations to create new ideas, and they are willing to take disruptive opportunities to market. Compare Apple to Dell, or Netflix to Blockbuster.
Recent investments have valued Facebook at $50B, Groupon at $6B and Twitter at almost $4B. Apple is now the second most valuable company (measured by market capitalization). Why? Because they are disrupting the way we do things. To thrive (perhaps survive by 2015) requires moving beyond the status quo, overcoming the perceived risk of innovation (and change) and taking the actions necessary to provide customers what they want in the future! Any company can thrive if it embraces the disruptions around it, and uses them to create a few disruptions of its own.
by Adam Hartung | Oct 13, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in
Summary:
- Many large, and leading, companies have not created much shareholder value the last decade
- A surprising number of very large companies have gone bankrupt (GM) or failed (Circuit City)
- Wal-Mart is a company that has generated no shareholder value
- The Wal-Mart disease is focusing on executing the business's long-standing success formula better, faster and cheaper — even though it's not creating any value
- Size alone does not create value, you have to increase the rate of return
- Companies that have increased value, like Apple, have moved beyond execution to creating new success formulas
Have you noticed how many of America's leading companies have done nothing for shareholders lately? Or for that matter, a lot longer than just lately. Of course General Motors wiped out its shareholders. As did Chrysler and Circuit City. The DJIA and S&P both struggle to return to levels of the past decade, as many of the largest companies seem unable to generate investor value.
Take for example Wal-Mart. As this chart from InvestorGuide.com clearly shows, after generating very nice returns practically from inception through the 1990s, investors have gotten nothing for holding Wal-Mart shares since 2000.
Far too many CEOs today suffer from what I call "the Wal-Mart Disease." It's an obsession with sticking to the core business, and doing everything possible to defend & extend it — even when rates of return are unacceptable and there is a constant struggle to improve valuation.
Fortune magazine's recent puff article about Mike Duke, "Meet the CEO of the Biggest Company on Earth" gives clear insight to the symptoms of this disease. Throughout the article, Mr. Duke demonstrates a penchant for obsessing about the smallest details related to the nearly 4 decade old Wal-Mart success formula. While going bananas over the price of bananas, he involves himself intimately in the underwear inventory, and goes cuckoo over Cocoa Puffs displays. No detail is too small for the attention of the CEO trying to make sure he runs the tightest ship in retailing. With frequent references to what Wal-Mart does best, from the top down Wal-Mart is focused on execution. Doing more of what it's always done – hopefully a little better, faster and cheaper.
But long forgotten is that all this attention to detail isn't moving the needle for investors. For all its size, and cheap products, the only people benefiting from Wal-Mart are consumers who save a few cents on everything from jeans to jewelry.
The Wal-Mart Disease is becoming so obsessive about execution, so focused on doing more of the same, that you forget your prime objective is to grow the investment. Not just execute. Not just expand with more of the same by constantly trying to enter new markets – such as Europe or China or Brazil. You have to improve the rate of return. The Disease keeps management so focused on trying to work harder, to somehow squeeze more out of the old success formula, to find new places to implement the old success formula, that they ignore environmental changes which make it impossible, despite size, for the company to ever again grow both revenues and rates of return.
Today competitors are chipping away at Wal-Mart on multiple fronts. Some retailers offer the same merchandise but in a better environment, such as Target. Some offer a greater selection of targeted goods, at a wider price range, such as Kohl's or Penney's. Some offer better quality goods as well as selection, such as Trader Joe's or Whole Foods. And some offer an entirely different way to shop, such as Amazon.com. These competitors are all growing, and earning more, and in several cases doing more for their investors because they are creating new markets, with new ways to compete, that have both growth and better returns.
It's not enough for Wal-Mart to just be cheap. That was a keen idea 40 years ago, and it served the company well for 20+ years. But competitors constantly work to change the marketplace. And as they learn how to copy what Wal-Mart did, they can get to 90%+ of the Wal-Mart goal. Then, they start offering other, distinctive advantages. In doing so, they make it harder and harder for Wal-Mart to be successful by simply doing more of the same, only better, faster and cheaper.
Ten years ago if you'd predicted bankruptcy for GM or Chrysler or Circuit City you'd have been laughed at. Circuit City was a darling of the infamous best seller "Good To Great." Likewise laughter would have been the most likely outcome had you predicted the demise of Sun Microsystems – which was an internet leader worth over $200B at century's turn. So it's easy to scoff at the notion that Wal-Mart may never hit $500B revenue. Or it may do so, but at considerable cost that continues to hurt rates of return, keeping the share price mired – or even declining. And it would be impossible to think that Wal-Mart could ever fail, like Woolworth's did. Or that it even might see itself shredded by competitors into an also-ran position, like once powerful, DJIA member Sears.
The Disease is keeping Wal-Mart from doing what it must do if it really wants to succeed. It has to change. Wal-Mart leadership has to realize that what made Wal-Mart once great isn't going to make it great in 2020. Instead of obsessing about execution, Wal-Mart has to become a lot better at competing in new markets. And that means competing in new ways. Mostly, fundamentally different ways. If it can't do that, Wal-Mart's value will keep moving sideways until something unexpected happens – maybe it's related to employee costs, or changes in import laws, or successful lawsuits, or continued growth in internet retailing that sucks away more volume year after year – and the success formula collapses. Like at GM.
Comparatively, if Apple had remained the Mac company it would have failed. If Google were just a search engine company it would be called Alta Vista, or AskJeeves. If Google were just an ad placement company it would be Yahoo! If Nike had remained obsessed with being the world's best athletic shoe company it would be Adidas, or Converse.
Businesses exist to create shareholder value – and today more than ever that means getting into markets with profitable growth. Not merely obsessing about defending & extending what once made you great. The Wal-Mart Disease can become painfully fatal.
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 | Feb 16, 2010 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership
About 30 years ago Roberta Flack hit the top of the record charts (remember records anybody?) with "Killing Me Softly" – a love song. Today we have 2 examples of CEO's softly killing their shareholders, employees and investors. Definitely NOT a love song.
Sears has continued its slide, which began the day Chairman Lampert acquired the company and merged it with KMart. I blogged this was a bad idea day of announcement. Although there was much fanfare at the beginning, since day 1 Mr. Lampert has pursued an effort to Defend & Extend the outdated Sears Success Formula. And simultaneously Defend & Extend his outdated personal Success Formula based on leveraged financing and cost cutting. The result has been a dramatic reduction in Sears stores, a huge headcount reduction, lower sales per store, less merchandise available, fewer customers, empty parking lots, acres of unused real estate and horrible profits. Nothing good has happened. Nobody, not customers, suppliers or investors, have benefited from this strategy. Sears is almost irrelevant in the retail scene, a zombie most analysts are waiting to expire.
Today Crain's Chicago Business reported "Sears to Offer Diehard Power Accessories for Sale at Other Retailers." Sears results are so bad that Mr. Lampert has decided to try pushing these batteries, charges, etc. through another channel. At this late stage, all this will do is offer a few incremental initial sales – but reduce the appeal of Sears as a retailer – and eventually diminish the brand as its wide availability makes it compete head-to-head with much stronger auto battery brands like Energizer, Duralast, Optima and the heavily advertised Interstate. Sears has attempted to "milk" the Diehard brand for cash for many years, and placed in retail stores head-to-head with these other products it won't be long before Sears learns that its competitive position is weak as sales decline.
Mr. Lampert needed to "fix" Sears – not try to cut costs and drain it of cash. He needed to rebuild Sears as a viable competitor by rethinking its market position, obsessing about competitors and using Disruptions to figure out how Sears could compete with the likes of WalMart, Target, Kohl's, Home Depot, JC Penneys and other strong retailers. Now, his effort to further "milk" Diehard will quickly kill it – and make Sears an even less viable competitor.
Simultaneously, Chairperson Barnes at Sara Lee has likewise been destroying shareholder value, employee careers and supplier growth goals since taking over. During her tenure Sara Lee has sold buisinesses, cut headcount, killed almost all R&D and new product development, sold real estate and otherwise squandered away the company assets. Sara Lee is now smaller, but nobody – other than perhaps herself – has benefited from her extremely poor leadership.
As this business failure continues advancing, Crain's Chicago Business reports "Sara Lee to Spend $3B on Stock Buyback." In 2009 Sara Lee announced it was continuing the dismantling of the company by selling its body-care business to
Unilever and its air-freshener products and assets to Procter & Gamble Co. for approximately $2.2 billion. As an investor you'd like to hear all that money was being reinvested in a high growth business that would earn a significant rate of return while adding to the top line for another decade. As a supplier you'd like to hear this money would strengthen the financials, and help Sara Lee to invest in new products for growth that you could support. As an employee you'd like this money to go into new projects for revenue growth that could help your personal growth and career advancement.
But, instead, Ms. Barnes will use this money to buy company stock. This does nothing but put a short-term prop under a falling valuation. Like bamboo poles holding up a badly damaged brick wall. As investors flee, because there is no growth, low rates of return and no indication of a viable future, the money will be spent to prop up the price by buying shares from these very intelligent owner escapees. After a couple of years the money will be gone, Sara Lee will be smaller, and the shares will fall to their fair market value – no longer propped up by this corporate subsidy. The only possible winner from this will be Sara Lee executives, like Ms. Barnes, who probably have incentive compensation tied to stock price — rather than something worthwhile like organic revenue growth.
Both of these very highly paid CEOs are simply killing their business. Softly and quietly, as if they are doing something intelligent. Just because they are in powerful positions does not make them right. To the contrary, this is an abuse of their positions as they squander assets, and harm the suburban Chicago communities where they are headquartered. That their Boards of Directors are approving these decisions just goes to show how ineffective Boards are at looking out for the interests of shareholders, employees and suppliers – as they ratify the decisions of their friendly Chairperson/CEOs who put them in their Board positions. The Boards of Sears and Sara Lee are demonstrating all the governance skill of the Boards at Circuit City and GM.
It's too bad. Both companies could be viable competitors. But not as long as the leadership tries to Defend & Extend outdated Success Formulas unable to produce satisfactory rates of return. Lacking serious Disruption and White Space, these two publicly traded companies remain on the road to failure.
by Adam Hartung | Jan 25, 2010 | Current Affairs, Leadership, Lifecycle
We all love awards and lists. Who doesn't like being rewarded for their accomplishments. At the same time, we have acquired a strong taste for lists "The best…" Another verification of success. But both can be harbingers of potential problems – and even destruction.
Ben Bernanke became Time magazine's "Man of the Year" and now he's at some risk of losing his job (see 24/7WallStreet.com "In Not Bernanke, Who?" Think about the list of Great Companies that appear in books, like Good to Great, only to end up in big trouble – like Circuit City and Fannie Mae. Why does it seem those who top awards and lists end up shortly struggling?
Too often businesses, and business people, "win" by doing more of the same. They work hard to optimize their Success Formula. They get really committed to practicing what they do (remember Outliers by Malcolm Glaldwell and his recommendation to practice, practice, practice?) They get better and better. And in fields like sports and music, where the rules are well understood and the approach is clear, this often works. And as long as they keep practicing top athletes and musicians often remain near the top of competitors.
But we have to recognize that most of the time those "at the top" in business have emerged within a given market. Then they are knocked off by a shift. Like Ed Zander of Motorola being named #1 CEO in 2004, only to be fired within 2 years as RAZR sales toppled. Like Sun Microsystems perfecting Unix servers for an emerging client/server technology market that became saturated and shifted to PC servers. Like Michael Dell (and Dell Corporation) which emerged when lower cost made supply chain efficiencies critical for PCs, before the PC market became saturated and iPhones plus Blackberries started dominating the landscape. Or WalMart which also used a new supply chain to grow the emerging discount retailing sector, only now it is laying off 10,000 employees as it shuts Sam's stores across the country. These companies created a Success Formula and honed it quarter after quarter to maximize performance in a high growth environment. But the market shifted.
In business the rules are not "set". There is no written music to
perform. Instead, the market is highly dynamic. New competitors
emerge, new ways of competing emerge, new technologies emerge and new
solutions emerge. The market keeps changing. Suddenly, what worked last year isn't successful any more. When the market shifts, the previous winner becomes the new goat. That optimized business starts to look like the world's best wrestler, only to be obsolete when a flood occurs making swimming the new, necessary skill. Being last year's best is impossible to repeat because the market shift makes the old approach less valuable – possibly obsolete.
"Best practices" are usually little more than copying last year's list topper. In the 1990s everyone wanted to copy product development practices at Sun, and supply chain practices at Dell. But both led to horrible returns when demand for servers and PCs diminished. Best practices are almost guaranteed to be a solution developed to late, and applied even later, to solve previous years' problems. They aren't forward looking, and not designed to meet the needs 2 years into the future.
Business success isn't about topping a list. And, to a great degree, the Outlier approach (as is a hedgehog concept) is very risky. If you spend 10,000 hours doing something, only to see the value for that something go away, what good was it? Remember when Cobol writers were in demand? Being the world's best at something in business can cause you to be optimized on the past and inflexible to market change.
Business success requires adaptability. And that requires a focus on future markets. It requires the ability to constantly Disrupt your approach, to build capability in many different areas and markets. It requires skill at establishing and operating White Space projects to learn about new markets and shifts – the ability to know how to test and then understand the results of those tests. In business adaptability trumps optimization, because you can be sure that things will change – markets will shift – and the highly optimized find themselves behind the shift and struggling.
