KMart, Sears, or Chapter 11?

Does anyone think KMart + Sears = a better company?  It doesn’t look that way.  Most experts say the company is worth nothing more than it’s inventory value plus the real estate.  Too bad, for both companies started as tremendous innovators in American retailing.

Kmart pioneered the discount store concept.  And Sears pioneered the retail catalog, store credit, private label tools and appliances, and lifetime warranties.  Both companies saw tremendous growth during their cycles of innovation.

Was it inevitable that they would both be relegated to below average returns?  Absolutely not.  Both simply stopped innovating.  They turned to defending and extending what they already knew, while other competitors attacked them with new innovations.

But why not change the game now?  The bankruptcy of KMart opened the door to new options – including the acquisition of Sears.  If the two chains view this latest action as a chance to simply defend and extend their outmoded businesses, they will both simply die off.  But if they view this as a major disruption to their business, and realize success will not come from chasing the two entrenched leaders (Wal*Mart and Target), they have the chance to create substantial value for their investors, employees and customers.

The new company needs to open its organization to innovation.  The new CEO, coming from restaurants, should eschew the conventional merchandisers and strike out for something new.  With the stock worth no more than the real estate, he has nothing to lose and everything to gain. 

We haven’t yet heard the new CEO make any claims about the future.  If he heads down the road of putting Craftsman in KMart and Martha Stewart in Sears – with great goals of a turn-around – run for the hills!  Investors should sell the stock and employees find new jobs.  But if he creates a new company that innovates away from the old business and toward something brand new he has a chance of creating a new company that could produce great returns.

The fate of KMart and Sears is not cast in concrete.  But the leadership must act quickly while the cement is still wet!  They must use this disruption to create something new — not defend and extend "the best parts" of what’s already not working.

Quoted in the Chicago Tribune

Adam Hartung was quoted in the Chicago Tribune today regarding the announcement of the Sears and K-Mart merger.  Here’s what Adam had to say:

Kmart Corp.’s cheeky proposal to
acquire Sears, Roebuck and Co. for $11 billion may be wowing Wall
Street, but it doesn’t do anything to fix the serious problems
afflicting two of the country’s largest retailers, retail and business
strategy experts say.

 

Kmart’s retail business is shrinking at an alarming double-digit
rate. Sears is only slightly better off, closing in on its fourth
straight year of sales declines. Neither company has articulated a
strategy for attracting shoppers in a retail world increasingly
dominated by discount juggernauts Wal-Mart Stores Inc. and Target Corp.

 

"If I put Kmart and Sears together, I’m putting together two broken
business models," said Adam Hartung, managing partner in Spark
Partners, a business strategy firm in Long Grove. "You put a bad heart
and a bad liver together, and you don’t get a healthy body."

You can go to the Chicago Trib site to read the entire article: "Will Bigger Be Better: Retail experts not sold on the wisdom of combining 2 ‘broken’ companies".

BLockbuster does it again

This is just too good. I just read on Business 2.0 blog that Blockbuster is trying to buy Hollywood Video, a rival chain of video rental stores. OK, this is CLASSIC Defend & Extend Management. They must be thinking that if they can just get big enough, they will be able to get those elusive scale savings and be able to have more control over their pricing. It won’t happen. They have to understand that storefront video rentals will never get any better as a business, no matter how big they get. (See my previous blogs on this.) 

It’s amazing to see companies with broken Success Formulas buy other companies with the SAME Success Formula and expect that to improve the business. Didn’t anybody at Blockbuster ask WHY it would improve the business? Why it would make someone suddenly decide not to order that video on demand and charge down to the video store instead? Sadly, there are many other examples. Here’s one: Tupperware, who thinks its home party concept is still a viable concept in the 21st century, bought Beauty Control a few years ago because the company also sold through home parties. They expected to benefit from the synergies. Want to guess how that turned out?

Didn’t They See It Coming?

I have noticed a common behavior among companies in the Swamp and Whirlpool stages of the lifecycle.  They never seem to plan ahead for unexpected things to happen. It is as if they make an annual plan and there are no contingencies for marketplace challenges and disruptions. Maybe they really do believe that the plan will turn out like they lay it out if they simply hold the leaders accountable, which would indicate a terminal case of denial and self-deception.

Consider the major airlines which always seem to be on the verge of bankruptcy. After 9/11, they have all been in survival mode and their actions have been classic Defend & Extend  Management:  cut costs, layoff employees and reduce their pay,  reduce prices, reorganize the business, replace management. They think that if they can do these things, they will become competitive again.

But they didn’t plan on oil prices reaching all time highs, which meant they had to make deeper cuts and go to even harsher extremes. And now, it seems that these troubled airlines didn’t plan on their healthy competitors adding more planes as part of their growth plans. (Well duh!) That’s a problem because more planes means more capacity which means more competition which means lower prices. And that means that the major airlines’ plans to rebound aren’t worth much. The fact is that they never were worth much.

Troubled organizations like those late in their lifecycle don’t have
any excess capacity. That’s why they keep getting knocked further and
further down by marketplace changes.  No sooner than they recover from
one crisis, another crashes onto the scene. If you need proof, read the
countless annual reports that offer excuse after excuse for unexpected
events that hurt the company’s performance that year. Then read the hollow
promises about how they’ll plan better next year.

It would be valuable for any senior manager of a business or functional unit to assume that unexpected things are going to happen and to plan ahead for them. Scenario planning as a discipline has been around for many years and is a useful practice. In addition, every organization must budget for excess capacity to deal with unexpected challenges.  Where will you get the money, people, capital, and management bandwidth to deal with surprises? In order to estimate how much extra capacity is necessary, managers can evaluate prior years and determine how much was consumed by surprises in the past. This, coupled with effective scenario planning, can help companies minimize the consequences of unexpected disruptions.

Oh, and adopting The Phoenix Principle wouldn’t be a bad idea either!

How Your Business Is Like A Praying Mantis

The Praying Mantis is a remarkable example of evolutionary adaptation. I saw one today and marveled at how well it had adapted to prey on unsuspecting insects. It was solid brown, looked like a stick and has lethal forearms and claws. It is easy to understand how it can blend into the limb it is standing on and capture its prey as it wanders by.

Trouble is, the Praying Mantis that I saw was on my garage wall, which is solid white.  So, it stuck out like, well, a carnivorous bug. This particular specimen wasn’t going to surprise any prey. It may as well have hung up a sign saying " BUGS BEWARE, I"M HERE TO EAT YOU!"

The Preying Mantis has an exceptional Success Formula… for the right habitat (context). However, when the context changed, that Success Formula became a liability. A brown colored Praying Mantis on a white background loses the element of surprise, and will go hungry.

That’s exactly what has happened to countless businesses today. They developed Success Formulas for a different competitive environment and have not adapted adequately to the changing business context. They’re like a brown Praying Mantis on a white wall, and they are struggling and suffering as a result.

Quote: He who joyfully marches in rank…

He who joyfully marches in rank and file has already earned my contempt. He has been given a large brain by mistake, since for him the spinal cord would suffice.
—Albert Einstein

The Power of Openness

While reading Seth Godin’s blog today, I was struck by his point about the power of videotape to shape behavior. He was commenting on the shabby way that he was treated while trying to buy a lobster and he wondered:

So, the two questions are, “Do you think the owner wanted them to act this way?” and “Would they have acted differently if they were on camera?”

What a delightful line of thought! One of the key design principles for being able to build a self-renewing organization is “openness.” Why? Openness prevents abuses. People who are going to do unethical things don’t want anyone to know about it, that’s why they require secrecy. (Why do you think they call them “shady” dealings?) Whether its employees who our mistreating customers, or senior managers who are looting the company for personal gain, they all depend on secrecy.

Behaviors like that are like cockroaches: they like dark places out of peoples’ view. But when you shine a light on them, they scatter. That’s the affect of openness on unethical, illicit, and illegal behavior.

Great organizations of any kind (including countries) only prosper in a climate of openness. I wonder what would happen if everyone in a company behaved as if their every move were being broadcast live to the world. I guarantee that they would change their behavior! How could your organization benefit from more openness? What can you do to increase openness in your organization?

Women Business Builders

Kirsten Osolind, a delightfully witty and thought-provoking marketing whiz, pointed out in a recent blog that women were not nearly as likely to embrace the “built-to-flip” mentality as men. The Phoenix Principle is based on an assumption that the owners/managers of a business are in it for the long-term. Otherwise, why bother investing in creating a business that will renew itself?

According to Marsha Clark, an expert in issues related to women in business, women are dropping out of the big corporate buisness scene in record numbers. Many of these women are starting their own companies where they can, as Kirsten says: “groom them as we would our child’s hair.” I wonder what this trend portends about business in the next 20 years, and about the likelihood that increasing numbers of business entrepreneurs will be building businesses that they expect to last over the long-term?

I suspect that women’s influence on business, which is growing quietly in the background, will one day in the not too distant future burst into prominence and create an unexpected disruption across the economy. Why? Women will have irrevocably put their stamp on managment practice and organizational design… and it promises to be remarkably different from that of industrial management.

Starbuck’s Big Experiment

Starbuck’s has been breaking the rules ever since it was brewed up in the mind of founder Howard Schultz, and it looks like they are doing so again. Many of Starbuck’s innovations have been product-related breakthroughs such as Frappuccino and adding Music CD’s to the store’s inventory. These have been profitable innovations, but the first time the company really challenged its success formula is when it added wireless internet connectivity. Now the company is opening dozens of “media bar” stores that will enable customers to listen to and burn custom CD’s while they slurp down that Venti no-foam non-fat caramel Latte. This is a dramatic entrée into a new success formula that speaks loudly of Starbuck’s commitment to reinventing itself.

How are they able to do this when other companies struggle with even small innovations? I think there are three key elements. The first is the company’s commitment to ongoing innovation. CEO Schultz has created a climate where innovations are valued and can come from anywhere in the organization. For instance, the idea for Frappuccino came from two store managers who were experimenting with a frozen coffee drink.

A second factor is that the identity of the company is sufficiently large that many different strategic directions are possible. Rather than narrowly define itself as a coffee bar, Starbucks sees itself as a “third place”—a destination where people can escape from the rat race and other troubles, relax and experience a sense of well-being and community. Music is a natural addition to the sense of leisurely self-indulgence.

The third element is passion. I think passion is the secret ingredient in every really great success story. Why? Because business is about people, and people are passionate to their very core. Employees who are passionate about the business will give more energy, more creativity and will be more productive than the norm. Customers can tell when passion is in the air—it’s infectious and they start to catch it too. Passionate customers inspire employees in a positive feedback loop. Passionate customers also breed new customers. Someone who is crazy about your business will tell their friends and very nearly drag them to your store. In practically every early morning meeting I attend, someone is drinking from a Starbucks cup and telling somebody how they “never miss their Starbucks run in the morning.”

How much passion do you have for your business? How much passion do your employees and customers have for your business? In my experience, passion is something that leaders must consciously nurture. And it’s rare. I mostly experience it in growing companies that are still in the Rapids. Most mature organizations feel dead and (gasp!) business-like to me. Yuck! I want to feel a buzz in the air, some excitement, and people who are really happy to be doing their job that day. I get that sense at Starbucks, at CiCi’s Pizza, and at Discount Tire. It’s missing at McDonald’s, Pizza Inn, and Firestone. I’ll pick the first three over the second three at every chance, and I’m betting that most of you do too.

Do the same, or disrupt?

We all know our business goal is to create above-average results. Yet, much of what we’re trained to do in business is sure not to achieve these results.

In the August 24 issue of FORTUNE you’ll find the following analysis of modern marketing http://www.fortune.com/fortune/valuedriven/0,15704,686868,00.html :

“And here is one of the key insights of that science: In category after category, the market leaders are virtually identical. “Virtually” is important. They aren’t absolutely identical. They’re just very, very close. Whether it’s potato chips, toothpaste, disposable diapers, or any of hundreds of other products, the pattern holds. You can tell the difference between Coke and Pepsi if you care about soft drinks, but the difference is minuscule. That’s because endless research has established what consumers like most, and straying too far from those specs is asking for failure.”

What we’re missing from much management science today, including marketing, is the capability to create marketplace disruptions. It’s only by creating market disruptions that companies can achieve competitive advantage. Me-too strategies lead to me-too returns, until the inevitable price war breaks out when one competitor tries to buy share causing everyone to go from mediocre to below-market shareholder returns.

Leaders today need to unlock the breakthroughs inside their companies. They need to encourage breakthrough thinking among the employees. They must overcome the “me too” approaches taught too often in business school, and practiced too often in business. Lead your competition in breakthroughs and you’ll lead them in returns as well.