Disruptive Times

Readers of this BLOG know I have been no fan of Roger Deromedi and Kraft.  So, you probably think I’m delighted with his ouster this week by Altria (effective parent of Kraft).  Actually, I’m unconvinced whether it will matter.

There is no doubt that Kraft was locked-into a Defend & Extend strategy which was producing declining results.  The stock price had declined 30% since 2002, and the CEO had no plans for growth.  Deromedi laid off 14,000 people and closed 40 factories in 2.5 years.  His plans could be summed up in his own quote "strong execution of our strategies will deliver improved results in 2006 and beyond."  Just like it had done in 2004 and 2005 – right.  Obsessing about execution is one critical telltale signal of a failing, locked-in strategy.  There was no plan for growth, sooner or later, as he kept selling brands and investing more money in no-growth categories like cheese.  The Chairman of Kraft, currently the CEO of Altria, finally realized that there was no interest in an independent no-growth Kraft, so he’d better make some changes or the spin-out of Kraft was never going to be completed. 

But, what’s needed at Kraft is a Disruption to the Lock-in, and replacing the CEO is more of a Disturbance than a Disruption.  Changing the CEO doesn’t inherently change anything beyond the sign on the door.  And the new CEO, for all the praise now heaped upon her, is a 20-year returning veteran of Kraft.  She spent barely 1 year running Frito-Lay, so despite her $2.5million compensation, she wasn’t there long enough for us to know what difference she made, or might have made. 

We do know that she left the job running Kraft North America, which was a $30B revenue business to later run Frito-Lay, only a $10B business.  That indicates she was no fan of Deromedi when she split, nor most likely of his then co-CEO Betsy Holden.  Nonetheless, her career was a pretty straightforward development up the management ranks of what has long been a low-innovation enterprise.  But is she ready to create some growth engines inside this behemoth?  Does she know how?

Top marketing gurus around Chicago have weighed in, calling for the first steps to include changing the culture toward product innovation from brand extensions, and using portfolio planning to milk some brands for cash while investing in growth with other brands and a refocusing on innovation and new product launches. 

What is required, as I said earlier, is a Disruption.  Kraft must stop viewing itself as being self-satisfied, and realize there are external Challenges to its brands and its business.  Older Americans are changing their diets to live longer, and younger Americans no longer look to these old brands when thinking of meals.  A great past does not assure a great future – just look at Brach’s candy company (bankrupt), ConAgra or Sara Lee (themselves drastically downsizing).  The new CEOs first step must be to avoid reassuring the people of Kraft, and rather to hlep them see that these Challenges are placing Kraft – soon to be an independent company – at risk of having a viable future.  There is no growth in Kraft, and without it the company is doomed to a very unhappy competitive reality.

And she must Disrupt Kraft.  The mechanisms which keep Kraft acting like Kraft.  She needs to attack Kraft’s critical metrics, its hiring practices, its centralized decision-making processes, its arrogant approach to retailers and end-users, its focus on "do no harm" brand tactics, its rewarding of "farmers" and punishment of "explorers" in the workforce, its deep  hierarchy that vets out ideas which don’t look like guaranteed wins (and thus little more than extensions of old businesses), and its obsession with cost reductions.  Of course, not all of these should be attacked at once.  But, she must attack them.  She must identify the Status Quo Police and reduce their numbers while gutting their influence – be they in finance, HR, or marketing.  She must create a pattern interrupt in Kraft; she must Disrupt the old Success Formula.

And, she must put in place White Space.  Something completely lacking at Kraft.  We need to see her create project teams which have explicit permission to behave differently, outside the old Lock-ins.  And she must show us that she is dedicating resources, in advance, to these teams so they have the wherewithal to actually create new Success Formulas for the company.

We must keep our eyes on Kraft.  When Mr. Zander joined the cross-town company Motorola he too faced a seriously Locked-in organization.  Yet, within only 6 months he effectively Disrupted Motorola and put in place White Space projects that almost immediately began changing the fortunes of the company.  Let’s hope Ms. Rosenfeld does the same – so Kraft can once again take its place among the leading consumer goods companies of the world.

Double-up that Lock-in

As readers of this BLOG, you know that I find McDonald’s a risky company that is horribly Locked-in to its old Success Formula.  So, I wasn’t surprised when I recently read about McDonald’s latest plan to grow.

McDonald’s is planning to pump up sales by opening a series of drive-through units in China (see Chicago Tribune article.)  Sounds like a decent idea you say?  Well, let’s see, only 10% of all food in China is eaten out (and 90% of that comes from full service restaurants.)  People in China don’t view their cars as eating places, and they still prefer to sit together and eat.  The largest western food chain in China is KFC (remember that the next time someone says Asian bird flu is a detraction to their sales), with about 3x the number of units McDonald’s has. 

But McDonald’s is ready to predict great success.  Why? Well, firstly 74% of people in the U.S. get their McDonald’s from a drive-through, so surely the Chinese will do the same thing – right?  (Lock-in #1, people want drive-throughs).  Secondly, they have found a company willing to be their partner, the state-owned gasoline retailer, so that insures success – right?  (Lock-in #2, McDonald’s is a franchising company so it loves partners that will roll out units for it.)  McDonald’s has to be appealing to the skyrocketing Chinese middle class, who are buying cars like won-ton noodles, right?  (Lock-in #3, the McDonald’s brand is appealing to middle-class consumers globally.)

McDonald’s has passed on a number of growth opportunities.  Remember the hot growing Chipotle’s chain that McDonald’s shipped out the door? Remember the McCafe concept that was to challenge Starbucks but that can’t get beyond 30 units opened?  The fact is that McDonald’s will only attempt growth ventures which fit inside its Lock-in.  Will the Chinese venture work?  The odds look long given the approach McDonald’s is taking.  Only when viewed through the lens of McDonald’s Lock-in does this venture look like something to brag about.

Cut cost, extend product lines and go to new markets – that’s the same strategy Krispy Kreme said would turn around their lagging fortunes.  That was before they went bankrupt.  There’s nothing insightful about that strategy, and it’s not likely to put the fizz from its soda into McDonald’s stock price either.  It’s a Defend & Extend strategy, when what McDonald’s needs is more White Space, the ability to listen to changing market needs, and some really new ideas for growth.

Easy Idea Susceptibility

I recently attended a great event.  A marketing company offered $3,000 to the start-up with the best idea – an idea they had only 3 minutes to explain.  This was a competition for companies looking for angel or venture funding. 

As the dozen companies put out their ideas, which ones do you think the 100+ event attendees most backed?  Quite simply, they were the ideas that allowed the audience to imagine doing something currently well known better, faster and cheaper.  The audience members had a fast, positive, visceral favorable reaction to the ideas that Defended & Extended existing behavior.  When it came to thinking about giving away money, they were most ready to support an idea that took the least effort to develop.

The fact is that upon further discussion, the Defend & Extend ideas looked to have a fairly short half-life.  Many of the other ideas showed greater long-term value, but they would require finding early angel customers, and white space to actually test the idea and develop a valid implementation.  Many audience members could not see past the development problems, and were unwilling to fund White Space for these ideas to possibly flourish.

We all are susceptible to More, Better, Faster.  We all have our Lock-ins, and we quickly recognize and accept things which Defend & Extend existing behavior.  If we don’t Disrupt ourselves, we’ll never really think about new solutions – and never grow the way we all can.  And we’re very susceptible to favoring ideas we see as easy – rather than the ones with greatest potential value.

Selling Success

DJIA member, and industry leading pharmaceutical company Pfizer has had a rough go of it the last 4 years.  While revenues are up from 2001, they were flat in 2005 signaling a growth stall.  This had been predicted since 2001, as earnings have been highly erratic over these years.  Company value peaked in the late 1990s, and since then investors have lost half their value.

The Challenge at Pfizer is the same malady affecting several other big pharma companies.  Their strategy to rely on blockbuster drugs, those that address widespread human conditions (such as male impotence), has left them see-sawing between enormous investments and difficulties getting approvals for sale through the FDA – as well as losses from rushing drugs to market that have later been found not as safe as promised.  While there are lots of other opportunities for these companies to grow, many of them keep trying to find the next "blockbuster" and their growth is erratic.

Pfizer’s latest reaction has been to sell their consumer goods business.  Even though the business has been growing at a strong 10%/year, and has an 18% operating profit, management has said the business is "non core" and thus they want to sell it.  Not many consumers who need Benadryl, Zantac, Rolaids, BenGay and Rogaine think of these products as "non core," but for some reason Pfizer now does.

Management’s real objective is to generate additional cash in an effort to Defend & Extend its poorly producing old Success Formula.  Rather than Disrupting their old, and struggling, Success Formula, Pfizer would rather sell a great, growing, profitable business in an effort to make another stand for what the company has always done – even if there is no reason to believe it will be more successful in the future.

Pfizer has $52B in revenue.  Their proceeds from the sale will be $14B.  That’s before taxes – which could be half the proceeds.  But rather than trying to grow this business even faster, they are ready to sell it to Glaxo SmithKline or Johnson & Johnson.  Both of these companies are huge as well, but both of them know how to recognize a pearl in the oyster bed.  They are ready to grow what Pfizer won’t.

Normally, the investors in selling businesses come out the winner.  But in this case, the buyers are the winners.  They are getting great brands in a great business with opportunities to increase their growth rates simply because the current owner is too Locked-in to its "blockbuster" addiction to unleash the value in its own assets. 

This is too bad for Pfizer’s shareholders.  They get a relatively small amount of cash and they give up a potentially high growth business.  And all because leadership is focused on its short-term problems, rather than the long-term Challenges to its Success Formula.  And thus Pfizer leadership is Defending & Extending a struggling model, hoping to regain past glory, instead of using Disruptions and White Space to create new value.

Impatient Management

I talk a lot about the deadly impact of growth stalls.  Whenever companies suffer two consecutive flat or declining quarters, or a year-over-year decline, I call that a growth stall.  And the results are deadly, with fewer than 10% of these companies ever achieving sustained growth of 2% again.

I’m often asked if two quarters, or year to year comparisons, aren’t too short.  After all, I preach on the importance of White Space and using transformations for long-term good health.  Aren’t I supporting the short-term thinking that gets leaders into trouble?

My answer is no.  Leaders and managers must be impatient for results.  The world moves quickly, and it takes precious little time for a company to falter and fail.  Take for example Sun Microsystems.  This was a high-growth tech company for 20 years and a big winner in the internet boom of the 1990s.  But now the company has seen 4 consecutive years of declining revenue.  It’s value has been lackluster that entire time as well.  And now it has announced it is planning to cut another 4-5,000 jobs in an effort to find profitability.

Investors and managers can’t wait 4 years for improved results.  In fact, they shouldn’t wait at all.  If a company can’t grow, it will atrophy and eventually falter.  The purpose of Disruptions is to constantly challenge Lock-In to old Success Formulas, and the purpose of White Space is to identify new opportunities that can create long-lived growth.  The problem is that too many companies try to milk the Lock-in, and they wait too long before they Disrupt and seek White Space.  They confuse short-term optimization of an old Success Formula with the requirement to continuously identify and develop growth opportunities ad infinitum.

When it was doing incredibly well, Sun Microsystem decided the right strategic action was to "identify its core strengths" upon the recommendation of Gary Hamel.  Scott McNealy said the company’s future was "selling iron" (his macho-speak for selling computer server hardware.)  As a result, Sun never moved into networking gear, like Cisco, or network software like Google.  Also, Sun was pushing boxes so hard it missed the Challenge Linux placed on its own Unix software.  Sun was a hot player in the center of the action, but by "sticking to its core" it wasn’t prepared when the marketplace determined it had sufficient server capacity and good a good software alternative.  It’s market started collapsing.  And Sun wasn’t prepared to move to the next market opportunity.  The first two declining quarters led to nearly 20 declining quarters.

The best time to Disrupt and fund White Space is when your business is doing well.  It is then that you can clearly evaluate new Success Formulas without the crisis of declining revenue making you "bet the company" on limited options – and do so quickly.  By the time you see two consecutive bad quarters, or year-over-year revenue declines, the business is already stuck in the Swamp and well on its way into the Whirlpool.  It might not look that bad, but it already has almost no hope of ever growing again.