Dell Disaster

I need to thank one of my readers for bringing to my attention a recent BusinessWeek article on Dell (see article here.)  As he pointed out, this article comes almost exactly 3 months after I talked about how Dell’s Lock-in was disastrous.  There are some great quotes worthy of sharing:

Regarding Lock-in:

• "Dell remained slavishly loyal to its core idea of ultra-efficient supply-chain management and direct sales to consumers, even as rivals have stepped up their game and markets have shifted to take away some of Dell’s key advantages. Instead of adapting, critics say, Dell cut costs in ways that compromised customer service and, possibly, product quality."

Some readers may recall on April 16, 2006 when I pointed out Wal-Mart’s problems and discussed the risk of being a 1-Trick Pony:

• "They’re a one-trick pony. It was a great trick for over 10 years, but the rest of us have figured it out and Dell hasn’t plowed any of its profits into creating a new trick."

Regarding identifying Telltales of big problems that indicate a company is moving into the Swamp – or Whirlpool:

• "Dell’s culture is not inspirational or aspirational," says Geoffrey Moore, a tech consultant and author of Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution. "This is when they need to be imaginative, but [Dell’s] culture only wants to talk about execution."

Of course, in an execution focused company there is no room for White Space, and you don’t get innovation:

• "They don’t feel they’re part of something at Dell, and they generally leave because they feel frustrated," says Snyder. "Dell is not a fun place to work, and it’s less fun now than it used to be."
• "Even the CEO admitted so in 2003 – "There are some organizations where people think they’re a hero if they invent a new thing," he said. "Being a hero at Dell means saving money."
• "Inside Dell, ideas that break from the model are discouraged, say former Dell managers. Notes one: "You had to be very confident and thick-skinned to stay on an issue that wasn’t popular. A lot of red flags got waved—but only once."

Lock-in makes you an easy target for competitors:

• "But it was clear some time ago that Dell’s model was not keeping pace and was not going to be such a big advantage in the future… And while experts believe Dell got the best prices on components when it was outgrowing all of its rivals, these days newly ascendant HP and Asian rivals Lenovo Group (LNVYG) and Acer are offering plenty of growth themselves."

Once a company commits to a Defend & Extend strategy, it becomes so structurally Locked-in it becomes almost powerless to change: 

• "So why hasn’t Michael Dell—clearly a brilliant guy—changed tactics? For starters, say rivals and Dell alums, shifting gears would upset investors who expect hyper-profitability from Dell’s hyper-efficiency. And having stuck to his guns in the past, he can’t risk letting customers think that "Direct from Dell" is no longer the cheapest, smartest way to go."

By following the Siren’s song of "operational excellence" Dell adopted a Defend & Extend strategy that has placed it at great risk.  Now it lacks the tools for innovation that could help the company to have a longer, more successful future.  Without a serious Disruption, and new leadership that can implement and manage White Space Dell’s future is easy to predict.

Consistency vs Success

Almost two years ago I published a case study comparing McDonald’s and Motorola (download paper here).  As a reader of this blog you know the former I don’t care for, while the latter is doing all the right things.

This week, the #2 fellow at McDonald’s abruptly left.  Why?  Because he was considered to radical, and too quick to try and change things.  As you know, McDonald’s dramatically cut back its number of stores 4 years ago.  Since then, the company has sold off all it’s growth businesses, and has made minor changes to the existing stores which has helped them to improve sales and profits – although the company still does not support the number of stores it once did.  And McDonald’s still is not winning the battle for growth against Starbucks and other less Locked-in competitors. 

The thing McDonald’s most needs is someone willing to Disrupt the organization, install White Space and get the company on a growth path for the future.  Unfortunately, the current CEO, Chairman and Board members are more interested in historical consistency.  Content to Defend & Extend a Success Formula that is no longer leading the marketplace, they have pushed out their best hope for rejuvenating the organization.

Meanwhile Motorola last week again announced it is taking market share from competitors.  Its phones simply keep attracting new customes, as unit volumes are up 46% versus a year ago.  As you know, Motorola’s Board took the opposite set of actions that McDonald’s took, putting in place a CEO who has Disrupted the company and installed White Space in multiple locations.

While McDonald’s has shown signs of reviving the last couple of years, it is important to remember that it still is smaller than at its peak, it has sold off its growth businesses (such as Chipotles) and it is not the dominant market leader it once was.  This most recent action simply demonstrates that the Board is more interested in Consistency than Success.  Too bad for all those employees and shareholders.

You win or You lose

Here in Chicago we have a convenience chain called White Hen.  The stores have been a fixture in Chicago for 4 decades.  But they are about to all disappear.  That is, the remaining ones.  Although the chain is being bought by the much larger 7-11 chain, there is no premium being paid for the company.  On the contrary, investors are losing money on the sale.  Sold in 2000 to Clark (a gas station operator) for $80million, the company went bankrupt and was acquired by management in 2002 for $45million.  Now, 7-11 is paying $35million.  So what happened?

During those 6 years, White Hen shrunk from 245 stores to 206 in Chicago.  This may not sound like a huge problem, but for a debt-laden acquired company losing 16% of capacity is enough to drown it.  In short, the management of White Hen spent too much focus on trying to generate fast profits, and not enough recognizing the need to grow.  They kept trying to cut size and cost to create more profits, and in the end they simply cut cash flow and killed the company.

White Hen is a microcosm of what we see in far too many companies today.  They forget that either you win, or you lose.  You can’t simply "mark time" and try to tweak the profit model.  Competitors today won’t let you do that, they are too smart and too capable.  Today, you have to keep innovating, meeting Marketing Challenges, creating new Success Formulas — or you lose.  There is no tie.  You win, or you lose.  And the leadership of those companies trying to follow the example of White Hen (such as Sara Lee and Sears) should take note of this example.

Did you see it coming?

Today WalMart announced that for the first time in a decade it’s quarterly earnings actually declined.  The stock is down again, remaining a very poorly performing equity investment since the company peaked back around 2000.  Since then, investors have not been rewarded for staying with the Locked-In strategy of the world’s largest retailer.

Did you see it coming?  You should have.  For over a year this blog has been pointing out that Wal-Mart is horribly Locked-in to its old ways, and unwilling to use White Space to create a new Success Formula.  Although it’s impossible to predict the day when things will demonstrably go south, it isn’t hard to predict the trend if you pay attention to White Space – or lack thereof.

When announcing these poor results, Wal-Mart blamed high gasoline prices.  Let’s see, for 3 years now we’ve had high gas prices, and Wal-Mart has blamed petroleum costs for its problems.  You’d think by now, if management was as good as it claims, the company would have adjusted to the reality that gasoline is most likely to remain expensive.  At the very least, they should have executed contingency plans to react to such a market Challenge.  Instead, they plod forward with the same Success Formula, fail to meet expectations, then blame circumstances that they long ago should have planned for and dealt with.

Worse, Wal-Mart leadership blamed this specific quarterly failure on selling off WHITE SPACE projects in Germany and Korea.  Wal-Mart is a company that desperately needs to find a new future.  To overcome its Lock-in.  Yet, once again, we see they have decided to exit markets where they should be learning and growing.  If they can’t succeed the Wal-Mart way, then they leave.  If there was ever a big, bright red flag that says this company is in trouble, missing earnings forecast while exiting White Space and blaming the cost of White Space for their earnings problems – while ignoring market challenges like high oil prices – has got to be it. 

This should be a clarion call to avoid this company as an investment, as an employer, and as your primary customer – unless you want to suffer prolonged poor performance.  If they miss forecasts again next quarter they will officially enter a growth stall, and that will put them in the category of having less than a 10% chance of ever maintaining growth of a meager 2%.  The chances of a turnaround are nil, simply due to demonstrated Lock-in, and the odds of a growth stall just jumped dramatically.

Follow the White Space

Once again we have the opportunity to view the tale of two companies. Both troubled, yet capable of success if they do the right things.

Motorola was struggling a few years ago.  Then, a new leader came on board and started Disrupting the old Success Formula.  Simultaneously, he opened up White Space all around the company.  Sales went up, and so did innovation.  While everyone knows about the success of RAZR, Motorola also built its business in digital video recorders and networks.  Now, today, we learn that Motorola has further grown its success, winning a $3billion deal to build out a wireless data network for Sprint/Nextel.  (See full article here.)

Sara Lee found itself also struggling a few years ago.  They also hired a new leader.  But this leader chose to disturb the organization without really changing the Success Formula – focusing on cost cutting and selling businesses without creating any new White Space.  Now, today, we find out that the leader is conceding she won’t meet her margin goals (even as the business shrinks more than 50%), and isn’t really sure when the company will be growing again.  (See full article here.)

Motorola is up over 30% in market value.  Sara Lee is down more than 30% in market value.  Those who read this blog know that I was a very early fan of Motorola’s turnaround, and recommended it as an investment.  They also know I’ve been a longstanding pessimist of Sara Lee.  Why?  It’s as simple as White Space.  At Motorola you could observe a leader attacking the Lock-in and implementing White Space.  At Sara Lee there was no attack on company, or industry, Lock-in to old formulas and there was absolutely no White Space.

A successful turnaround absolutely requires fast action to Disrupt and implement White Space.  It is the single best predictor of whether a company will overcome its growth stall, or not.  Any time you need to decide whether to invest in, join, or supply a troubled company follow one simple rule – Follow the White Space.