Scenario Planning

Even in the midst of the recent financial crisis, you probably also noticed that the price of oil has dropped.  In fact, it's had a record-setting drop (read article here).  It was just in July that oil peaked at $147/barrel.  Now it's trading around $60-70/barrel.  I'm sure you've noticed the benefit if you're a U.S. driver, as the gasoline pump price has dropped from over $4/gallon to under $3/gallon.

A lot of people simply breathed a sigh of relief.  "Well, that's one problem I can now forget about" an executive recently said to me.  I was disappointed to hear him say that.  Because how does he know oil won't go back up to $150?  Or drop to $25?  Regardless, doesn't it have implications on how competitors in your business behave?  On who wins and who loses?  Things certainly haven't "returned to normal."  The signs are all around us that there have been substantial changes in how companies manufacture, procure IT services and finance their business.  Just because the price of oil went from $25 to $150 to $65 dollars doesn't mean things are "back to normal."

Scenario planning is really important to developing competitive strategy.  Most people spend a lot of energy to achieve high precision understanding their historical sales, customers, technology comparisons, price comparisons and share.  But they put very little energy on creating potential scenarios about the future.  When they do look forward, the tendency is to seek the same sort of precision.  As a result, too few scenarios are developed and they end up being based on data people feel are "highly predictable."  The scenarios that are important are the ones where unlikely events and outcomes occur.  They create opportunities for changes in competitive position.

Scenario planning should start with "big themes."   Once you explore that theme, however, the objective is not to develop your "best guess."  Instead, the objective is to cast a wide net and explore, in detail, what the world will look like given that scenario.  How would thing change given the expectation?  How will that help, or hurt your ocmpetitiveness.  Who will be the big winner?  The big loser?  Create a robust description of that scenario – what are the implications – not the likelihood of it happening.

Over the last year the price of energy was one such big theme which interested a lot of people.  But most people only explored one scenario – what if oil prices went to $200 or $250?  Interesting, but not sufficient.  Yes, that scenario is well worth investigating in great detail.  But, it's also important to investigate other options – like oil at $150, or $100 or $65 or $35.  All of those have different implications.  What's important in scenario planning is to investigate them all.  To understand how each would impact competition and individual competitors.  So your SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis can be done for the future – not just for today. 

The other value from scenarios is identifying and understanding the triggers.  By exploring the scenarios you start to understand what would make each of the outcomes more likely.  Not so you can develop a probability distribution – which will lead you to the "average" or "most likely" outcome – and thus the least likely to make any difference and therefore the least interesting.  You don't want to use scenarios to become a forecaster – because odds are you won't be very good at it.  You want to recognize the implications of these scenarios, and then figure out how you can use that scenario to improve your competitive position.  To upend competitors who did not do the scenario planning and thus aren't prepared.  Then you can start tracking key variables, key metrics, in order to recognize when you need to prepare for one of the various outcomes.  And if you've done a good job with your scenarios, be the competitor best prepared to take advantage of the changed circumstance to improve your position. 

The only way you can be prepared is to have considered the scenarios, and developed some plans should that scenario happen.  To be a long-term winner it's not enough just to be good in the current environment, you have to be prepared to succeed no matter what the environment.  By developing scenarios, you can be prepared to take advantage of market shifts – and if your competitor isn't, you can gain market share and improve your returns. 

We all are subject to letting current events drive our views of the future.  Then we try to "stand back" and look at a long term trend and develop some sort of "average" point of view.  But neither of these really help when markets shift.  What's needed is a set of scenarios – such as oil at $25 or 50 or $100 or $150 or $250 or $300.  Understanding how you can grow sales and profits in each makes you prepared, and greatly improves your long-term chances of growth.  It's the only way to prepare for market shifts, and worth a lot more during turbulent changes, like we're seeing now, than the deepest analysis of what you've done the last year, 3 years or 5 years.

Deadly stalls

The business press, whether print or on-line, is full of stories about lay-offs.  Motorola (chart here) to cut another 3,000 jobs in its flailing handset business (article here).  American Express (chart here) to cut 7,000 jobs (article here).  Over the last few weeks, other announcements included 3,200 job cuts at Goldman Sachs (chart here), 5,000 at Whirlpool (chart here) and 1,000 at Yahoo! (chart here). 

Given the regularity with which leaders have implemented layoffs since the 1980s, investors have come to expect these actions.  Many see it as the necessary action of tough managers making sure their costs don't unnecessarily balloon.  And political officials, as well as investors and employees, have started thinking that layoffs don't necessarily have much negative long-term meaning.  People assume these are just short-term actions to save a quarterly P&L by a highly bonused CEO.  The jobs will eventually come back.

Guess again.

Most layoffs indicate a serious problem with the company.  Long gone are the days when layoffs meant people went home for a major plant retooling.  Now, layoffs are a permanent end of the job.  For the employer and the employee.  Layoffs indicate the company is facing a market problem for which it has no fix.  Without a fix, management is laying off people because the revenues are not intended to come back.  Thus, the company is sliding into the Swamp – or possibly the Whirlpool – from which it is unlikely to ever again be a good place to work, a good place to supply as a vendor or a good place to invest for higher future cash flow.  Layoffs are one of the clearest indicators of a company implementing Defend & Extend Management attempting to protect an outdated Success Formula.  Future actions are likely to be asset sales, outsourcing functions, reduced marketing, advertising &  R&D, changes in accounting to accelerate write-offs in hopes of boosting future profits — and overall weak performance.

Layoffs are closely connected with growth stalls.  Growth stalls happen when year over year there are 2 successive quarters of lower revenues and/or profits, or 2 consecutive declines in revenues and/or profits.  And, as I detail in my book, when this happens, 55% of companies will have future growth of -2% or worse.  38% will have no growth, bouncing between -2% and +2%.  Only 7% will ever again consistently grow at 2% or more.  That's right, only 7%. 

When you hear about these layoffs, don't be fooled.  These aren't clever managers with a keen eye for how to keep companies growing.  Layoffs are the clearest indicator of a company in trouble.  It's growth is stalled, and management has no plan to regain that growth.  So it is retrenching.  And when retrenching, it will consume its cash in poorly designed programs to Defend & Extend its outdated Success Formula leaving nothing for investors, employees or suppliers.  The world becomes an ugly place for people working in companies unable to sustain growth.  People try to find foxholes, and stay near them, to avoid being the next laid off as conditions continue deteriorating.  Just look at what's happened to employment and cash flow at GM, Ford and Chrysler the last 40 years.  Ever since Japanese competitors stalled their growth, "there's been no joy in Mudville."

Given how many companies are now pushing layoffs, and how many more are projecting them, this has to be very, very concerning for Americans.  Clearly, many financial institutions, manufacturers, IT services and technology companies appear unlikely to survive.  Meanwhile, we see wave after wave of new employees being brought on in companies located in China, India, South America and Eastern Europe.  For every job lost in Detroit, Tata Motors is adding 2 in India.  For every technologist out of work in silicon valley, Lenovo adds 2 in China.  For every IT services person laid off at HP's EDS subsidiary, Infosys adds 2 in Bangalore.  It's no wonder these companies don't regain growth, they are losing to competitors who are more effective at meeting customer needs.  There really is no evidence these companies will start growing again – as long as they use layoffs and other D&E (Defend & Extend) actions to try propping up an old Success Formula.

Sure, times are tough.  But why die a long, lingering death?  Instead of layoffs, why not put these people to work in White Space projects designed to turn around the organization?  Instead of trying to save their way to prosperity – an oxymoron – why not take action?  In most of these companies, lack of scenario planning and competitor focus leaves them unprepared to rapidly adjust to these market changes.  But worse, Lock-in and an unwillingness to Disrupt means management simply finds it easier to lay off people than even try doing new things.  And that is unfortunate, because the historical record tells us that these companies will inevitably find themselves minimized in the market – and eventually gone.  Just think about Polaroid, Montgomery Wards, Brach's Candy company, DEC, Wang, Lanier, Allegheny Coal, Bear Sterns and Lehman Brothers.

In the land of the blind…

The old story goes that once a there was a European village that was overrun by its mortal enemy.  The enemy left without investigating one small area where all the blind people lived.  Upon learning that their village was now gone, the remaining people found out that there had been a single survivor of the attack.  He had lost one eye, and his vision was poor.  Nonetheless, he was voted the new leader of the village.  From this story comes the famous line,  "In the land of the blind, the near-sighted one-eyed man is king."  In other words, how good something looks has a lot to do with what it's being compared to.

That's about the only explanation for recent interest in Kraft (chart here), Procter & Gamble (chart here) and Kellogg's (chart here).  About the only thing that makes these companies appear attractive is their equity values haven't been hammered like some other companies.  But are these companies upon which we can expect growing revenues and profits that will generate more dividends for investors, more demand for suppliers and higher pay and more jobs for employees? 

Investors have not shed these companies as fast as some others because the view has been that demand for their products is more recession-resistant.  But one thing these companies have in common is limited growth.  Kraft was recently placed on the Dow Jones Industrial average to replace AIG.  Until recently, Kraft was a division of Altria (the old Phillip Morris cigarette company).  As Kraft "repositioned" for spinning out it sold most of its growth businesses, including Altoids.  The company refocused on its old-line businesses, like Velveeta, Oscar Meyer bologna, Ritz crackers and Kraft macaroni and cheese - none any kind of high-growth business and each with ample competition from other branded and store-branded products.  Leadership planned to increase earnings by cutting costs in these old businesses.  Now we hear profits are up!  But that's because Kraft sold its Post cereal business, gathering another one-time asset sale gain.  And the company keeps cutting heads (read article here).  The company isn't bringing out new products, or developing new businesses.  If the stock market wasn't crashing, who would care about Kraft's asset sales and headcount reductions as it tries to find profits without anything new.

P&G's profit is up 9%, but the company admitted sales growth will fall below forecast (read article here).  Profits are up mostly because commodity prices have fallen.  Its competition from store-brands is hurting sales, as competitive private label sales are up 8.4% this year.  Kellogg's got on the Phoenix track with plenty of White Space under previous CEO Guitierez, but the current CEO has done nothing to maintain Disruptions and White Space.  Sales are up 9%, but that's primarily due to raising prices driven by higher commodity costs.  Frozen meal sales seem to benefit from people eating at home more – not any new products (read article here).  That's not a long-term trend.

Are these companies poised for high growth?  Well, do you see the companies doing extensive scenario planning to identify new business opportunities?  Are they talking about fringe competitors that they are worried about, and need to address with new products??  Do you see them Disrupting their Lock-ins to historical products and markets?  Attacking old sacred cows?  Is there any discussion of White Space where they can develop new Success Formulas with more growth and higher rates of return?  Or are these recent earnings announcements mostly discussions of how well they are trying to Defend & Extend the old Success Formulas in turbulent markets?

Before the bottom fell out of the stock market investors focused on growth opportunities.  Now, with fear involved, they are looking for companies that appear less risky.  If you want less risk, go buy bonds!  Preferably government bonds!  There is no such thing as a low-risk company.  Doing more of the same, but at lower cost or charging higher prices, inevitably leads to competitive problems.  There are no "defensive" companies because all companies are vulnerable to new competitors with new solutions that better meet customer needs.  Those who like these consumer goods companies today are too narrow in their focus.  They are ignoring other investment opportunities in companies outside the USA, or in other types of assets like bonds, tangible items like art, or commodities like gold.  As U.S. equities have seen problems, short-term these consumer goods companies have had less equity problems.  But that does not make them good investments.  For high rates of return companies must be developing new Success Formulas that deal with current Challenges and allow for higher future rates of return. 

You're not likely to come out a winner if you vote the one-eyed, short-sighted person (or company) king.  Better to find another village.

Hunting for growth

Wal-Mart (see chart here) has not been doing badly the last couple of quarters.  Of course, it hasn't done great either.  And if we look back the last 8 years – well there's not been much to get excited about.  Wal-Mart Locked-in on its low price Success Formula 40 years ago and hasn't swayed since.  Today as incomes go down and fear is huge about jobs and investments people are looking for low prices so they are returning to Wal-Mart.  But those sales aren't coming easily, because Target, Kohls and other retailers are battling to get recognized for value while simultaneously offering benefits consumers demonstrated they enjoyed before economy went kaput.  It's not at all clear that the small uptick in sales at Wal-Mart is anything more than a short-term blip in a very flat environment for Wal-Mart.

It's unclear that there's much growth.  This week Wal-Mart admitted it was finding fewer opportunities to open new stores as saturation of its low-price approach appears imminent in the USA (read article here).  Instead of opening new stores capital expenditures are going to decline by 1/3, and dollars are being shifted to store remodeling rather than new store opening.  This implies a far more defensive tactic set, reacting to inroads made by competitors, rather than an understanding of how to regain the growth Wal-Mart had in the previous decades.

So now Wal-Mart is saying it will turn investments toward emerging markets (read article here).  Sure.  Wal-Mart wrote off huge investments and exited failed efforts in Germany and France, It's efforts to expand in Canada and the U.K. have been marginal.  In Japan it only avoided a huge write-off and failure by making an acquisition.  And its China project has gone nowhere, despite much opening hoopla 5 years ago.  So why should we expect them to do better with a second attack into China, possibly going into India and Mexico? 

The Wal-Mart Success Formula worked in the USA and drove incredible growth, but it is unclear that shoppers in developing countries get much benefit from a strategy largely based on buying goods from low-cost underdeveloped countries and importing them to the USA for mass-market buyers in low-cost penny-pinching store environments.  What's the benefit to Wal-Mart's approach in Mexico or India?  In India and China customers must pay high duties on imported goods, and low-cost retail exchanges already exist across the country for domestic products.  Additionally, lacking a robust infrastructure (meaning a big car and good roadway to carry home mass quantities of stuff bought in large containers) it's unclear that Wal-Mart's approach is even viable.  If you have to carry goods home on a bicycle, why would you want to go to a big central store?  Isn't buying regularly what you need better?  Wal-Mart has made no case that it's Success Formula is at all viable outside the USA, and especially in emerging countries. 

Compare the Wal-Mart approach to Google (see chart here).   In the last year Google has moved beyond mere search into other high-growth businesses such as mobile telephones.  And today Google announced it is going to legally offer books and other copyrighted material to customers in some ways unique – but competing with Amazon's e-book (Kindle) business (read article here).  Google keeps entering new high-growth markets with new demands from new customers.  And in each market Google enters with new products intended to be better than what's out there today.

Wal-Mart keeps trying to find a way to Defend & Extend its old, tired Success Formula.  Wal-Mart is huge, but its growth has slowed.  Competitors have entered all around it, and every year they are chipping away at Wal-Mart by offering different solutions to customers.  The competitors are getting better and better at matching the old Wal-Mart advantages, while offering their own new advantages.  And we can see Wal-Mart is now being defensive in its histiorical markets while naive in trying to export its old Success Formula to markets that don't show any need for it.  Wal-Mart is mired in the Swamp, struggling to fight off competitors while its growth is disappearing and its returns are under attack.  On the other hand, Google keeps throwing itself back into the Rapids of growth in new businesses that offer new revenues and increased profits.  And it enters those markets with new solutions that have the opportunity of changing competition.  Google doesn't have to have everything work right for it to find growth through its White Space projects and continue expanding its value for customers, suppliers, employees and investors. 

Adam Hartung Quoted in Investor’s Business Daily

You never know when interviewed exactly what the writer is looking for, what the article is, or how your comments will be used.  But I was delighted to be interviewed by the acclaimed weekly newspaper Investor's Business Daily a couple of weeks ago.  (The article can be found on Yahoo! business here.)

"Get Through It With Grit – by Sonja Carberry

Pust the envelope.  Adam Hartung, author of "Create Marketplace Disruption," points out that winning companies aren't afraid to shake things up, especially during a downcycle.  He said Cisco — instead of aiming to sell more products — has the "Disruptive" goal of making its offerings obsolete by creating new solutions.  "This kind of approach keeps you from riding the tail (of a trend) too long."

Tap rabble-rousers.  Hartung cited Apple's CEO as a prime example.  "Steve Jobs is a very dsruptive kind of guy," Hartung said.  So much so, Apple and Jobs parted ways in 1985.  When Jobs was coaxed back to Apple 15 years later, he championed such out-there ideas as the now-mainstream iPod."

What's great in this article is some information from the Managing Director of one of the world's top management consulting companies, Bain & Company.  Steve Ellis divulged from a recent Bain study that 24% more firms rose from the bottom to the top of their industries during the 2001 receission than the following sunnier economic period. 

What great support for the fact that when markets shift the opportunity is created for changing competitive position.  Those companies that build detailed future scenarios, obsess about competitors, Disrupt their internal Lock-ins and implement White Space can come out big winners during market shifts.  So if you're a leader, now's a good time to be more Steve Jobs like and not fear Disruption.  It's time to push your company to the top by taking advantage of competitor Lock-ins!!

Check your assumptions

(Read the following quote in Forbes, October 5, 1998, written by Peter Drucker) "As we advance deeper into the knowledge economy, the basic assumptions underlying much of what is taught and practiced in the name of management are hopelessly out of date… most of our assumptions about business, technology and organization are at least 50 years old.  They have outlived their time… Get the assumptions wrong and everything that follows from them is wrong."

Last week, former Reserve Board Chairman Alan Greenspan admitted to Congress that his assumptions about financial services and the products being offered, including credit default swaps (CDS), were wrong (read article here).  As a result, what he thought would happen in the financial markets – from interest rates to equity prices to currency values – turned out to be wrong.  Unfortunately, this helped create the opportunity for runaway leverage and the banking meltdown which has affected world trade since early September.  When leaders operate with wrong assumptions, the price paid by everyone can be pretty hefty.

The reality is that pretty much all leaders work with assumptions about business that are very country specific.  The impact of global knowledge transfer – of worldwide information at a moment's notice – of labor arbitrate happening in hours – and the immediacy of financing and financial reactions – is still not well understood by leaders trained in an earlier era.  Thus leaders under-recognized the speed with which manufacturing jobs could move around the world – as well as the speed with which IT services could move to lower cost markets.  Even though the current Federal Reserve Chairman (Dr. Bernanke) is a student of America's Great Depression, what he doesn't understand is that Depession happened in an isolated way to the USA.  Today, globalization means that problems with U.S. banks becomes a problem globally.  For all his studies of history – things in financial services have fundamentally shifted.  His assumptions are, well, often wrong.

In November there will be an economic summit.  Some are referring to it as the next "Bretton Woods" – a reference to the meeting in New York which determined how foreign currency exchange rates would be set and how banks would interact between countries (read about the summit here).  Yet, there are others who say no changes are needed.  But let's get real.  Of course we need to rethink how our country-based banking system works in a world where insurance companies and hedge funds often move faster and have more ability to affect markets than traditional banks.  In the 1800s banks in the USA issued their own currency – and then states issued their own currency.  Eventually this disappeared to federal currency.  So, do we now need a global currency?  With the change to the Euro in Eurpope the need for individual country currencies took a step toward unnecessary.  Should that trend continue?  You see, it's easy to think about the world using old assumptions – like a U.S. dollar as independent of other countries - but does it make sense in a world where products and services are supplied globally and governments (such as India and China notably) now manipulate their currencies to maintain price advantages?

On Friday evening a "guru" on ABC's Nightline was talking about the wild swings on the New York Stock Exchange and the NASDAQ.  He commented "the only way to get hurt on a roller coaster is to get off.  So hold onto your equities and keep buying."  Give me a break.  A roller coaster is a closed system.  Even though it goes up and down, you know where it will end and the result.  WE DON'T KNOW THAT ABOUT EQUITIES TODAY.  Many, many companies we've known for decades could disappear (GM, Ford, Chrysler are prime examples).  Just like Lehman Brothers disappeared, and AIG practically so.  If you were an investor in common or preferred equities of Freddie Mac or Fannie Mae, your "roller coaster ride" did not have a happy ending – and you would obviously have been a whole lot smarter to have jumped off.  You may get bruised, but that would have been better than the disaster that loomed.

It is critically important to check assumptions.  This is not easy.  We don't think about assumptions, they just are part of how we operate.  That's why now, more than ever, it is incredibly important to do scenario planning which will challenge assumptions by opening our eyes to what really might happen.  Because you can never assume tomorrow will be like yesterday – not in business.  To survive you have to constantly be planning for a future that can be very, very different.  Doing more of what you always did will not produce the same results in a shifting world.  Planning for future shifts is one of the most important things managers can do.

White Space makes all the difference

Odds are you don't know what a DN-01 is.  And that's OK. 

Think about my recent post on motorcycles.  Even with gasoline prices down substantially, they are still about where they were a year ago – which is way higher than they were 5 years ago.  So, the desire to obtain high gas mileage is still relavent. There are still people who would like the high gas mileage a motorcyle provides.  So what do you suppose holds them back?  Safety is an issue.  But for many, it's "I don't know how to ride." 

Very few Americans know how to drive a standard shift auto any longer.  If you're under 30, the odds are that you've never even sat in a car with a clutch and a stick shift.  And that's a problem if you go to buy a motorcycle, because they have standard transmissions.  So, while learning to ride the motorcycle you not only have to learn how to manage a front brake and back brake, but how to work a clutch and shift a manual transmission.  Now, that's a big hold up for a lot of people. 

And that's where the DN-01 comes in (see link to DN-01 here).  This new motorcycle from Honda (see chart here) has a transmission that doesn't need shifting.  Formerly only possible on a small engine scooter, now Honda has a full-size motorcycle that can be ridden without thinking about shifting.  If you think about that for a few minutes, you realize that opens the market to about 10x the previous number of possible customers.  I've long extolled how Honda is a leader in using Disruptions and White Space to find new opportunities.  Here again we see Honda taking the lead in finding a way to greatly expand the marketplace.  Another example of White Space at work. 

Compare this to Harley Davidson (see chart here).  Most Harley motorcycles use the same technology they've used since the 1940s (albeit with minor modifications – but not a lot).  Around the turn of the century Harley tried to update its customer base by launching a new motorcycle with an engine designed by Porsche of Germany.  Even though it's been out since 2002, the V-Rod has not been a big seller (read about the V-Rod here).  If you go into a Harley dealer and ask about this bike you'll likely be told "oh, the chick bike," in a derogatory way that only a Harley dealer could figure somehow talks down one of his own products.  While this bike represented the next breakthrough in technology to move Harley forward, the company and its dealers have chosen to largely downplay it – and sales results keep falling.

Now compare Honda to Sony.  Sony was long considered at the front edge of innovation.  For years Sony was known for bringing forward solid state radios, solid state televisions, the walk man  and the disk man.  But in the late 1990s Akio Morita, long the company head, decided to retire.  Throughout his career, Morita focused on new product development, testing and finding new markets for new technologies.  But the Board replaced Mr. Morita with an MBA.  Sony's new leader first reacted to stop all the wasted new product development at Sony in order to immediately raise profits.  Then, he cut R&D and product development budgets in favor of acquisitions.  Today, Sony is no longer the technology leader it once was. 

Think about how Sony (see chart here) - which owned a recording studio as well as #1 position in consumer electronics – completely missed the MP3 music market.  The new management's focus on profit, and Defending & Extending its past market position without investing in new development, left the company vulnerable to Apple and its Disruptive effort to change the music business.  As a result, Sony's profits are now down 38% this year, and leading a recent drop in the entire Japanese stock market (see article here).  Sony is worth less today than at any time since 1996! 

Sony and Harley Davidson both Locked-in on what worked in the past.  They tried to maintain sales on old products, and old product technologies.  They tried to say that "brand" was what was important.  That let new competitors come into their markets and find new customers, using new products.  And that's exactly what Honda is doing.  By Disrupting old notions about motorcycles (that they have manual transmissions, most recently) they create White Space for new products (and new businesses – like jet airplanes and robotics.)  As an investor or employee, you're better off with the Disruptor than the D&E competitor every day.

It’s never too late

Yesterday I talked about how Lock-in to an old Success Formula kept Sun Microsystems from undertaking Disruptions in the 1990s that would have helped the company keep from floundering.  One could get the point that with this weak economy, the die has been cast and there’s little we can do.  "Oh Contrare little one".

Let’s look at Apple (see chart here) – the company Sun passed up to focus on its core server business in the 1990s.  Today Apple announced profits are up 26% this year – despite the soft economy (read article here).  We all know about the iPod, iTunes, iTouch and now iPhone.  Apple has demonstrated that it is willing to bring out new products in new markets without regard for "market conditions", and as a result drive new revenues and profits.  It would be easy to delay new investments and new launches in this economy to drive up profits, but the company CEO maintains commitment to internal Disruptions and ongoing White Space to drive growth – especially while competitors are retrenching.

Another recent example is Coach (see chart here) the maker of high-end luggage, leather goods and fashion accesories.  Most high-end goods are seeing sales plummet.  But Coach used its scenarios about the future to invest in its 103 factory outlets and many discount outlets.  Instead of running to the high end and doing more of the same, while cutting costs, Coach has put new products into the market and offered new discount programs – in addition to its growth of outlets beyond the traditional Coach stores (read article about Coach here.)

Any company can take action at any time to grow.  All it takes are plans based on future scenarios, rather than based on just doing "more of the same."  Being obsessive about competitors allows for launching new products before anyone else, and gaining share.  And using Disruptions to create White Space for successful new business development.  This can happen at any time – not just when times are good.  In fact, when times are bad (like now) it can be the very best time to focus on growth.  When competitors are trying to retrench it creates the opportunity to change how customers view you, and grow.  This might well be the best time ever to not only Disrupt your own thinking – but Disrupt competitors by changing your Success Formula and doing what’s not expected!

Disrupt when times are good

With the economy soft, and sales harder to come by, more companies are thinking about what changes they can make to be more competitive.  But what we’re seeing now is the emergence of competitors that Disrupted when times were good, and the decline of those who chose to Defend & Extend old Success Formulas in order to maximize profits back then.

Let’s take a look at Sun Microsystems (see chart here.)   Trading today at $5.25/share, Sun was a darling of the internet boom – peaking at about $250/share in 2000.  But $5.25/share (adjusted for splits) is about what Sun was worth in the mid-1990s.  At that time Sun was a big winner as internet usage exploded and the telecom companies – as well as industry participants from tech to manufacturers – could not get enough Unix servers.  Everyone was predicting that the need for servers was never going to decline, and Sun was "#1 with a rocket", to use an old radio term for a big hit song.

In 1995 Sun held a management retreat for all its managers and higher in Monterey, CA.  Scott McNealy, the chairman and CEO, asked the audience "if you could buy Apple, would you do it?"  The audience reacted with a positive roar!  These managers all saw the benefit of having a low-price workstation line to augment their expensive servers.  Further, Unix was notoriously difficult to use and the hope of bringing a better GUI interface was very appealing.  They saw that if they could help the sales of Macs it would be a great way to slow the Wintel (Microsoft Windows plus Intel microprocessor) PC platform – which was the biggest competitor to Unix.  And Apple had lots of applications in media and the office that eluded the very techie Sun products.  These managers, directors and V.P.s had all thought about an Apple + Sun merger, and they saw the opportunities.

Mr. McNealy looked at the raucous, hopeful crowd and said, "you think you could fix that mess?  With all we have to do to keep up with market growth, you don’t see buying Apple as a major diversion?"  The air was sucked out of the room.  Obviously, Apple was troubled.  But there was real hope for growth in new and unpredictable ways from combining the two companies, their positive brands, their great technologies and their creative roots.  But Mr. McNealy went on to tell the audience that the executive team had thought about the acquisition, and just couldn’t see doing it.  It would be too disruptive.

That management retreat had as its keynote speaker Gary Hamel, author of Competing for the Future.  Mr. Hamel gave a great presentation about how his research showed great companies figured out their core – their core strength – and then reinforced that strength.  The rest of the retreat was spent with the management personnel in various break-out sessions defining the "core" at Sun Microsystems and then identifying how Sun could reinforce that core.

Of course, it only took 5 years for the internet bubble to burst.  The telecoms were some of the first victims, with their value plummeting.  Demand for servers fell off a proverbial cliff.   Meanwhile, Unix servers from IBM and others had increased in performance and capability – giving the once high-flying Sun a competitive kick in the pants.  Worse, the power of Wintel servers had continued to increase, making the price difference between a Unix server and a Wintel server much less acceptable.  IT Department customers were beginning to shift to PC servers in order to lower cost.  And Sun, with its focus on servers, had no desktop product to sell – no competitor to the PC – nor any software products to sell.  The internet market was rapidly shifting toward Cisco and those who sold robust network gear.  Sun was watching its market disappear right out from under it – and happening in weeks.

Now it’s unclear what the future holds for Sun Microsystems (read article here).  Sales have not recovered.  Losses have been mounting.  Sun’s dealing with hundreds of millions of dollars in restructuring costs (again), and some of its businesses are now worth so little that the company is probably going to be forced to write off millions (maybe billions) in goodwill on the books.  If it has to write off too much good will, Sun could end up declaring bankruptcy.

The time for Disruption at Sun was when business was good – in 1995 and 1996.  Had they bought Apple, who knows what combination might have happened.  At the time, Cisco (see chart here) was growing quite handily.  But Cisco built into its ethos the notion that the company would obsolete its own products.  This desire, to never ride too far out the product curve and instead cannibalize their own sales before competitors did, has allowed Cisco to keep growing revenues and profits.  Instead of "focusing on its core" Cisco keeps looking for the competitors (companies and products) that could make Cisco obsolete – and using those competitors to help Cisco drive growth.

Even with Disruptions, many competitors will not survive this recession.  Not because the managers are lazy or sloppy.  But because they will become victims of better competitors who built Success Formulas more aligned with future market needs.  Those who Disrupted in 2005 and 2006, who positioned themselves for globalization and rapid market shifts, will do relatively better in 2009 than those who chose to Defend & Extend what they used to do.  The best time to Disrupt and create White Space is when things are good – because that prepares you to win big when markets shift and times get tough.

Reading ALL the headlines

Ever heard of "confirmation bias"?  It’s a term that refers to how our behavior changes due to Lock-in.  As we develop Lock-in we don’t see all the information around us.  Instead, we start filtering information according to our Lock-ins – focusing on the things related to what we know and mostly ignoring things not related.  As a result we often start missing things that could be really important.  Consider someone who makes hammers (or pheumatic hammers) and nails.  They can easily ignore glues, or super-powerful adhesive tape, when those solutoins might well be a greater long-term profit threat than offshore hammer and nail manufacturers!

Another example.  A recent headline in The Chicago Tribune read "Abbott Absorbed with new Stent Therapy" (read article here).  (See Abbott chart here)  The article talks about how newly engineered dissolvable stents have been working extremely well in trials.  If you aren’t in the health care industry, or being treated for a possible heart attack, or an investor in Abbott, you might well completely ignore the article.  But, that would be a mistake.

Bio-engineering is going to be as important to our future as air travel and computers became.  It was easy for people in 1928 riding horses, or driving a Model A, to think air travel was something exotic and only interesting for people obsessed with flight.  But, we all know that by the end of WWII airplanes had changed the world, and the way we travel.  Likewise, it would have been easy for people with slide rules and adding machines in 1968 to ignore computer discussions when they were mostly about mainframes in air conditioned basements.  Yet, by the 1980s computers were everywhere and businesses that were early adopters figured out how to gain significant advantages.  And that’s the truth about bio-engineering today.  It will make a huge difference in all aspects of our lives.

Fistly, simple things.  Like we’re more likely to live longer.  But beyond that, injuries will be less onerous.  As we learn how to engineer products that are somewhere between inanimate and living, we are able to come closer to the bionic man/woman.  We’ll be able to repair major injuries in a fraction of the time.  We’ll be able to regrow damaged organs – from skin to livers.  We’ll regrow nerves – making paralyzation a temporary phenomenon and dramatically lowering the impact of strokes.  Injured soldiers will return to the battlefield within days – instead of going home badly hurt.  Senior citizens will regrow damaged or arthritic joints, instead of replacing them with major surgery making it possible for them to work much longer.  Athletes will be able to increase performance in ways we’ve never before imagined – and the line between "natural" and "performance enhanced" will become impossible to define. 

But think bigger.  There is no computer in our bodies, yet we do amazingly complex analytics in record speed.  Even a 2 year old can recognize the difference between a bird and a plane in a fraction of a second.  Ask a computer to do that simple task!  So we can expect a wave of bio-computers to be developed.  Devices that use chemical reactions to process information rather than electrons acting in logic gates.  How will we apply this technology to our lives and work? Cars that drive themselves? Super-secure baby walkers?   Pens that never misspell words?  Foods that never overcook?  Foods that never spoil?  Clothes that change to dissipate or hold-in heat depending on ambient temperature?  Floors that purge themselves of dirt – pushing it to the surface for automatic removal? 

When we are able to make chemicals – even cells – smart, what happens to the world around us?  Do we ever need to go to a dentist if we can have smart toothpaste that eats away tarter and placque, applying flouride, without going into the enamel?  Can we eat anything we want if we take products that absorb poison – or possibly fats – and discharge it through the system?  Do cosmetics become obsolete if we all have skin creams that repair damage and keep skin forever young?  What happens at companies like Procter & Gamble? 

As you go to work and do your job, it’s easy to get focused on the industry in which you compete – and the traditional way that industry worked.  You stop looking sideways at technologies in other fields not related to what you do today.  And that can be a huge mistake. Because it’s often someone that takes a technology you ignored and apply it to your customers’ needs who makes you less valuable.  Microsoft singlehandedly, and without much thought, destroyed the encyclopedia business by giving away what was considered a third-rate product (Encarta – for more on this story read Blown to Bits by Evans & Wurster).  Encyclopedia Britannica never saw it coming as they kept trying to print a better product. 

Spend some time reading ALL the headlines – and keep your eyes open for opportunities that you previously never considered.