Thanksgiving is tomorrow, so the crush of people flying through O'Hare airport has started.  It's natural to think about the largest airline in Chicago – United. 

United was on the brink of failure last summer as jet fuel prices skyrocketed.  In response, United started charging people for baggage.  Take a couple of bags along and your baggage costs could be 50% or more of your ticket price for a round trip.  United also raised prices, and cut flights.  None of these actions were likely to make United a more competitive airline – and weren't designed to.  United leadership was using "foxhole management" – trying to survive.  Of course the problem is that it doesn't take long sitting in a foxhole to get blown up.

Last week I had a business trip from Chicago to south Florida.  Imagine my surprise to learn that United no longer services 2 of the 3 airports in south Florida, and for the remaining destination it has one flight each direction daily.  The result?  To get to south Florida from Chicago (something done by many people in the winter), I had to fly U.S. Airways connecting through Charlotte.  Not supporting any loyalty to United.  And the latest word is that United intends to further cut flights (read article here).  United is the example of a company that is slowly killing itself in its effort to save its old Success Formula.

Meanwhile, Southwest Airlines keeps growing.  After United left South Florida, Southwest raised its fares on those flights, from its lower-cost Midway airport, to over $800!  It has been a profit boon for Southwest that United is cutting flights – and allowing Southwest to keep on growing.

When oil prices took their dramatic rise last summer, United was already a very weak competitor.  Although it was large, it had never addressed the market changes making its hub-and-spoke system and militaristic operating practices less viable.  Not the shutdown on 9/11/01, nor the bankruptcy filing, caused United to alter its business practices established 3 decades ago.  Thus the oil run-up put a weak competitor on the edge of viability – with a nudge over the other side.  United's reaction demonstrates how, when confronted with the non-viability of its outdated Success Formula, an organization can remain entrenched – and uwilling to take actions that would save it.  Locked-in, without White Space, United was unprepared to deal with yet another market shift.  Intead, United chose to take minimal actions short term, HOPING somehow things would change back to the good old days, long ago, when the company was less unprofitable (keep in mind that over its lifetime since deregulation United has never consistently been profitable.) 

Trying to save a troubled business, in rough economic waters, during a period of market change, cannot be done by doing more of the same – "better, faster, cheaper."  Market Challenges pile up, until a punctuated equilibrium changes the market for all competitors – and rendering some no longer viable.  To be viable long-term takes a willingness to recognize the future must be different from the past, that competitors are more successfully growing and are worthy of intense study, that Disrupting old patterns which keep the status quo in place makes it possible to leverage White Space to create a new Success Formula.  Unfortunately for all those travelers out there this holiday – that's not what United has done.

Invest in the future, not the past

Are you encouraged by the Federal Reserve's actions to purchase $100B debt from Freddie Mac, Fannie Mae and Ginnie Mae?  Government leaders say this is necessary to "get the markets moving again" (read article here). 

Unfortunately, this action is really no different than if the government purchased $100B of SUVs from GM, Ford and Chrysler to "get the auto market moving again."  Or, if they purchased $100B of coffee from struggling Starbucks, whose per store sales are predicted to fall all through 2009 (read article here) to "get the coffee shop market moving again."  Or if they purchased $100B of homes, now that prices have fallen over 17% in the last year and sales are down at least that much (read article here) in order to "get the real estate market moving again".  None of these actions will help the banks, or the auto companies, or Starbucks or homebuilders be more competitive.  At best, any of these (including the Fed's planned action) is a stop-gap effort attempting to protect the status quo – in the middle of dramatic market change. 

When markets shift, the impact is often delayed by ongoing efforts to Defend & Extend the status quo.  Eventually, however, the market shift is unavoidable – and in what seems a very sudden shift change is very dramatic.  The market moves from one equilibrium to another.  And it is at this shift point (what's called a punctuated equilibrium) that the weaknesses in old competitors become highly visible.  Like Citigroup, GM, etc.  At the same time, the opportunities for new solutions become visible as well.

When violent market shifts happen, efforts to return to the old status quo never work.  Look no further than Japan's economy in the 1990s – which suffered a recession for more than a decade as the country's leaders refused to adjust to the changed competitiveness of Japan in the global economy.  Today, 15 years after Japan's recession began, that economy has still not recovered on a consistent growth plan because the leaders keep spending resources trying to protect old business practices which do not work in today's global economy.  Consequently, Japan keeps falling further behind China, India and other more competitive economies - and the companies in those economies.  Is this the direction we should lead America today?

Future success depends upon changing to meet dynamic market requirements.  So far, none of the TARP activities, or the spending by the Treasury or Federal Reserve, are meeting this need.  While Congress denies aid to everyone else, a situation likely to change, the spending on financial assets is not creating any new jobs, nor helping the advancement of any innovations in technology, or business practices.  Increasingly, however, people are beginning to realize that attempts to shore up these old industry practices are not preparing the American economy, and its companies, for global competition.

What's needed is leadership that will use funding to improve competitiveness – not attempt to preserve the past.  Spending funds on unnecessary business trips, unnecessary perquisites, bonuses and dividends does not increase the likelihood of having a vibrant competitive set of industry players in 2010.  What does work is installing leaders willing to develop new Success Formulas which are more competitive – by intensely focusing on competitors, Disrupting current practices and using White Space to innovate.  If Congress is going to make citizens stakeholders in these businesses, it is within their purview to demand Disruptions – or create them – so the recipients move forward rather than waste money in a vainglorious effort to find the past.

Winning at news

As consumers, it's easy to forget that news is a business.  After all, we don't directly pay for news.  It comes free to us via television, radio, print or the web.  Thus, it's easy to forget that the providers rely on advertisers to foot the bill.  Of course, they attract advertisers by competing to get us consumers to watch, read or listen to their news programming.  So, you may not have noticed the change in competitors recently in national news – and the big difference this is having on some valuations.

Focusing on television, CNN was the first at making news into a stand-alone business.  For many years, CNN was practically uncontested.  But in the late 1980s Rupert Murdoch woke up to realize that any business with one player deserved some competition, and he launched Fox.  Using tools right out of The Phoenix Principle, he managed to unseat CNN and become #1:

• Fox looked into the future and predicted the market for news was likely to grow, even if the market for newspapers was not.  Thus, even though News Corporation had been a newspaper company up until that time, Murdoch invested the vast bulk of all money he could raise into creating a brand new, from scratch, television news company that would be on broadcast television as well as cable.  Many people thought he was nuts – but he quickly proved them wrong creating enormous profits.
• Fox obsessed about competition.  The new leaders studied what the competitors in broadcasting (NBC, CBS, ABC) did, and studied CNN.  They looked for what they could copy – and the weaknesses.
• Fox Disrupted.  Where everyone thought news had to be neutral, Fox chose to be non-neutral.  Recognizing that many advertisers were corporations that perceived news media were biased liberally politically, Fox news proposed to counter that bias by being biased conservatively politically.  Not only was this opportunity available, but Fox recognized there was no way to counter this position by the existing competitors.  What could they say they would do differently once Fox said they were going to be conservatively biased?  That they would be more neutral?  Fox found a way to change how viewers thought about news coverage and what they would watch.
• Fox used White Space to develop new programming.  News was not just reporting, but stealing an idea from Nightline people were hired to interpret the news.  Bill O'Reilly, Sean Hannity and many others were hired to interpret the news for viewers, not merely report it.  While not all of these efforts succeeded, some were wildly successful drawing so many viewers Fox surpassed CNN as #1 in cable news.

Fox developed a Success Formula that grew revenues quickly.  The Lock-ins helped Fox attract viewers, and grow revenues and produce prodigous profits.  But, that's not the end of the story.

In the 1990s Microsoft joined with NBC investing in a new company to launch a cable channel and internet presence.  That company had wide berth, but was intended to provide news.  MSNBC faced the competitive marketplace that now had both powerhouses Fox News and CNN.  So, what did they do?

• Looking into the future, the leaders recognized that if there was a market for neutrality, and for political conservatism, there was probably a market for political liberalism.  So they identified a counterpoint to Fox and CNN.
• They studied what worked at CNN, Fox and cable news.  They identified weaknesses in them all.  They recognized that many of the programs on both stations had audiences that weren't growing, leaving time slots available for alternative programming.
• And they Disrupted.  MSNBC mixed general news coverage with "special investigation" programs into prisons and other locations with news interpretation programs that took a distinctly politically liberal bent.  Additionally, program hosts directly compared their programs to Fox and CNN, and even blatantly compared their competitive audience size ratings. 

• And there was plenty of White Space.  Programs were tried, added and dropped as fast as they could get them to market.  Some were produced fewer than 2 months.  Others were tried in multiple time slots.  And as programs were shown to have audiences, they were moved around to compete directly with similar programs on the other channels.  Newscasters from other NBC programming, such as CNBC or NBC news, were shared with MSNBC creating a different operating model than existed at either CNN or Fox News.  Links to MSNBC web programming were added to augment the television programs, offering multi-media capability for viewers.

As a result, MSNBC is now closely tied with Fox News and has a lead in many age groups and time slots (read Marketwatch article here.)  The valuation at News Corp. has fallen 67% in the last year (see chart here) – a staggering $10.5billion.   

In any market, no matter how strong the competition, the opportunity exists to attack competitor Lock-ins and introduce a new Success Formula which can grow.  Even if earlier competitors used The Phoenix Priniciple, if they change to Defending & Extending Lock-in on their Success Formula and do not keep applying the principles to remain evergreen new competitors can re-apply the principles to grow and take share.

Now, in this soft economy, the tendency is to focus on what you always did.  But it is during this kind of economy that weaknesses in competitors become more apparent.  Opportunities to change competition can become clearer.  Customers are more willing to try alternative solutions, giving new competitors a better chance of success.  Suppliers are willing to take greater risks to develop new business, making new business launch easier.  If you programmatically apply The Phoenix Principle, it is possible to tackle the new economic/customer requirements more quickly, and improve your competitive position.

Where’s the next Lee Iacocca when you need him?

The auto execs have not made their case in Washington D.C.  Speaker Nancy Pelosi is saying Congress has not yet seen a plan in which they can invest taxpayer money.  Almost half of Americans don't think a bailout should be undertaken (read article here).  

For those of us who've been around a while, reflections on the last time an auto company asked for help are inevitable.   It was 29 years ago, from September into December of 1979, that Lee Iacocca (former Ford executive) and the UAW asked Congress to provide $1.5billion in loan guarantees (not a loan – not cash – just a government guarantee) in order to save Chrysler from bankruptcy.  The economy was bad, but nothing like the banking crisis we're in now, and a recalcitrant Congress was not happy.  Nonetheless, they prevailed and Democrat Jimmy Carter signed guarantee approval in January, 1978. (Read about the Chrysler loan guarantee here.)

By all accounts then, and certainly later, Lee Iacocca was nothing like Rick Waggoner (GM CEO) or Alan Mulally (Ford CEO).  Iacocca had been fired from Ford because he told management they were going the wrong direction.  He was a person willing to dissent, to Disrupt, and he'd shown it at Ford before ever coming to Chrysler.  Additionally, as a new leader at Chrysler, he was willing to demonstrate changes were afoot by proposing from the beginning to place the head of the UAW on the Chrysler Board of Directors.  After decades of labor wrangling, this was a significantly Disruptive act never before considered – and showed a leader willing to do things very differently.  Mr. Iacocca even promised to take no salary his first year – he'd only get paid if his plan worked allowing him to earn a bonus according to predefined metrics. (Imagine that – an executive with real skin in the game.)

Iacocca was never a fellow to do what was "easy" or "natural".  A feisty fellow with Italian roots, he spoke his mind.  When Ford was making boring cars, and considered the Edsel "every man's car" (the Edsel was an enormous failure), Mr. Iacocca conceived of the Mustang — a car that was small, sporty and affordable.  Something otherwise not on the American market scene.  That car, more than anything else, saved Ford in the 1960s.  Even today, Ford is hanging its future and much of its brand image on the 45 year old Mustang.

When he got to Chrysler, Iacocca kept that focus on the future.  At a time when automakers were struggling to figure out a profitable way to develop cars that fit American needs he brought out the mini-van – a practical vehicle never before seen.  As the economy improved he felt a convertible would be a good idea.  He asked his head of engineering how long it would take to make a convertible for him to test – and the exec told Mr. Iacocca 3 years.  CEO Iacocca told his engineer he didn't understand – Iacocca wanted him to pull a car off the line, take a saw and cut the top off.  That should take about 4 hours.  The action was taken, and Mr. Iacocca took the topless sedan for a ride around the block.  In less than an hour he was convinced bringing back convertibles would be a huge boost to Chrysler profits.

Mr. Iacocca didn't look to his customers for ideas, he looked at future needs and competitors.  Mr. Iacocca studied the cars, and manufacturing processes, from Europe and Japan.  By obsessing on everything they did he found ways to make better cars that were more desirable and less costly.  At a time when the Japanese Yen was a screaming buy compared to the dollar he changed processes to permenantly lower car costs – not relying on layoffs or more traditional cost cutting – making his company much more competitive than Ford or GM.

Mr. Iacocca never was slow to Disrupt those around him, or the market.  As discussed, he was ready to launch new car concepts quickly, and go to the union with changes in work rules and compensation schemes.  He created White Space everywhere from car design to manufacturing process groups to union discussions in order to find ways to make his company competitive with offshore players – and the most preferred of the American auto companies.

Ledership makes a difference.  Congress has asked Messrs. Waggoner and Mulally to sell off the private jets, cut executive pay and produce a plan that shows the future will not be like the past.  And that's fair.  But it's not at all clear these leaders are of the Iacocca (or Jobs) way of thinking.  If they keep trying to preserve what used to be normal, things aren't likely break their way from those in charge of giving a bailout.  Mr. Iacocca is now retired, and far removed from the demands and dilemmas of the current auto manufacturers.  But there are other managers out there – other leaders with the ability to focus on the future, obsess about competitors, Disrupt and implement White Space to turn around these troubled companies.  I sure hope someone puts them in the right place to persuade Congress fast – before a couple million people lose their jobs and this recession turns into a Depression!

Of course you change leaders at Yahoo!

It was only about 6 months ago that Microsoft was offering over $30/share for Yahoo!  That deal didn't happen.  And Yahoo! (see chart here) fell to under $ 11/share  .  Now Microsoft is saying "no thanks" despite the lower value – and Yahoo is changing it's CEO (read article here).  Should Microsoft have purchased Yahoo!?  Should Yang be fired?

No, and Yes.  Yahoo created what is probably the fastest growing business on the planet today – internet advertising.  And Search + ad sales has not only grown fast, it has been highly profitable.  Look no further than Google.  That one company so dominates a high growth sector is – well – incredible.  Why aren't there more competitors being more effective?  Yahoo! should be growing like a weed in a hot and wet garden. 

And that's why it shouldn't be purchased by Microsoft. Microsoft is thoroughly Locked-in to its old Success Formula all about the PC.  Money alone doesn't make a good company.  Cash reserves do not assure future growth.  And when you watch Microsoft you can see a company that doesn't really have a plan to grow.  Microsoft is far from close to the fastest changes and growth happening in technology today – such as wireless application devices – and search.  Just buying a company in either sector won't help if it is smothered by the Lock-ins surrounding Microsoft.  Microsoft has been without Disruption since Bill Gates shook up things and launched Internet Explorer.  And there's been no White Space as Microsoft drolled along creating updates to Windows and Microsoft Office.

At the same time, Mr. Yang has been unable to create the Disruptions and White Space that would allow Yahoo! to compete with Google.  Recently, he's even been trying to license Google technology to affirm a lifelong competitive position as no better than #2.  But there is no "iYahoo" phone in development – nor any other new business coming out of Yahoo!  For a high tech company, with rapidly changing competitors in a dynamic marketplace, to have so few White Space projects is the kiss of death – and has been the death of Yahoo!'s stock price.  So Yahoo! desperately needs a new CEO.  Someone willing to apply John Chambers or Steve Jobs style business practices to get Yahoo! competing more effectively and growing again – not trying to Defend & Extend the original Success Formula which the market has moved beyond.

I just wish the Board members at GM, Ford and Chrysler would follow the Yahoo! lead.  They need to change the leaders in those companies faster than Yahoo! did.  If we could get different leaders guiding these auto companies, and different managers carrying out Disruptions and White Space, we could dramatically hasten the return to ecnomic growth for America.

Yes, it would be nice to see Steve Jobs run GM (or Ford or Chrysler)

On Tuesday, New York Times columnist Thomas Friedman (author of The World is Flat) chided the auto companies for their lack of innovation and desire for government assistance (read article here).  Setting off a firestorm of comments across the web, he not only recommended replacing the Board of Directors and executives at GM (as I have blogged), but went so far as to recommend asking Steve Jobs to take over GM leadership as an act of national service.

The other side of this argument was made by columnist John Dvorak on Marketwatch (read article here).  Mr. Dvorak says this is a foolish idea, because the auto industry is so integrated and unique that only someone within the auto industry could hope to run an auto company.  He recommends searching within the bowels of the auto companies for some overlooked wonderkind who is able to turn around the organization while maintaining the existing business model.  He goes on to say that the only reason Steve Jobs has been successful is due to the unique features of the tech industry, implying no tech manager could hope to run a company as complex as GM.

Mr. Dvorak suffers from the sort of traditional management thinking that has gotten GM (Ford, Chrysler, Citibank, Washington Mutual, Sears, General Growth Properties, Sun Microsystems, etc.) into big trouble.  As he lists off the "unique features" of the industry, and discusses "the manufacturing, inventory, subassemblies, delivery and other systems that are in place…too delicately balanced and complicated for a newbie to deal with" he describes Lock-in.  Mr. Dvorak views what's been done in the name of Defend & Extend Management as good – and therefore necessary to keep.  Thus, any turnaround would require doing more of what's been done – hoping somehow doing it better, faster and cheaper can make the company successful again.  But he completely ignores the fact, which he actually makes in his article, that there are a lot of other auto companies competing with GM, Ford and Chrysler — and they are better at running these complexities than GM, because they are able to make autos that customers purchase at a higher profit.  Mr. Dvorak ignores the obvious fact that it is very likely the structural and behavioral Lock-ins which he thinks impossible for a new leader to manage that are causing the horrible results in the U.S. auto companies.  He ignores the notion that it is the very heart of the GM Success Formula that is competitively outdated, and thus causing these horrible results.

Successful turnarounds are rarely accomplished by people who are part of the industry.  Because those in the companies are Locked-in to the Success Formula which is producing the poor results.  Existing leders and mangers accept those Lock-ins, and that old Success Formula, thus trying marginal changes – or more of the same but with less resource.  What really works is when a new leader implements significant Disruptions that cause people to approach the work with a very different frame of mind, and then implement White Space projects (usually several, and with lots of resources and visibility) which allow the company to develop a very different Success Formula to which the company can migrate.  Example – consumer products leader Lou Gerstner's turnaround of tech giant IBM.

While Steve Jobs likely could make a significant difference in GM, I don't think it has to be Steve Jobs.  We so love our heros we start thinking only they can make a difference.  What GM needs is new leadership that works like Steve Jobs.  Leadership that (a) focuses on future needs rather than current problems (b) obsesses about competition rather than thinking all solutions lie within the company (c) is not only willing to be Disruptive – but enjoys creating Disruptions to the Lock-ins which overwhelm the Status Quo Police and (d) set up White Space projects where leaders are given permission to do things very differently, and the resources to achieve significant goals.

It can happen in the auto industry.  About 25 years ago much maligned Chairman Roger Smith took cost savings from closing outdated plants in places like Flint, Michigan (the reason for Michael Moore's first docu-story Roger and Me) and invested them in a start-up company called Saturn.  Saturn was White Space where the leaders were not forced to follow old G.M. Success Formula tactics – like keeping the same union contracts, or using the same components, or using the same dealers, or using the same customer pricing mechanisms.  Saturn came on the scene with great fanfare.  With only 3 vehicles in their initial line-up, the company's brand became "Apple-like" with its near-cult status.  People loved the smaller cars, the focus on safety and consistency, the no-negotiating price method and the low-pressure dealerships.  This was a great example of White Space that produced a very significant change in customer opinions about American cars - and car companies – and in just a few years.

Unfortunately, Roger Smith retired and over the years GM's management has dismantled what made Saturn great.  Rather than migrate GM in the direction of what made Saturn a winner, they slowly pulled Saturn into the old Success Formula of GM, killing its advantages.  Away went all the uniqueness of Saturn as it was turned into just another division GM.  Similarly, the acquisition of Hummer from American General offered an opportunity for GM to move in unique directions – but quickly Hummer became just another division which focused on a narrow product range and eliminated much of its uniqueness homogenizing the brand into something far less desirable.  GM spent billions on developing an electric car, more than a decade before the hybrids were launched by Toyota and Honda.  But management's Lock-in to preset ideas about what that car needed to do caused them to kill the project — and go so far as to sue test customers to retrieve the electric autos they LOVED.

GM desperately needs leaders willing to Disrupt.  And willing to implement White Space to develop a new Success Formula.  Leaders willing to let the company migrate toward new ways of operating – who believe it is essential.  People like Steve Jobs.  People the auto companies weeded out long ago when forcing those who move up to slavishly accept the failing Success Formula and focus on Defending & Extending it – despite the declining results.  It will take people from outside GM, Ford and Chrysler to turn them around.  It can be done. 

Be Careful about listening to your customers – GM, Ford, Merrill Lynch, Harley, etc.

For years we've heard how important it is to listen to you customers.  Many books have been written on the importance of listening to customers and giving them what they want.  Unfortunately, and this ay sound like heresy, listening to customers can be more problematic than helpful.  It's better to use scenario planning, compiling info from a range of resources, than let customers lead your planning.

Look no further than the current problems at GM, Ford and Chrysler.  While they may have done many things poorly, one thing they did slavishly was listen to customers.  Throughout this decade American customers have told them"we want bigger cars, with bigger engines, with more power."  The #1 selling vehicle in the USA for several years was the Ford F Series pick-up, a gas user.  For all 3 manufacturers their large SUVs were not only big sellers, but huge profit producers.  Customers were willing to pay big dollars for the steel, V-8 engines and luxuries that went with 12 miles per gallon in the city.  When asked what they wanted, buyers cried for "more."  So Chrysler relaunched the hemi engine – a high horsepower and gas sucking beast.  When launched, they sold out hemis – even in station wagons!  But this close listening to customers meant the companies were NOT thinking about potential market shifts that could cause customers to shift quickly away from what the Big 3 were making.  $150/barrel oil caught them flat-footed, unprepared, with loads of inventory and weak balance sheets.  A sitting duck for the recession and debt crisis.

We see this phenomenon in many markets.  IBM invented the personal computer, then exited the business 4 years later because their customers – data center managers – had no use for PCs and didn't buy any.  Apple launched the Newton – the first PDA – but dropped it like a hot potato when customers told them they were more interested in enhanced Macintosh computers.  Harley Davidson's 50 year old customer base keeps saying they only want big V-Twin roaring motorcycles – so Harley has ignored the faster growing and more profitable crotch rocket and scooter cycle markets (not to mention quadrunners, waverunners and snowmobiles.)  Harley sales are down over 30% this year.

And we can see emerging trends that point to problem companies who listened too long to customers.  Sony, EMI and other traditional music companies missed the digital/MP3 music wave because their retailers wanted to keep making CDs.  They kept listening to Blockbuster Music until it disappeared.  Major movie studios have missed the move to digital/MP4 film distribution as they keep listening to customers (like Wal-Mart, Target and Best Buy) that want DVDs to sell.  Sam Zell spent hundreds of millions of dollars buying the newspaper-dominated Tribune Company, famously saying how he reads 4 newspapers a day, only to find out that people younger than 30 never read newspapers – and never will.  When projecting future subscriber numbers, and ad sales, he talked to older folks who read newspapers and didn't recognize a major, permanent market shift in the market.  Circuit City catered to their in-store customer, but now is finally waking up to the reality that on-line retailers can kill its profit with lower overhead, less inventory, faster turns and lower cost.  Where once on-line shopping was only for the young, everybody is now going to the lower prices.  And we now have evidence that for people under 35, they see no value in a traditional stock brokerage (read article here) – meaning bad things portend for companies like Merrill Lynch that keep thinking their over-40 customer base with $2million in liquid assets is the group to listen to.  In all these instances, their "core" customers were not telling them where the market was heading, thus letting them drive right off a profit cliff.  Heads up to travel agents (yes, a few still exist) and insurance agents out there!

Your customers Lock-in to your Lock-ins.  They like what you offer.  When you ask them what they want, you'll hear "more, better, faster, cheaper."  Nothing insightful there.  The customers you need to listen to are those who left you – those who never signed on to you – and those using competitors you've conveniently organized out of your "core segment."  They can help you see where markets are headed, and where your Lock-in to old products, services and practices leaves you vulnerable.  Otherwise, like GM, Ford, Lehman Brothers, Bear Sterns, Sears, Circuit City and Best Buy you'll be planning from the past – and when market shifts happen – KA-POW! 

To be successful you have to use scenario planning that keeps you prepared for future markets.  You have to understand not only current competitors, but future competitors.  And you have to anticipate what customers will want in the future, not just what they can tell you about their needs today.  So be careful about listening to your customers, they are very likely to lead you right into the abyss.  Just ask Mr. Waggoner at GM and Mr. Ford, Jr.

What to do with GM and Ford?

What to do with GM and Ford?  It sort of sounds like "what do we do about our miscreant son ______?"  The reality is that both companies are on the brink of failure – and no one believes they can survive without some sort of government bailout.  The national news is now active in the debate about whether to bailout or not – and how to bailout – from Nancy Pelosi in the U.S. House of Representatives to MSNBC pundits Keith Oberman and Chris Mathews to CNBC stock maven Jim Cramer.  But plenty of people are angry.  They were first angered by the bank bailout – and now this potential auto industry bailout makes them angrier.  Cries of "socialism" are not hard to find.

Not many Americans want GM and Ford to disappear.  The loss of millions of jobs, havoc on the unemployment, insurance and pension systems and the disappearance of thousands of dealerships along with the subsequent short-term shortage of product would be a tornado of problems making the banking crisis look like a west Texas dust devil.  But simultaneously, almost everyone is angry about bailing out the companies.  So where should this anger be directed, and can it be used constructively?

We must hold management accountable for the terrible state of these companies.  Even if you want to blame the union leaders, no labor contracts could have been created without acceptance by company management.  Under every bad decision rock will be the fingerprints of someone in management at the company.  It is management's responsibility to look out for the fiduciary well being of debtors and investors – as well as the long-term interests of customers who want service and replacement product, and employees who want to keep working, and suppliers who want to support the business.  All of these groups have suffered badly due to bad management decisions.

So, are these managers all a bunch of dopes?  That would be a radically over-simplified conclusion.  These managers are well educated, many from the top schools.  They are experienced.  They have more vested in the success of their companies than almost anyone.  Most have sacrificed pay, bonuses and benefits over the last several years, just like their employees (or even moreso) as part of helping their companies make it year to year.

What we have to realize is that these managers are Locked-in to the Success Formulas their companies created in the 1940s-1960s.  During those heydays, investing in auto manufacturing was a great way to grow wealth.  Working in an auto company made you amongst the highest paid workers on the globe.  Times were good, GM and Ford were on top, and the companies created behavioral norms and structural decision-making systems that helped them do more of what was making money.  The companies Locked-in on those behaviors and processes, and they are still trying to run these companies according to those outdated Lock-ins.  Even though the marketplace has shifted dramatically over the last 50 years, amazingly little has changed within the Lock-ins at these companies.  They have steadfastly Defended & Extended their Success Formulas – even ignoring the learning opportunities from acquisitions in aerospace and computers.

There are auto companies not on the brink of extinction.  Toyota, Honda and Kia may not be raking in the money this year, but no one thinks they are going broke.  They disrupted the auto market, and have never looked back.  As the market Disruptors, they have taken advantage of their Locked-in competitors in everything from labor agreements to manufacturing processes to design methods and even sales/marketing approaches.  GM and Ford have been sitting targets, easy to prey upon, because they were so unwilling to Disrupt and use White Space to evolve.  Quite to the contrary, the Locked-in leaders at GM and Ford have sold asset after asset – from Hughes Aircraft to EDS to GMAC at GM, for example – in their effort to protect the auto industry Lock-in within their companies yielding poorer and poorer return on assets year after year after year.

Now that the leaders of these companies (and this goes for the financial industry players looking for TARP bailouts) are asking for bailout, someone must step up to forcing change in the management.  Not because they are bad people, or ignorant, but because they are Locked-in to approaches assured of not improving results.  It makes no sense to put money into Locked-in management teams that have proven they can't make an adequate rate of return.  While some are saying "the smartest people about the auto industry are in the auto industry" (or banking), what they really mean is "the people who are Locked-in to how this industry has historically operated, and ignored market shifts to the point they took their companies to the edge of bankruptcy, are asking now for government support to maintain their Lock-in."  And that would be a foolish way to invest anyone's money – private or taxpayher.  Benjamin Franklin is credited with once saying "lunacy is doing what you always did but expecting a different result."  It would be lunacy to bail out these companies and leave the existing management in place – to do more of what was done that led them to failure. 

If managing was easy managers would be paid less than workers.  To earn more – like the remarkable pay of CEOs – managers are supposed to keep their companies making high rates of return.  If they don't, why are these managers there?  Once they fail, why should management teams be given money to do more of what they've already done, but to unsuccessful results?  Recent examples of AIG managers who are going on lavish business trips so shortly after their company was saved from bankruptcy by the governement is a clear indicator of how ready these managers are to return to the same behaviors and decision-making processes that almost destroyed their companies.  They are planning on more of the same, with possibly a little trimming around the edges.  Not the kind of change needed for these companies to regain competitiveness.  Have you heard any of these management teams take responsibility for their company failures, or recommend they be replaced?  Or are they asking for money to keep themselves employed?

There's a lot of competition for managerial positions.  There are a lot of leaders and managers who have been pushed out of organizations due to downsizings, or even age.  There are thousands of managers receiving new management degrees every year.  If these bailouts are to be effective, then we should assuage the anger of those supplying the bailout funds with a change in the management of these companies.  If we don't want government employees running them, according to stagnant rules incapable of keeping up with rapid market shifts, then we need a new batch of leaders and managers who are willing to Disrupt how these companies operate – internally – and start up a batch of White Space projects to create new Success Formulas that are competitive and able to produce positive returns in today's marketplace.  If we don't change the leadership, we shouldn't expect much payback for the investment.

Uh, oh – will Starbucks recover?

Starbucks (see chart here)announced earnings – well sort of (read article here).  Accounting rules are the only thing determining whether Starbucks had earnings or losses.  Let's say the company broke even – because we don't know for sure given the financial machinations.  Starbucks was on a growth tear for a decade, and became a brand synonymous with upward mobility.  Company value is now down 75% in just 2 years.  Revenues are down, and projected to continue declining into 2010.  Earnings have evaporated and company leaders say the only way to create them in the future is continued draconian cost cutting.  Company management would like to lay blame for these horrid results on the crappy economy.  But is that why Starbucks has taken this fall?

Management has to take responsibility for these results – and it's the leadership in place now.  Starbucks was a model of growth.  While the company was expanding its shops the previous CEO looked into the future and developed a series of new businesses to augment the original business: 

• He started adding food – both cold and hot – to increase sales within the stores
• He pushed Starbucks into food service (United Airlines, among others)
• He pushed Starbucks into grocery stores with prepacked beans
• He pushed Starbucks into liquor stores
• He began promoting CD sales and exploring MP3 distribution
• He produced music – including the #1 CD in 2005 (Ray Charles Greatest Hits)
• He began producing movies (Akeelah and the Bee)
• He opened an agency for artists (signing Paul McCartney of Beetle's fame)

These actions all opened White Space for expanding Starbucks when, inevitably, either stores reached saturation or the growing lust for coffee and tea declined.  But he was replaced by Howard Schulz, considered the founding CEO by most.  Schulz demonstrated true "hedgehog" behavior (to coin a term used by Jim Collins in "Good to Great") by rapidly exiting of most of these businesses.  Mr. Schulz felt Starbucks should concentrate on its "roots" – on coffee.  His approach to improving Starbucks was to "focus" on what used to work.  And to cut costs until profits met his goal.

But now we can see the disastrous results of his strategy.  Stores are closing, and revenues in open stores are going down causing total revenues to decline.  And revenues are falling faster than costs, evaporating profits.  Where Starbucks was once a model employer, he is cutting benefits to employees and shows little (if any) interest in the famous barrista experimentation that led to innovations like "Frappucino" which helped add billions to total revenue.  In just a very few months Starbucks has gone from a company willing to Disrupt its Success Formula and use White Space to grow – into a company exclusively trying to Defend & Extend a strategy from 15 years ago. 

But in the last 15 years, the marketplace has shifted dramatically.  Quality coffee, including specialties like espresso and latte not formerly common in America, have become commonplace as competitors from Caribou Coffee to Panera Bread, Dunkin Donuts and McDonalds have entered the business.  Prices for good coffee have declined, and customers now have other places they can mingle, network or sit and read besides Starbucks.  And increasingly you can obtain a good coffee right where you eat breakfast, lunch or dinner.  The need to pay a "Starbucks premium" has evaporated – like Starbucks' profits.  The new CEO, by following the Jim Collins approach, has ignored the dramatic market shifts which make Starbucks coffee shops a far less profitable business than they were just 5 years ago.  He's more likely to end up like Circuit City than the growth company Starbucks used to be.

As mentioned before in this blog, research for "Create Marketplace Disruption" disclosed that only 7% of the time do companies that hit a growth stall ever grow again at 2% or higher.  Why such dismal performance?  Because the growth stall shows management has missed important market shifts!  Focusing internally on profit improvement – especially with cost cutting or "back to basics" actions – only allows competitors to keep improving their position while the former leader retrenches.  While the competitors are charging forward, the hedgehog company is burrowing into the dirt, allowing himself to get run over.

Markets never run in reverse.  Once someone develops a winning Success Formula competitors emerge.  They copy the leader down to the detail, and even come up with their own advantages (including lower price.)  Some develop a better solution.  And when market shift happens, the leader finds profits decline.  To maintain revenue and profit growth requires leaders use White Space to explore new businesses that can evolve and enhance the Success Formula.  That was the road Starbucks was on.  Until Mr. Schultz took over the reigns.  And now, his "Collins-esque" approach to business is driving Starbucks right into the ground(s). 

Who pulled the rug?

What a day this Monday is turning out to be.  Circuit City files for Chapter 11 (read Reuters article here, and Marketwatch article here).  Sirius radio looks like it will follow soon (read article here).  And Deutsche Bank analysts are predicting GM will end up wiping out shareholders through either bankruptcy or a government bailout that will eliminate the equity (read article here).  GM was trying to find a solution by merging with Chrysler, but that deal's now dead leaving Ford at risk of failure, and Chrysler in need of a partner if it is to survive (read Financial Times article here).  Who's pulling the rug out from all these stalwarts of American capitalism?

Let's not forget that Circuit City was the statistically best performing company in Jim Collins' wildly popular book "Good to Great".  How could a company that was considered a model for all leaders to follow decline so far, so fast?  Is it worth considering that the management approach the author recommends possibly might not be as effective as promised?  Mr. Collins' recommends companies figure out their approach to the market, then get everyone committed to that approach.  After that, his recommendation is to leave ego at the door, and execute, execute, execute against the approach and its metrics.  Those who work hard, and sacrifice, he predicts will win.  So, should we conclude that Circuit City changed after he wrote his book?  Did management become vainglorious?  Did leaders, managers and employees lose commitment to the market approach?  Did everyone quit working hard, quit sacrificing?  Is that the problem in all these companies?  Egotistical management lacking committed and hard working employees willing to sacrifice?

My research into hundreds of companies for "Create Marketplace Disruption" concluded just the opposite.  In most instances of troubled companies, management was extremely dedicated and hard working.  Examples of sacrifice were everywhere, as employees dropped bonuses and accepted pay and benefit cuts.  Vendors took longer terms and lower prices while carrying inventory for their troubled customers.  Customers remained loyal often right up to the point of failure.  In reality, there was just as much commitment and sacrifice, hard work and effort in those that failed as those that succeeded.  As Mr. Rosenzweig concludes in "The Halo Effect" these characteristics do not explain performance of winners as distinctive from losers.  So, what is it?

Following best practices can oftentimes be as harmful as anything else.  Companies that get into trouble consistently demonstrated commitment to Defend & Extend management, even after market shifts rendered D&E management unable to improve results.  Continuing to optimize, to do more while trying to be faster and better and cutting costs in efforts to be cheaper simply did not turn the corner on performance.  For example, just today a leading marketing web site is recommending that companies need to implement only tactics that are designed to optimize the existing brand and its performance while eschewing innovation (read article here).  Innovation is costly and risky, they presume, so investing in wht you know is the only way to go.  That same journal pointed out that all the American auto companies were focusing on cost cuts in an effort to save themselves (read article here) - when we all know the biggest problem these companies face are autos which aren't competitive with foreign products which have equal or higher quality at better pricing and often considerable advantages in fuel economy, longevity, cost of ownership and performance. 

When management focuses internally, bad things happen.  Focusing on how to operate better presumes there will be no market changes which alter competitiveness.  The reality is that most companies falter because they miss market shifts – and the shifts cause competitors to become relatively more attractive.  If management keeps trying to do what it used to do better, it misses market changes and keeps falling farther and farther behind.  Simple product enhancements (product variations or simple derivatives), early cost cuts, and other short-term actions give a false sense of betterment leading to complacency – as competitors keep gaining share due to better relative market position.

The retail marketplace started shifting powerfully in the late 1990s as internet retailers changed the costs and processes for customers.  Circuit City ignored these market trends far too long.  The auto industry has been shifting ever since offshore competitors started gaining share in the 1980s.  But the "Big 3", their employees and their vendors ignored these trends for too long.  Even as offshore competitors opened facilities in America, the changed competitive marketplace was ignored as GM, Ford and Chrysler tried doing more of what they'd always done.  In the end, who pulls the rug on these companies?  It's the competition. 

Competitors who link their Success Formula to changing markets use scenario planning to keep abreast of necessary changes and obsess about all competitors to learn what they can do to remain in front with customers.  These winning competitors don't Defend & Extend some plan management creates, but instead use Disruptions to keep themselves adaptable to changing markets, and use White Space to constantly test new solutions which can keep them advantaged.  The losers are the ones who keep trying to do more, better, faster, cheaper with their old Success Formula, and fall behind competitors who ignore the siren's call of optimization, focus, productivity and sacrifice in favor of adaptability and leading market trends.