The big shift – GM, Chrysler, Ford

GM will file bankruptcy next week ("GM reaches swap deal, but bankruptcy still lies ahead" Marketwatch).  It's likely historians will look back on this event as a major turning point in the change away from an industrial world (away from making money on "hard" assets like factories).  GM was considered invincible.  As were all the auto companies.  The reorganizing of Ford, and bankruptcy of Chrysler will be remembered, but not likely with the impact of GM filing bankruptcy.  Pick up any book on America post WWII and you'll find a discussion of General Motors.  The quintessential industrial company.  Destined to live forever due to its massive revenues and assets.  After next week, history books will change.  Altered by the previously unimaginable bankruptcy of GM.  If "What's good for GM is good for America" is no longer true, what does it mean for America when GM declares Bankruptcy?

None of America's car companies will ever again be strong, vibrant auto companies.  They are in the Whirlpook and can't get out.  It's simply impossible.  GM is now worth about $450million (at current prices of about $.80/share).  It already owes the federal government $20billion – which is supposed to be converted to equity, with more equity owned by employees and converted bondholders.  For most of the time since the 1970s, the average value of GM has been only $15billion (split adjusted average price $25).  To again become viable GM wants the government to increase its investment to $60billion ("GM bondholders may recoup $14Billion" Marketwatch.com.  That means for GM to ever be worth just the amount being supplied by the government bailout it would have to be worth $116/share – which is $20/share more than it was worth at its peak in the market blowout of 2000! (Chart here).

That means it is impossible to conceive of any way GM could ever be successful enough to achieve enough value as a car company to repay the government – and thus it has no future ability to provide dividends to private investors.  Even though GM says it will be repositioned to be healthy, that simply is not true.  It's no more healthy or attractive than Quasimodo, the hunchback of Notre Dame, could have ever hoped to be – or the elephant man.  Helping them is charity, not a business proposition.  When a company has no conceivable hope of making enough money to repay its investors it cannot attract management talent, or additional capital as assets wear out, and it eventually fails.  It won't be long before the people running GM realize their future are as bureaucrats in a non-profit – but with far less psychic value than working at, for example, the Red Cross.

Meanwhile, Chrysler is downsizing dramatically as it looks for its way out of bankruptcy.  As it tries to give the company to Italians to run, the company is dropping obligations it has carried for years.  Even the venerable Lee Iacocca, who literally saved the company 20some years ago, will lose his pension and even his company car ("Iacocca losing pension, car in Chrysler bankruptcy" Reuters). 

Ford, which restructured before this latest market shift, has not asked for bailout money.  But its market share is dropping fast.  Its vendors (including Visteon) are going bankrupt and Ford is guaranteeing their debt to keep them in business – with an open-ended cost not yet reflected in Ford's P&L.  Even though it restructured, Ford's balance sheet is shot ("What About Ford?" 24/7 Wall Street).  It has no money to design a new line of competitive vehicles.

None of these 3 companies have the wherewithal as operating businesses to replace assets.  And  they are competing with Japanese, Korean and Indian companies that have lower operating costs, lower fixed asset investments, higher quality and newer product lines, better customer satisfaction rates, higher profits and stronger balance sheets.  Without competition it's hard to expect America's car companies to do well.  When you look at competitors you realize this game can still have several more moves (especially with market intervention by government players with public policy objectives) – but the end is predicatable.  Only for reasons of public policy, rather than business investment, would you continue to fund any of these American competitors.

Even though the switch from an industrial economy to an information economy began in the 1990s, historians will likely link the switch to June, 2009. (I guess that's fair, since the shift from an agrarian economy to an industrial economy began in the 1920s but wasn't recognized until the late 1940s.)   Just as GM was the company that epitomized the success of industial business models, it will be the company that becomes the icon for the end of industrial models.  It failed much faster, and worse, than anyone expected.

If "What's good for GM" (as in the government bailout) isn't good for America any longer – what is?  For many people, this is shift is conceptually easy to understand – but hard to do anything about.  They don't know what to do next; what to do differently.  They fully expect to continue focusing on balance sheets and assets and the tools we used to analyze industrial companies.  And those people will see their money drift away.  Just like you can't make decent returns farming in a post-agrarian economy, you won't be able to make money on assets in a post-industrial economy.  From here on, it's all about the information value and learning how to maximize it.  It's not about old-style execution, its about adaptability to rapidly shifting markets built on information.

Let's consider CDW – a 1990s marvel of growth shipping computers to businsesses around America.  CDW has pushed hardware and software onto its customers for 2 decades in its chase with Dell.  But every year, making money as a push distributor gets harder and harder.  And that's because buyers have so many different sources for products that the value of the salesperson/distributor keeps declining.  Finding the product, the product info, inventory, low shipping and low price is now very easily accomplished with a PC on the web.  Every year you need CDW less and less.  Just like we've seen distributors squeezed out of travel we're seeing them squeezed out of industry after industry – including computer componentry.  If CDW keeps thinking of itself as a &quot
;push" company selling products – a very industrial view of its business – it's future profitability is highly jeapardized.

The market has shifted.  For CDW to have high value it must find value in the value of the information in its business.  Perhaps like the Chicago Mercantile Exchange they could create and trade futures contracts on the value of storage, computing capacity or some other business commodity.  The information about their products – production, inventory and consumption – being more profitable than the products themselves (everyone knows more profit is made by Merc commodity traders than all the farmers in America combined).  Or CDW needs to develop extensive databases on their customers' behaviors so they can supply them with new things (services or products) before they even realize they need them — sort of like how Google has all those searches stored on computers so they can predict the behavior of you, or a group your identified with, before you even type an internet command.  CDW's value as a box pusher is dropping fast. In the future CDW will have to be a lot smarter about the information surrounding products, services and customers if it wants to make money.

A lot of people are very uncomfortable these days.  Since the 1990s, markets keep shifting fast – and hard.  Nothing seems to stay the same very long.  Those trying to follow 1980s business strategy keep trying to find some rock to cling to – some way to build an industrial-era entry barrier to protect themselves from competition.  They try using financial statements, which are geared around assets, to run the business.  Their uncomfortableness will not diminish, because their approach is hopelessly out of date.  GM knew those tools better than anyone – and we can see how that worked out for them.

To regain control of your future you have to recognize that the base of the pyramid has shifted.  How we once made money won't work any more.  Value doesn't grow from just owning, holding and operating assets.  Maximizing utility of assets will not produce high rates of return.  We are now in a new economy.  One where outdated distribution systems (like the auto dealer structure) simply get in the way of success.  One where a focus on the product, rather than its use or customer, won't make high rates of return.  With the bankruptcy of GM reliance on the old business model must now be declared over.  We've entered the Google age (for lack of a better icon) – and it affects every business and manager in the world.

The future requires companies focus on markets, shifts and adaptable organizations.  Successful businesses must have good market sensing systems, rather than rely on powerful six sigma internal quality programs.  They have to know their competitors even better than they know customers to deal with rapid changes in market moves.  They have to be willing to become what the market needs – not what they want to define as a core competency.  They have to accept Disruptions as normal – not something to avoid.  And they have to use White Space to learn how to be what they are not, so they remain vital as markets shift.  So they can quickly evolve to the next source of value creation.

Too big to fail? Overcoming size disadvantages – JPMorgan Chase

"The Need for Failure" is a recent Forbes article on why it is bad – really bad – to prop up failing institutions. The author is an esteemed economics professor at NYU. He says "too big to fail is dangerous.  It suggests there is an insurance policy that says, no matter how risky your behavior, we will make sure you stay in business."  Rightly said, only it creates a conundrum.  Large organizations are not known for taking risky actions.  Large organizations are known primarily for lethargic decision-making which weeds out all forms of risk – right down to how people dress and what they can say in the office.  When you think of a big bank, like Bank of America or Citibank, you don't think of risk.  You think just the opposite.  Of risk aversion so great they cannot do anything new or different.

What I'd add to the good professor's article is recognition that large organizations stumble into risk they don't recognize, by trying to do more of the same when that behavior becomes risky due to market changes.  My dad said that 100 years ago when my grandfather was first given pills by a doctor he decided to take the whole bottle at once.  His logic was "if one pill will help me, I might as well take the whole lot and get better fast."  Clearly, an example where doing more of the same was not a good idea.  Then there was the boy who loved jumping off the railroad bridge into the river.  He did it all the time, year after year.  Then one month there was a draught, the river level fell while he was busy at school, and when he next jumped off the bridge he broke his leg.  He did what he always did, but the environmental change suddenly made his previous behavior very risky.

Big corporations behave this way.  They build Lock-ins around everything they do.  They use hierarchy, cultural norm enforcement, sacred cows, rigid decision-making systems, narrow strategy processes, consistency in hiring practices, inflexible IT systems, knowledge silos and dependence on large investments to make sure the organization cannot flex.  The intent of these Lock-ins is to make sure that historical decisions are replicated, to make sure past behaviors are repeated again and again with the expectation that those behaviors will consistently produce the same returns.

But when the market shifts these Lock-ins create risk that is unseen.  Bankers had built systems for generating their own loans, and acquiring loans from others, that were designed to keep growing.  They designed various derivative products as their own form of insurance on their assets.  But what they did not recognize was that pushing forward in highly unregulated product markets, as the quality of debtors declined, created unexpected risk.  In other words, doing more of the same did not reduce risk – it increased the risk!   Because the company is designed to undertake these behaviors, there is no one who can recognize that the risk is growing.  There is no one who challenges whether doing more of the same is risky – only those who would challenge making a change by saying change is risky! 

Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and AIG all created a much higher risk than they ever anticipated.  And they never saw it.  Because they were doing what they always did – and expecting the results would take care of themselves.  They were measuring their own behaviors, not the behavior of the market.  And thus they missed recognizing that the market had moved – and thus doing more of the same was inherently risky. 

(The same is true of GM, for example.  GM kept doing what it always did, refusing to see  the risk it incurred by ignoring market shifts brought on by changing customer behaviors, rising energy costs and offshore competitors.)

That's why big company CEOs feel OK about asking for a bail-out.  To them, they did not fail.  They did not take risk.  They did what they had always done – and something went wrong "out there".  Something went wrong "in the market".  Not in their company.  They need protection from the marketplace. 

Of course, this is just the opposite of what free markets are all about.  Free markets are intended to allow changes to develop, forcing competitors to adapt to market shifts or fail.  But those who run (or ran) our big banks, and many of our big industrial companies, haven't see it that way.  They believe their size means they are the market – so they want regulators to change the market back.  Back to where they can make money again.

So how is this to to be avoided?  It starts by having leaders who can recognize market shifts, and recognize the need for change.  In an companion Forbes article "Jamie Dimon's Straight Talk Has A Good Ring" the author takes time to review J.P. Morgan Chase's Chairman's letter to shareholders regarding 2008.  In the letter, surprisingly for a big organization, the JPMC Chairman points out market shifts, and then points out that his organization made mistakes by not reacting fast enough – for example by changing practices on acquiring mortgages from independent brokers.  He goes no to point out that several changes have happened, and will continue happening, at JPMC to deal with market shifts.  And he even comments on future scenarios which he hopes will help protect investors from the hidden risk of companies that take actions based on history.

Mr. Dimon's actions demonstrate a willingness to implement The Phoenix Principle.  For those who don't know him, Mr. Dimon has long been one of the more controversial figures in banking.  He is well known for exhibiting highly Disruptive behavior, yet he has found his way up the corporate ranks of the traditional banking industry.  Now he is not being shy about Disrupting his own bank – JPMC. 

1. His discussion of future scenarios clearly points to expected changes in the market, from competitor shifts, economic shifts and regulatory shifts which his bank must address.
2. He sees competitors changing, and the need for JPMC to compete differently with different sorts of institutions under different regulations.  Mr. Dimon clearly has his eyes on competitors, and he intends for JPMC to grow as a result of the market shift, not merely "hang on."
3. He is espousing Disruptions for his company, the industry and the regulatory environment.  By going public with his views, excoriating insurance regulators as well as unregulated hedge funds,  he intends for his employees and investors to think hard about what caused past problems and how important it is to change.
4. He keeps trying new and different things to improve growth and performance at the company.  It's not merely "more of the same, but hopefully cheaper."  He is proposing new approaches for lending as well as investing – and for significant changes in regulations now that banking is global.

Very few leaders recognize the risk from doing more of the same.  Leaders often feel it is conservative to not change course.  But, when markets shift, not changing course introduces dramatic risk.  People just don't perceive it.  Because they are looking at the past, not at the future.  They are measuring risk based upon what they know – what they've failed to take into account.  And the only way to overcome this problem is to spend a lot more time on market scenarios, competitor analysis and using Disruptions to keep the organization vital and connected with the market using White Space projects.

Hoisted on my own pitard – Radio

Today I was hit by a market shift that left me baffled as to what I should do next. 

Everybody, every work team, every company has Lock-ins.  Lock-ins help you operate quickly and efficiently.  And they blind you to potential market shifts.  I have as many Lock-ins as anyone.  Some I recognize, and some I don't.  It's always the ones we don't recognize that leave us in trouble.

For 18 years I've listened to only one radio station in Chicago.  WNUA 95.5 smooth jazz.  I like jazz, and I've just about quit listening to anything else musically.  I grew accustomed to the people who played the "light jazz" music on WNUA, and so enjoyed it I even listened to the station on my computer when traveling out of town.  I was a stalwart, loyal fan.  My whole family knew that when I was driving the car, the channel would be 95.5.

Then, after a long weekend out of town, I got in the car this morning.  I pushed the button for 95.5, and for some reason there was Hispanic music.  I couldn't figure it out.  This didn't make any sense.  So I turned off the radio and went about my business.  When I returned home I logged onto WNUA.com to find a letter from a Clear Channel Chicago executive telling me that WNUA was no longer broadcasting as of 10:00am on Friday, May 22.  The web site was gone, only this one HTML page existed.  I was stunned. 

I quickly did a Google search and found an article published by the media critic at The Chicago Tribune dated May 22, "WNUA Swings to Spanish Format."  I immediately thought "this can't be right.  There has to be something I can do to get back my radio station.  Maybe if I email Clear Channel?"  See, I quickly wanted to defend my radio selection, and extend the life of the product I personally enjoyed.

But then I read the article.  Turns out there are a lot of smooth jazz lovers who were loyal to WNUA.  But, unfortunately, that number has not been growing for a while.  The channel management had tried many things to boost listeners, but none had worked.  The market just wouldn't grow, despite their efforts.  The jazz radio listener market had stalled – and was showing signs of (oh my gosh) decline!  I was getting older, and apparently us old Chicago smooth jazz hounds aren't creating new jazz followers.

But, the station had done a lot of analysis as to what was growing.  Hispanics now outnumber African-Americans as the largest minority group in the country.  Clear Channel Chicago did a full scenario about the future, thinking about what would be needed to fill the needs of Chicago's biggest listener groups in 5 years.  Looking forward, there was no doubt that smooth jazz wasn't going to grow – but the opportunity for an Hispanic station was "crystal clear".  Competitively, they would continue losing revenue playing smooth jazz, and although the cost of shifting would be great – the opportunity to be part of a growing market had much more to gain.  Chicago is the 5th largest Hispanic population in the USA and growing, with 28% of the current population Hispanic.  Clear Channel management did both scenario planning and competitor analysis before deciding to make this switch – just what a Phoenix Principle company is supposed to do!

KaBoom.  The market was shifting, and I saw it, but I didn't think about the impact on my own life.  I just assumed WNUA would always be there playing jazz for me.  But the people at Clear Channel looked at the market shifts, and how they could best use their 5 stations to service the most people.  That is good for Chicago, and good business for Clear Channel.  If they wanted to keep growing, WNUA had to be replaced.  I would bet the hate mail has been extreme.  The longing for our old station must be felt by several thousand people around Chicago.  It's hard to let go of a Lock-in.

Oh, I feel terrible about not having my radio station.  But the right move was made.  I should have thought about this more, and seen it coming.  I could have scouted out other radio stations, and started looking for other music styles that I'd like to listen to.  But I wore blinders – until the market shifted and left me in the cold. 

I'm curious, have any of you readers found yourself the unfortunate loser due to a market shift?  Did some favorite aspect of your life or work disappear because the market went a different direction – and you found yourself in a small segment unprofitable to serve?  I'd love to hear more stories from folks whose Lock-in left them unprepared for a change in lifestyle or work.

As for me, I guess there's always CDs.  Or NPR (I'm getting old enough to like the news). But those would be D&E behaviors intended to ignore the shifting market.  So, maybe I should start letting others in my family select the radio stations so I could climb out of my cave and learn what more modern musicians are doing these days.  It would do me good to update my music knowledge – get me closer to people who have music appreciation beyond jazz, and probably make me a lot more likable as a driver.  It's never too late to open up some White Space and learn what's new in the world you couldn't see because of your old Lock-in.

Market Shifts and Lifecycles – Playboy, Oprah and Skype

One of the hardest things for leaders to do is recognize market shifts.  The tendency to remain focused on Defending & Extending what was always does is so great that market shifts which demand change are overlooked in the urge to improve what was always done – even as results fade.

An obvious example is Playboy enterprises.  "Playboy denies report of $300M price tag" was a Chicago Crain's headline, as rumors that the company (now publicly valued at only $90M) was being shopped for a new owner.  Playboy was founded as a "lifestyle" media company intended to meet the emerging needs of "sophisticated" adult males in the 1960s.  To the surprise of many publishers and government leaders, Playboy became a huge success.  Its magazines outsold expectations.  The company grew by opening clubs in major cities where businessmen entertained.  Even resorts were founded as vacation destinations.  As the company expanded it moved its headquarters from Chicago, where government officials disliked the hometown anomaly, to LA.  And the company acquired a 727 as the corporate jet.  As revenues and profits expanded, the company went public.  As recently as 2000 the company was worth nearly $1.2billion (chart here).

But, the market changed.  Women entered the workforce as one primary contributor to the clubs becoming passe, leading to their close.  Likewise, the resorts closed as competitors – clubs catering to young men and couples, such as Club Med – did a better job of meeting their needs.  The magazine became less and less viable as market shifts led to a split between pornography magazines for those who wanted photos and serious mens journals ranging from Stereophile and Autoweek to GQ.  Market shifts ranging from America's attitudes about how to treat women, to what was needed in a serious current events or hobbyist journal, left the company's products less and less interesting.   As the founder aged, the company lost track of its primary target and failed to identify a new target market.  And the new CEO, the founder's daughter, was unable to develop future scenarios identifying a viable direction – or products – to keep the company growing. 

At this point, Playboy has no clear market, has suffered from decades of declining revenue and profits, and investors have no reason to expect an improved return on investment.  Why anyone should want to buy the company, especially as we observe that all print journalism is shrinking dramatically, is unclear.  Playboy is at the vanguard again – but this time of demonstrating the end of print media and the losses capable from ignoring market shifts.  Had Playboy long ago dropped the salatious pictures and moved itself toward a growing readership – providing insights to men's lifestyle issues in sports, fashion, electronics, autos or any number of topics – it had a chance of maintaining its success.  But now the brand represents a complete out-of-synch with market needs and is more likely a negative than a positive; of no value.  Playboy leadership should take the money and run, distributing what it can to investors, from whatever fool is willing to throw away its money on an acquisition.

Meanwhile, a recent Wall Street Journal Blog was titled "Skype Gets the Oprah Treatment".  The WSJ blooger seemed perplexed that Oprah Winfrey's show would choose to run an entire episode by interviewing people on Skype.  His implication was strongly that the episode was some sort of technology endorsement in disguise.

But, to the contrary, we can see where Ms. Winfrey and her producers are much smarter than her media CEO counterpart at Playboy.  This episode gave viewers a firsthand experience with new technology which is available and usable by her target audience.  People were able to recognize how the technology works, and why you would use it to communicate with others – possibly in remote locations. 

Although Ms. Winfrey is "50ish" her company is keeping her product very current.  Her audience is learning how to use new technology that will help them be better connected to family or business associates.   And save money doing so, compared to traditional telephonic tools.  Ms. Winfrey and her leadership team could continue to do what they always did, but this kind of new show helps them keep Harpo Enterprises and one of its products – The Oprah Show – in the forefront of competitivesness.  That's why Harpo can lay claim to reaching even more people in Asia and Europe than in the USA!  Thus Harpo keeps viewer numbers high, and advertisers willing to foot the bill. 

Harpo Productions and Ms. Winfrey are demonstrating their willingness to shift with the marketplace.  They are trying new things, and are willing to branch out with changes to stay connected to markets as they shift.  Doing so is a requirement in lifestyle products, like media.  She benefits her customers by willingly shifting with the market, and those lucky enough to work for Harpo or supply the company, will benefit by its willingness to remain connected to changing markets – by staying on the forefront. 

Many CEOs and their leadership teams would do well to understand the failure of remaining Locked-in, like Playboy did.  And to recognize the value of remaining abreast of market shifts and keeping products current with changing market requirements, like Harpo Productions and is famous CEO.  Sometimes being criticized for being too avant garde is a good thing, because it shows you aren't afraid to change in the pursuit of keeping current with market shifts.

Avoid succumbing to conventional wisdom – Target & Pershing Square

"Target heads toward the Crossroads" is the Marketwatch headline today.  Like almost all large retailers, Target has had a tough year.  Profits dropped, and Target hit a growth stall.  If not careful, the company could fall away into noncompetitiveness, like KMart did.  At the same time, some think Target is the only strong competitor to WalMart.  Just to rough up the problem, outside investors led by raider Bill Ackman are trying to pressure Target to "restructure" and spin off its real estate into a publicly traded trust. Management isn't helped by a Wall Street Journal report "Proxy firm backs critics in Target vote" recommending shareholders vote to put Mr. Ackman on the Board. At this time, in the Flats, is when management teams are most vulnerable – and more often than not make decisions that doom the company.

It's at this time, when growth has stalled and vultures are swirling around, that management is most likely to turn to Defend & Extend Management.  They look backward, and try to implement old practices hoping it will ward off attacks.  They stop Disrupting, instead forcing high levels of conformance among employees.  They jump into short-term cost cutting actions, which kill off new growth ideas, and shut down White Space projects to conserve cash.  Instead of heading toward new markets, they emulate traditional competitors and focus on short-term actions.  Unfortunately, these actions throw the company into the Swamp, hurting their ability to compete long term and making them victims of competitors.  Look at Motorola, which swung from an intense high into the throws of near-failure when the executive team turned toward D&E management after Carl Icahn attacked the company.  Instead of going after market growth, the D&E practices plunged the company into a cash drain leading to cataclysmic drop in sales and market share.

The worst thing Target could do is try to be Wal-Mart.  Nobody can beat WalMart at being WalMart.  And WalMart has its own troubles, including saturation of its stores as well as declining customer interest in its low-cost format.  Recent resurgence, linked to the worst economy in 70 years, does not reflect a change in what customers want from retailers long-term.  Rather, it's a short-term blip for a Locked-in Success Formula that has seen declining returns on investment for over a decade.  If Target were to try emulating WalMart, in format or approach, it would be disastrous.

Nor is doing what Target always did the right thing to do.  The market has shifted.  What worked in 2005 cannot be assured of working in 2010.  Trying to refind its "core" and do more of the same practices would again be a Defend & Extend approach which will hurt results.  Amplifying those D&E practices by taking radical actions, such as spinning out its real estate in a short-term financial machination, would only reduce the variables Target can use to regain growth.  Following the recommendations of raider Ackman and his Pershing Square firm will attempt to short-term spike profitability, but at the grave risk of killing the company long-term.

What Target needs to do now, more than ever, is study the market.  The retail industry is under a major shift as on-line participants increase capability and share, per-store numbers struggle to maintain, and as underlying real estate values tumble.  Customer expectations, from baby boomers to GenY are different than they were in 2001, and all retailers need to adapt to these changes.  The retailers that do, with new approaches – perhaps mixed approaches that combine on-line with traditional, and/or combine mega-stores with specialty, etc. – will be the ones that capture share as pent-up consumer demand re-emerges in the future.  What scenario of the future looks most likely to attract and retain customers in 2015?

Simultaneously, Target needs to study competitors, to define its positioning that produces best results.  The good news is that the biggest competitor (WalMart) is so locked in that it's easy to predict.  Target can study WalMart, Kohl's, Gordman's, J.C.Penney and others to identify what actions it can take that will avoid head-to-head battering and instead provide rapid growth.  Especially by focusing on on-line competitors, including Netshops.com, much can be learned about how the market is shifting and where Target should go to maximize growth.

Above all, Target needs to take this opportunity to Disrupt old behaviors and convince employees, and shareholders, that Target will pull out all stops to become the leading retailer by 2020.  WalMart is so Locked-in that it can easily decline (and if you doubt that, just look at other market leaders and how they did coming out of downturns – like GM and Sears).  The right retailer, making the right decisions, can become the next leader.  But not by just doing more of the same.  It will take a concerted effort to open the doors for trying and doing new things.

And right now Target needs to be throwing up test stores and new concepts – White Space projects – where it can learn what will work for the next great retailing Success Formula.  No amount of planning is worth as much as experimentation.  The newest ideas in retailing need to be reviewed and tested to see what can work now.  Maybe the time has finally arrived for home grocery shopping, for example. Who knows?  What we do know is that the company that uses this market transition period to build a new Success Formula aligned with changing customer expectations will be positioned to be the new market leader.

Conventional wisdom would say that Target should cut costs, emulate WalMart, get really cheap with prices, tighten its supply chain, spin out all "non core" assets and focus on returning to practices that made a profit in 2004, 05, 06 and 07.  But our studies for The Phoenix Principle showed that those practices almost always doom the competitor.  Instead, at this critical lifecycle point, it's more important than ever to focus on GROWTH and return to the Rapids – otherwise you end up in the Swamp, moving along toward the Whirlpool, like Woolworths, S.S. Kresge, TG&Y, Sears, KMart and Sharper Image.

Executive Pay – For Performance? – XTO Energy

Have you ever heard of a company paying an employee to die?  Hard to figure out how that's "pay for performance."  Yet, many companies have executive compensation agreements with "golden coffin" provisions which agree to pay the executive's estate substantial sums in the event that executive dies.  I first heard about this with the company AM International, which I profiled in my book Create Marketplace Disruption.  AM International's Chairman/CEO Merle Banta had a provision in his contract which continued his pay, and guaranteed his bonus, even if he died!  This was somewhat remarkable, because during the years he led AM it went bankrupt twice (the last time ending the company), and he laid off thousands of employees.  It was hard for the people at AM to understand why this provision existed, since they not only lost their jobs but also their pension fund when Mr. Banta put it all into a company ESOP that went under with the company,

This still goes on today.  Probably a lot more than many of us guess.  Today's headline "Golden Coffin proposal narrowly defeated at XTO" covers how some shareholders tried to kill the "pay to die" provision for company executives.  The Chairman received $1.63M in salary, and $30M in bonus last year – and the Golden Coffin provisions for him are worth more than $90M!!!  But I ask you, do you think XTO Energy did well because of the decisions made by Chairman Bob Simpson – or because oil prices spiked to record levels having nothing to do with the management team at all?

When you get paid to hammer nails, or insert rivets, or spot weld, or wash dishes piece pay can make sense.  The harder and smarter you work, the more you get done and you can make more money.  This is pure pay for performance. 

But does this make sense for executives, or even most managers, in a modern corporation?  According to its bio, XTO energy owns oil and gas reserves (some proven, some not) under the ground.  No matter what management does, the value of those reserves goes up or down with the value of oil and gas.  Why should an executive be rewarded if oil jumps to $150/barrel?  Sure, his company can be very profitable, but did he have anything to do with it?  A 5 year chart of XTO demonstrates that the value of the company is mostly tied to the value of its commodity asset (oil), and not much else. 

And the same can be said for most companies.  The current value is tied to many factors, including decisions made years before, as well as shifting markets.  Companies are quick to point this out when "other factors" conspire to do the value poorly, and they pay executive bonuses anyway.  But when the value goes up, there's a willingness to pass along a big chunk of that value to the executives as if they caused it.  In reality, about the only thing an executive can do to affect value in the short term (meaning less than 2 or 3 years) is cut R&D, cut product development, cut marketing, cut sales expenditures, outsource functionality to low cost centers, sell assets and lay off employees.  Most actions which pad the short-term bottom line but each of which can fatally doom the organization's future.  Compensation that's tied to short-term results reinforces doing more of the same, Defending & Extending the company's past, and ignoring needs to invest in shifting the company along with dynamic markets.

Good management keeps its eyes on markets so the company keep can keep positioning itself for growth as markets change.  Good management obsesses about competitors so it isn't caught off guard by current or emerging players that drive down returns.  Good management disrupts the organization so it is able to shift with markets, rather than getting stuck in behaviors and decision making processes that become outdated and unable to create value.  And good management maintains White Space where new products, services, operating practices, metrics and behaviors are tested in order to keep the company evergreen.  But how do you tie compensation to these behaviors? 

I recently had coffee with someone who worked at AM International when it was declining.  He still remembers, painfully, how executive compensation was not linked to what the company needed to do to survive.  He told me how later, after AM, he was working for a large manufacturer in central Michigan and he could not believe how every Director, V.P. and other management personnel tied every decision to maximizing their bonus.  Eventually, he grew tired of the self-centered behavior and he's now an entrepreneur.

If we are to believe in pay for performance, management bonuses should lag by 1 to 5 years.  Bonuses should be based on results – and the results of management decisions actually come to fruition over time.  They aren't like pounding nails.  This sounds absurd, but we all know that the real impact of executive decisions are seen years after the decision.  If CEO incentive compensation for 2009 were tied to performance in 2012 or 2013 do you think the behavior and decisions of executives would change?  Would they be more likely to focus on making decision that are for the business's long term health than trying to maximize short-term pay?

Those who've won the CEO lottery have done much better than those who have not.  It's very hard to say we "pay for performance" when huge bonuses are paid to the departing chairman of GM, or the CEO who quit launching new products at Motorola to maximize Razr sales.  Clearly, they were not paid for performance.  And it's unimaginable how paying someone to die makes any sense.  When compensation on the downside is guaranteed, and on the upside is maximized by short-term actions or market events not even tied to management decisions, the whole discussion of pay for performance becomes fairly absurd.

I was always struck that the founders of Ben & Jerry's Ice Cream came up with a formula that paid everyone based upon rank – and there was a set ratio between ranks.  As a result, the CEO's pay could not go up unless the pay of a worker on the line went up.  The inherent fairness was extremely hard to argue with.  And it meant everyone did better, or worse, as markets shifted and they either shifted with them – or not.  It would seem like the time has long come when we should reconsider exactly what we base pay upon.  And when measuring performance is as complex, or time lagged, as management we need to rethink the entire concept.  Maybe we should go back to compensating people for doing the right things, with most pay in salary, and tying people together for the long-term company interest.

History of the Book

Twelve years in the making.

As professional business consultant with almost 30 years experience, Adam Hartung is all too familiar with a common malady among today’s businesses. Regardless of how much the leaders and organizations are struggling to grow revenues and profits they cannot seem to break out of below-expectation performance. Even when hiring top advisors, consultants and employees, results do not respond as expected. They seem stuck, and unable to make changes which will lead to superb performance.

Why? This question which sparked a more than 12 year analysis to determine the root of—and the solution to—the problem. Geoffrey Moore encouraged Adam to put his findings into a book, which he now endorses on the cover. The principles now covered in Create Marketplace Disruption have been affirmed as “fresh and much needed” by Tom Peters, and “a revolutionary message” by Malcolm Gladwell. Bill Gates’ co-author, Collins Hemingway, considers Create Marketplace Disruption a must read, as he details in the Foreword.

Business leadership has not yet made the transition from management in the industrial economy to management in the information economy. While much has been written about an information economy it has yet to fundamentally affect how leaders manage their organizations. True, computer technology has unleashed new business models and methods of competition. Yet most leaders are still using management techniques which were taught in the 1970s and developed for the industrial economy.

To a large degree, the current disconnect is to be expected. The Russian economist Kondratiev demonstrated that economies move on a particularly long wave of approximately 75 years. He postulated that this was due to major changes in technology which took a very long time to reach adoption, massive use, decline and eventual replacement by another important new technology. Initially, the technology is used merely to improve existing processes and speed existing competitive models as we have seen with computer technology. Eventually, the full impact of the new technology creates new methods of competition which obviates the old, ushering in new rates of productivity and new methods of growth. We are at this fulcrum today.

For decades companies have prospered through “Defend and Extend” (D&E) Management—establishing a Success Formula, then improving and protecting it against competitors. In the Industrial Economy this worked well because size, economies of scale, and entry barriers were important. But today, due primarily to the emergence of information transparency, Success Formulas are being duplicated practically overnight—robbing companies of their competitive advantage. Practicing D&E Management in this environment is a prescription for failure, and yet that is what almost every company, large and small, is doing. And how most leaders are trying to get ahead.

In the three year period ending in 2003, bankruptcies of public companies increased 855% over the three year period ending just five years prior, and for companies with assets over a billion dollars the increase was an astounding 1,750%. To reverse this trend, companies must turn conventional wisdom on its head. Instead of looking to their Success Formulas as the solution to their problems, companies must learn to see their Success Formulas as the source of their problems. Companies must embrace the Phoenix Principle and become both willing and able to reinvent their Success Formulas… over and over again.

In recent years, Adam Hartung met with hundreds of senior executives. Almost every business leader sang the same sad refrain: every quarter of every year is a brutal struggle to make their numbers. Most admit that they don’t really know what to do to make things any better—nothing they have tried has made a sustainable difference. Historical tactics, including mergers and acquisitions, extensive cost-cutting, streamlining processes, outsourcing, and various quality programs have made little or no impact on competitiveness.

Well-meaning but increasingly outdated advice from business gurus such as Jim Collins and Larry Bossidy to focus on execution and optimize the core business are only making matters worse. Create Marketplace Disruption uses The Phoenix Principle to rebut the “optimize and execute” message while providing simple but powerful models that explain why so many companies are struggling to such an extent. The author illustrates with many convincing examples and case studies how the inevitable consequence of D&E Management has been lock-in to outdated Success Formulas leading to worsening performance. This has resulted in a vicious cycle of cost-cutting and profit erosion, eventually leading to failure.

D&E Management causes managers to behave as if their organizations are exempt from market and competitive shifts which can make their Success Formula obsolete. Many managers cling to the myth of business perpetuity as a rationalization for their mature companies to use continuous improvement as a way to create, then maintain, above average returns—even when the evidence overwhelmingly indicates otherwise. The hard truth is that the techniques Michael Porter published for competing in the 1980s no longer generate sustainable competitive advantage. Entry barriers are now exit barriers, supplier and customer leverage are short-lived, and focus on product innovation and cost reduction is far less likely to create success than implementing alternative business models.

Business leaders must embrace a new model for managing based on The Phoenix
Principle. This entails rethinking the traditional approach to organizational lifecycle management in several ways, including making profits in the growth stage, planning on very short periods of competitive advantage, and exiting businesses much quicker than before. The Phoenix Principle emphasizes leaders’ responsibility for disrupting existing Success Formulas in order to experiment with new and innovative profit opportunities. While agreeing with author Clayton Christensen on many points, the author confronts Clayton’s claim that established companies cannot compete against, nor implement, disruptive technologies. Instead, the author demonstrates a process whereby any organization can most definitely enhance innovation, growth and change, including installing a culture of continuous renewal through new processes and changes in the employee mix.

Create Marketplace Disruption provides readers with hope that even the most locked-in organizations can renew themselves. Through a four-phase approach backed up with solid examples, business managers will learn how to reinvent locked-in Success Formulas at the individual, work team, business function, operating unit and company levels. This book provides the vernacular and practical “how to” information to undertake the “Re-Imagining” recommended by Tom Peters. Additionally, the author introduces readers to breakthrough thinking, which is the ability to challenge and change assumptions at the individual level. Readers are given powerful tools for transforming Locked-in behaviors, and developing new solutions for today’s dynamic business competition in the Information Economy.

This book will help beleaguered business managers understand why their organizations are struggling, why their actions not only aren’t helping but are contributing to the problem, and how leaders and individuals can Disrupt and reinvent their Locked-in Success Formulas to generate significant breakthroughs in performance.

Book Reviews

What Thought Leaders are saying about Create Marketplace Disruption

“Companies that cannot change die. Companies that respond eventually survive but see their profits squeezed, their growth flattened. Long-term winners create their own disruptions and thrive on change. Hartung shows how to become one of the winning companies: how to attack competitors’ lock-ins, make their success formulas obsolete, and create the space needed to invent formulas for success.”
Harvard Business School Bulletin, March, 2009

“How do you participate in market disruptions which threaten your current leadership status? In this book Adam Hartung shows the kind of thinking needed to deal with the creative destruction that underlies global capitalism today.” Geoffrey Moore, author Dealing with Darwin” and “Crossing the Chasm,”
Managing Director TCG-Advisors venture capital, September, 2008

“Create Marketplace Disruptions is as thought-provoking as it is entertaining. Adam Hartung offers business managers and leaders new insights to long-term success that apply across markets and industries.”
Steve Burke, President Comcast, August, 2008

“This is a disruptive book. In times of ever accelerating, deep change survival through “ever better management” is an illusion. This is the book for the entrepreneur in us. Unite the entrepreneurial soul with corporate resourcefulness. Adam’s framework should be tried.”
Jost Stollman, Shadow Minister Economy and Technology Federal Republic of Germany, July, 2008

“The Fortune 1000 is a very fluid list. They become successful doing something right, but then keep doing that (because it’s what they know) even when marketplace conditions change. Companies need to reinvent themselves, become flexible, and do something completely different.”
Nick Morgan, CEO Public Words, February, 2009

“In what is possibly one of most stimulating books ever written on business management, Adam Hartung explores various ways for a corporation to achieve adaptive success: such as stop the ‘Defend & Extend’ old habits, generate controlled disruptions of the corporate personality, and create autonomous ‘White Space’ to continuously create revised success formulas.”
Jean-Louis Vullierme, global venture capitalist, January, 2009

“Talking innovation is easier than practicing innovation. Adam offers an excellent approach for corporations to identify how to innovate to gain competitive advantage. A must read. ”
Praveen Gupta, President, Accelper Consulting, author Business Innovation in the 21st Century, The Six Sigma Performance Handbook and Six Sigma Business Scorecard, September, 2008

“Adam Hartung gives a workable guide to overcome business inertia. Create disruption in your own business to keep ahead of the competition. Hartung looks at the reasons why businesses have difficulty changing, and provides help in overcoming those issues. Create Marketplace Disruption is an easy to read, helpful book and recommended.”
Sacramento Book Review, November, 2008

“Adam Hartung has forever changed the paradigm of what constitutes the leadership of change and innovation. He provides answers to why so many good organizations fail. He shows how leaders trained to focus on core competencies and customers may be sowing the seeds for their organization’s destruction in a time of accelerating change.”
Paul Davis, President Scanlon Leadership Network, October, 2008

“Adam Hartung offers courageous leaders a new language system and framework for generating long term profitable growth. Rich with compelling metaphors, stories, and illustrations, Create Marketplace Disruptions explains why even aggressive efforts to reinvent fail. Hartung provides leaders with practical tools for keeping companies ahead of declining results and obsolescence. Every leader needs to understand Hartung’s framework and heed his advice.”
Judi Rosen, Managing Director, CSC Index and President, The Concours Group, August, 2008

“Create Marketplace Disruption provides a model for competing more effectively in our constantly changing markets. Leapfrogging tired concepts which have largely focused on doing more of what you’ve always done, Adam Hartung focuses us on doing what it takes to do better. This is the book that all executives who want to leave a positive legacy must read!”
Ron Kirschner, Chairman Heartland Angels venture capital, December, 2008

“Adam Hartung blends stunning lessons learned from the fallen giants of business with set-you-back-in-your-seat insights that make this a must read for all business leaders of large and small companies alike. Hartung provides an intelligent blueprint for achieving what every business craves — competitive advantage and renewable growth. Smart, sophisticated treatment of a topic that no business executive worth his /her stock options can ignore — how to grow and differentiate your business”
John Popoli, President Lake Forest Graduate School of Management, January, 2009

“Create Marketplace Disruption is an engaging, enlightening, frightening, and occasionally upsetting book. Its contents will repay careful thought and periodic revisiting. It’s a book to keep in mind, and close at hand, whenever an organization faces the need to develop an effective plan for the future.”
Dr. Michael Vitale, Asia-Pacific Centre for Science and Wealth Creation, October, 2008

“The insights provided by Adam Hartung makes this book a must-read for all entrepreneurs. This is a blueprint for generating more wealth and getting to investor returns faster.”
William A Johnson, Founder and CEO CAER Group, March, 2009

“Creating Marketplace Disruptions is an outstanding approach for creating and maintaining growth and profitability in an increasingly dynamic and uncertain global economy. More importantly, the book moves beyond concepts with a well crafted set of tools and techniques for implementing change that are relevant regardless of industry or company size”
Sumeet Goel, Managing Director, HighPoint Associates, July, 2008

“Adam Hartung presents a fresh perspective and compelling case that demands business leaders pursue new markets – thirst to disrupt the status quo. Every business should apply Mr. Hartung’s principles – only hiring those individuals prepared to question the corporate culture, and vigorously willing to pursue White Space.”
Ken Daubenspeck, Chairman and CEO KDA global management recruiters, October, 2008

Frozen in the headlights Part 2 – Gannett, New York Times, McClatchy

"Newspapers face pressure in selling online advertising" is today's headline about newspapers.  Seems even when the papers realize they must sell more online ads they can't do it.  Instead of selling what people want, the way they want it, the newspapers are trying to sell online ads the way they sold paper ads – with poor results. 

We all know that newspaper ad spending is down some 20-30%.  But even in this soft economy internet ad spending is up 13% versus a year ago.  Except for newspaper sites.  At Gannett, NYT and McClatchy internet ad sales are down versus a year ago! 

People don't treat internet news like they do a newspaper.  The whole process of looking for news, retrieving it, reading it, and going to the next thing is nothing like a newspaper.  Yet, daily newspapers keep trying to think of internet publishing like it's as simple as putting a paper on the web!  What works much better, we know, are sites focused on specific issues – like Marketwatch.com for financial info, or FoodNetwork.com.  Also, nobody wants to hunt for an on-line classified ad at a newspaper site – not when it's easier to go to cars.com or vehix.com to look for cars, or monster.com to look for jobs.  Web searching means that you aren't looking to browse across whatever a newspaper editor wants to feed you.  Instead you want to look into a topic, often bouncing across sites for relevant or newer information.  But a look at ChicagoTribune.com or USAToday.com quickly shows these sites are still trying to be a newspaper.

Likewise, online advertisers have far different expectations than print advertisers.  Newspapers simply said "we have xxxx subscribers" and expected buyers to pay.  But on the web advertisers know they can pay for placement against specific topics, and they can expect a specific number of page views for their money.  As the article says "if newspapers want to get their online revenue growing again, once the economy recovers, they have to tie ad rates more closely to results, charge less for ads and provide web content that readers can't get at every news aggregation site." 

When markets shift, it's not enough to try applying your old Success Formula to the new market.  That kind of Defend & Extend practice won't work.  You're trying to put a square (or at least oblong) peg into a round hole.  Shifted markets require new solutions that meet the new needs.  You have to study those needs, and project what customers will pay for.  And you have to give them product that's superior to competitors in some key way.  Old customers aren't trying to buy from you.  Loyalty doesn't go far in a well greased internet enabled world.  You have to substantiate the reason customers need to remain loyal.  You have to offer them solutions that meet their emerging needs, not the old ones.

Years ago IBM almost went bust trying to be a mainframe company when people found hardware prices plummeting and off-the-shelf software good enough for their needs.  IBM had to develop new scenarios, which showed customers needed services to implement technology.  Then IBM had to demonstrate they could deliver those services competitively.  Only by Disrupting their old Success Formula, tied to very large hardware sales, and implementing White Space where they developed an entirely new Success Formula were they able to migrate forward and save the company from failure.

Unfortunately, most newspaper companies haven't figured this out yet.  They don't realize that bloggers and other on-line content generators are frequently scooping their news bureaus, getting to news fans faster and with more insight.  They don't realize that on-line delivery is not about a centralized aggregation of news, but rather the freshness and insight.  And they haven't figured out that advertisers take advantage of enhanced metrics to demand better results from their spending.  The New York Times, Gannett and other big newspaper companies better study the IBM turnaround before it's too late.

Frozen in the headlights – Gannett and other newspapers

"Gannett to shut down print version of Tucson newspaper" is the latest headline.  Yet another newspaper either cutting staff, cutting content, cutting print days, or stopping printing altogether.  That this would happen isn't really surprising.  Even Warren Buffett recently said he didn't see any way newspapers could make money.  (Yet, according to Marketwatch Berkshire Hathaway still owns shares in Gannett – primarily a newspaper company.)

What's surprising is that Gannett isn't doing anything to change the company.  A quick visit to http://www.Gannett.com and you'll learn that the company has almost no on-line business.  They company's profile says that it's online business consists of a 50% ownership in CareerBuilder.com and Shoplocal.  That's it.  No financial news site, no social networking site, no food site, no sites dedicated to the TV stations owned by Gannett, or the newspapers owned by Gannett.  A visit to the page dedicated to the Gannett online network is actually a page where you can ask for a salesperson to call you for placing an ad on USAToday.com.

Everyone today has to deal with market shifts.  Everyone.  The newspapers are in a position where their very survival depends upon making a shift.  This isn't new.  It's been clear for several months – and for those in the media actually well known for a few years.  So why hasn't Gannett done anything to reposition its business?  Over the last year equity value has declined 85% – some $6Billion of lost value.  Since June, 2007 the equity value has dropped from $60/share to $4/share (a loss of some $10Billion in value) [see chart here].

Leadership should not be allowed to behave like the lonely deer, caught on a rural road in the evening.  The proverbial animal caught staring into the headlights of the car speeding directly at it – and sudden death.  Leadership's job is to react to market changes in order to keep the business viable.  Gannett has succumbed to Lock-in – unwilling to take actions necessary to keep its customers (advertisers and readers) engaged.  Unwilling to help employees mobilize toward a new future, and help vendors identify growth opportunities.  By simply doing more of what the company has always done, leadership is dooming the investors to lose their money, and their employees their jobs and pensions. 

Everybody knows that the future for newspapers is bleak.  All of us will face these sorts of market shifts in our careers.  Doing nothing is not an option.  Leadership must engage the workforce in open dialogue about what the future holds, taking great pains to discuss competitors and how they are changing the market.  And leadership is responsible to Disrupt the Lock-ins, attacking them, so that new ideas can be brought forward and new investments can be made in White Space where the company can grow and migrate to a new Success Formula.

If somebody steals $100 that's a crime.  But if you lose $10Billion in market value that's not.  When market shifts are as obvious as those in newspapers, and management doesn't take action to reposition the company and engage employees in transition, not taking action seems criminal.  No wonder shareholders file class action lawsuits.