Creating the “Best of Times” – Apple, Cisco, Virgin

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Summary:

• Your view of today will be determined by your future success
• Conventional wisdom – often called “best practices” – will lead businesses to cut costs in today’s economy, leading to a vicious cycle of reductions and value destruction.  “Best Practice” application does not improve results
• Winning companies don’t focus on past behavior, but instead seek out new markets where they can grow – Apple, Google, Virgin, etc.

To paraphrase Charles Dickens (A Tale of Two Cities) are these “the best of times” or “the worst of times?”  Few new jobs are being created in the USA, its hard to obtain credit if you’re a borrower, but there’s very little return to saving, the stock market has been sideways for a decade, asset values (in particular real estate) have plummeted while health care costs are skyrocketing.  Look in the rear view mirror at the last decade and you could say it is the worst of times. 

But the answer doesn’t lie in the rear view mirror – the answer lies in the future.  If you succeed in the next 2 years at achieving your goals, you’ll look back and say this was the best of times.

In “Do You Have the Postrecession Blues” at Harvard Business Review blogs the author tells of two shoe salespeople that show up in a remote African village.  The first sends back the message “No one here wears shoes, will return shortly.”  The second sends the message “No one here wears shoes, send inventory!”

The history of business education has been to teach managers, usually by studying historical case experiences, the “best practices” employed by previous managers. But BPlans.com tells us in an article headlined “The Bad News About Best Practices” that this is a lousy way to make decisions. “..most of the time, they won’t work for you or me. They worked for somebody, some time, in some situation, in the past.” 

The New York Times deals with fallacious best practices recommendations in “From Good to Great… to Below Average.”  Best selling Freakonomics author Steven Levitt points out that most business authors try to push somebody else’s Success Formula as the road to success.  However, the most popular of these are really very inapplicable.  Those held up as “the best practice” have most often ended up with quite poor results.  So why should someone else follow them?  Nine of eleven of Collins’ “great” companies did worse than average!

Best practices has led businesses to cut heads, slash costs, sell assets and in general weaken their businesses the last few years.  Most leaders would prefer to believe that they have somehow improved the business by eliminating workers, the skills they bring and the function they perform.  But the result is less marketing, sales, R&D, etc.  How this ever became “best practice” is now a very good question.  What company can you think about that “saved its way to success?”  The cost cutters I think about – Sears, Scott Paper, Fannie Mae Candies, etc. – ended up a lot worse for their efforts. 

These can be the best of times.  Just ask the people at Apple Cisco Systems, Virgin and Google.  These businesses are growing as if there’s no recession.  Instead of “focusing on their core” business with defend & extend efforts to cut costs, they are entering new markets.  They are going to where growth is.  Amidst all the cost-cutting, best practice applying grief these are examples of success. 

So will you continue to operate as if these are the worst of times, are are you willing to make these the best of times?  You can grow if you use scenarios and competitor analysis to find new markets, embrace disruptions to attack Lock-ins that block innovation, and implement White Space teams that learn how to develop new markets for revenue and profit growth.

Postscript – entire Dickens’ quote: It was the best of times, it was the worst of times, it was the age of
wisdom, it was the age of foolishness, it was the epoch of belief, it
was the epoch of incredulity, it was the season of Light, it was the
season of Darkness, it was the spring of hope, it was the winter of
despair, we had everything before us, we had nothing before us, we were
all going direct to heaven, we were all going direct the other way – in
short, the period was so far like the present period, that some of its
noisiest authorities insisted on its being received, for good or for
evil, in the superlative degree of comparison only.

Post-postcript – I am trying a new format for the blog.  Please provide your feedback.  I’m dropping the bold enhancements, and replacing their intent with an introductory summary.  Let me know if you like this better.  And thanks to reader Jon Wolf for his specific recommendations for improvement.

Waiting for the economy? That won’t work.

Every day it seems someone tells me they "are looking forward to an improved economy."  When I ask "Why?" they give me a horrified look like I must be stupid.  "Because I want my business to improve" is the most frequent answer.  To which I ask "What makes you think an improved economy will help you?"

This recession/depression is the result of several market shifts.  What people/businesses want, and how they want it, has changed.  They no longer are willing to part for hard earned (and often saved) dollars for the same solutions they once purchased.  They want advances in technology, manufacturing processes, communications and all aspects of business to give them different solutions.  Until that comes along, they are willing to put money in the bank and simply wait.

Take for example restaurants.  Many owners and operators are complaining business was horrid in 2009, and still far from the way it was years ago.  And regularly we hear it is due to "the recession.  People fear they'll lose their jobs, so they don't eat out as often."  Nicely said.  Sounds logical. Makes for a convenient excuse for lousy results. 

Only it's wrong.

In "Dinner out Declines:  Economy Not Sole Factor" MediaPost.com does a great overview of the fact that dining out started declining in 2001, and has steadily been on a downward trend.  Across all age groups, eating out is simply less interesting – at least at current prices.  When the recession came along, it simply accelerated an existing trend.  Increasingly, people were less satisfied with cookie-cutter, similar establishments that had similar food (almost all of which was prepared somewhere else and merely heated and combined in the restaurant) and exorbitant drink prices.  For years restaurant prices had outpaced inflation, and simultaneously family changes – along with the growth of better prepared foods at grocers and specialty markets – was enticing people to eat at home.

This is true across almost all industries.  A revived economy will not increase demand for land-line phone service.  Nor for large V-8 American autos costing $60,000.  Nor for newspapers, or magazines – or even books most likely. Or for oversized homes that cost too much to heat and cool.   In fact, it was the trend away from these products which caused the recession.  People simply had all of these things they wanted, so they stopped buying.  Fearful of economic change, they simply accelerated a trend brought on by shifts in technology and underlying ways of doing things.  When we once again talk about better economic growth in America it will not drive people to these purchases.  Rather, people will be buying different things.

For the recession to go away requires a change in inputs.  Providers have to start giving buyers what they want.  They have to understand market needs, and give solutions which entice people to part with their money.  Waiting for "the economy" will make no difference.  Government stimulus can go on forever, but it won't create growth.  It can't.  Only new products and services that fulfill needs create growth.  That will cause spending (demand), which generates the requirement for supply.

There are companies that had a great 2009. Google, Apple and Amazon are popular names.  Why?  Not just because they are somehow "tech" or "internet" companies.  2009 saw the demise of Sun Microsystems and Silicon Graphics, for example.   The difference is these companies are studying the market, looking to the future and introducing new products and services which meet market needs.  Because of this, they are growing.  They are doing their part to revitalize the economy.  Not with stimulus, but with products that excite people to part with their cash.

Those who are waiting on the economy to improve are destined to find a rough road.  An improving economy will be full of new competitors with new solutions who did not wait.  To be a winner businesses today must be bringing forward new products and services that meet today's needs – not yesterday's.  And if we start getting winners then we will climb out of this economic foxhole.

Scenarios are so important – Dubai World debt crisis

So while most Americans are taking the traditional 4 day Thanksgiving holiday another debt crisis has emerged.  Easy enough for most Americans to miss the news, if only because they are vacationing or shopping.  But this debt crisis involves a company in a foreign land, so most Americans will say "Why should I even care?  This doesn't involve my bank."  That Dubai World looks to be unwilling to repay some of its debt, and will make no payments for 6 months, could be something a lot of Americans simply ignore – if for no reason than they simply can't link it to their work or life.

Dubai World is a very large real estate developer, owned by the Dubai government.  The banks that loaned Dubai World billions were more European than American.  Yet, we live in a global economy.  When things happen elsewhere, they have an impact on U.S. businesses and citizens.

American companies depend upon international banks to make local currency loans for their offshore operations.  And American companies depend upon businesses, and individuals, in foreign countries to borrow money in order to spend on American company goods.  With the U.S. economy in the doldrums, companies that have robust offshore businesses selling to people in the foreign markets have done considerably better than most U.S. focused companies.  But when these offshore banks don't get paid by Dubai World, they have to take write-downs.  And if they don't get payments, the bank's reserves dwindle.  As a result, these banks can't make loans – just like we've had happening in the USA since Bank of America, Citibank, etc. almost collapsed – due significantly to large real estate loan defaults.

Additionally, the U.S. government depends upon offshore entities – banks, businesses and individuals – to buy U.S. bonds.  Without offshore buyers, the U.S. government could not fund its recurring debts.  When a big corporation like Dubai World, part of a government backed with oil money, runs out of cash it causes a chain reaction of people not making loans.  Not investing.  And that can have a big impact on U.S. bond sales.  When the government can't sell bonds it has to increase the interest rate – which spells a worse economy or inflation.  So scared debt investors can have a quick impact on U.S. interest rates – because when U.S. Treasury bond rates go up all other rates, from municipal bonds to commercial loan rates to car loans, have to go up as well.

And this is why everyone needs to know about, and pay attention to, a big real estate developer in Dubai "restructuring" its debt and stopping payments.  In a global economy, the impact will be felt by Americans. 

• This action can further exacerbate real estate price deflation – a major cause of economic weakness and wealth destruction globally.
• If foreigners buy more stuff, Americans who sell this stuff will see lower sales – and that leads to less employment.
• The debt collapse in America is causing huge problems for small and medium-sized companies to stay in business.  European banks trimming their loans will have similar negative impact on smaller businesses in many countries rolling-up to substantially larger population than America.
• Higher interest rates further dampen any American recovery.
• This could lead to less money available for lending in the USA, and a lot of additional lost jobs.

Scenario planning is not about predicting a collapse of Dubai World.  It's impossible to forecast such specific events with any accuracy.  But that doesn't mean U.S. companies shouldn't be spending a lot more energy thinking about global impacts on their business.  What happens by central banks, big companies and even real estate developers around the globe is important.  In prior years, when these collapses happened (Mexico, Korea, Japan) the USA stepped in to stop the collapse from cascading.  But the U.S. government is no longer in position to thwart future declines. 

It's important all companies undertake scenario plans that consider the impact of higher international interest rates, changes in currency valuations, import/export restrictions or tariffs and country-by-country unemployment rates.  Our businesses are increasingly dependent upon offshore companies as our suppliers, customers and investors.  If your scenario plans aren't considering the impact of global changes, like the disaster now happening to European banks, you may well find yourself  wondering what hit you in 2, 4 or 6 months when the impact hits home.

Catch the shift and Grow – or die away – Apple vs. Sears

"Sears Axes Ad Budget As Sales Slide" is the latest Crain's article.  Revenues have been falling at Sears ever since Mr. Ed Lampert took control of the venerable Chicago retailer.  His initial actions were to cut costs in order to prop up profits.  Which worked for about 8 quarters.  But then the impact of cost cutting cracked back like a bullwhip, shredding profits.  Mr. Lampert reacted by further cutting costs to "bring them in line with sales."  And the whirlpool started.  Cut costs, revenue falls, cut costs, revenue falls, cut costs……  And now he largely blames the recession for Sears poor performance.  As if his Lock-in, and that of the management, to old approaches had nothing to do with the dismal results now at Sears.

There are those who think these actions are smart, to bring costs "in alignment with retail trends" as Morningstar put it.  But reality is Sears is now in the Whirlpool of failure.  Looking at the lifecycle, they've gone past the point of no return – out of the Swamp of slow growth – and into the last stage -  failure.  The stores would be closed and sold to other retailers, except there's a dearth of retail buyers out there these days.  Thus shareholders are stuck with underperforming real estate, constantly declining revenues and falling cash flow. 

Not all retailers are seeing declining revenues.  Bloomberg.com reported today "Apple May Be Highest Grossing Fifth Avenue Retailer."  While Sears and others are watching sales go down, Apple's retail store revenues rose 2.5% this year – and it's Fifth Avenue store has seen traffic increase 22% this last quarter.  In a town where tourists often put an emphasis on shopping, they used to ask locals how to find Bloomingdales or Saks.  Now they want to know where to find the Apple store. 

Markets shift.  When they do, you have to change your Success Formula or your results decline.  When customers change their behavior, you have to change as well or your sales and profits go down.  But most leaders react to market shifts by trying to do the same thing they've always done, only faster, better and cheaper.  Oops.  That only leaves you chasing your tail – just like Sears.  You keep working harder and harder but results don't improve.  Then eventually something happens that throws you into bankruptcy, or an acquisition for your assets, and it's "game over."   Meanwhile, all the time you're watching returns shrink shareholders watch value decline, employees grow disgruntled as you whittle away bonuses, benefits, pay and jobs, and vendors grow tired of the impossible negotiations for lower costs while waiting to get paid on strung-out terms.  Nobody is having a good time.  Just go ask the folks at Sears.

But there are always businesses that catch the market shift and use it to propel their growth.  Like Apple.  Once a niche and low-profit computer manufacturer, they've turned into a producer of music players, music distributor and mobile phone supplier as well as computer manufacturer.  And when everyone would have said that retail is a terrible investment, they've turned into a surprisingly successful retailer as well.  Appple keeps throwing itself back into the Rapids of growth, rather than slipping into the Swamp of stagnation and Whirlpool of failure.

Apple keeps going toward the market shifts.  Apple's CEO (and increasingly other executives) Disrupts the company's Success Formula, always challenging the company to do new things. And White Space is constantly created where permission is given to operate outside old Lock-ins and resources are provided for the opportunity to grow.  Apple could have done a half-hearted job of retailing, trying to act like Best Buy or Nike with its stores and merchandise, or only funding stores in suburban malls instead of tier 1 retail space on the very best (and most expensive) retail avenues.

The next time you're asking yourself "when will this recession end?" think about Sears and Apple.  If  your business acts like Sears your recession won't be anytime soon.  If you keep doing more of the same, cutting costs and hoping to hold on for a recovery, your doing nothing to end the recession and it's unlikely you'll find much improvement in your business.  But if you develop scenarios about the future which allow you to attack competitors, using Disruptions to change your approach and the market, then using White Space to develop new solutions you can bring this recession to an end sooner than you think.  People in your business will have chances to grow, and so will your revenues and profits. 

For more about how we set ourselves up for failure, and how to avoid the traps download the free ebook The Fall of GM:  What Went Wrong and How To Avoid Its Mistakes.

How do you hide? Sara Lee

"It's Hard to Like Sara Lee" was the Barrons headline this week.  And how could you, after the company reported its third straight quarter with sales and earnings below expectation.  Check out this quote "Failed expansion has become a hallmark of Sara Lee in recent years, as
the company entered and exited businesses more frequently than tourists
passing through Grand Central station."

Meanwhile, over at Businessweek the headline is "Sara Lee, Why Investors Won't Bite."  The company keeps focusing on cost cutting.  "Sara Lee Chairman and Chief Executive Brenda Barnes
said on Aug. 12 that she expects annual cost savings of $350 million to
$400 million by 2012."  I wonder how far revenues will fall during that same period?  Since Ms. Barnes took the helm 5 years ago, Sara Lee's value has shrunk 54% (chart here).  Yet, her biggest plan remains more sales of existing businesses – now focused on selling the "houesehold and body care segments."  Although after all the sales the last 4 years the takers keep getting thinner and thinner, and the prices lower and lower.  Buyers recognize when a business has been stripped of its value and is nothing more than a shell of its previous self – no longer able to grow and produce cash flow.

Meanwhile at Sara Lee there are no real plans to sell any new products or services, so the P/E just keeps falling.  Now at 11, it's one of the industry's lowest.  But when you expect revenues and profits to keep getting smaller, you can't justify much of a P/E now can you?  It takes growth to increase your P/E multiple.

Forbes tried putting lipstick on the pig with its headline "Sara Lee Sees Meaty Growth."  The writer tried to focus on hopes the company has for selling more sausage and lunch meat.  But there's no innovation. Just a hope that low commodity prices will improve the margins on these products – and the commodities will stay low so the margins don't dip. Sara Lee hasn't launched a new product since Ms. Barnes took the helm.  Crain's summarized the situation more bluntly "Investors Find Little Tasty in Sara Lee."

Business is about creating shareholder value, not destroying it.  And Ms. Barnes has been going the wrong way her entire tenure leading Sara Lee.  As I pointed out in her first year of leadership in this blog, and have repeated often, Ms. Barnes has not developed any new products for the future, she has not identified competitive opportunities for growth, nor has she been willing to Disrupt old patterns and use White Space to develop and launch new revenue opportunities.  Instead, she has slowly and painfully sold off one asset after another – and none of that money has come back to shareholders.  Today all shareholders have as a result of her leadership is a smaller and less profitable declining company.  And no cash to compensate for the shrinkage.

If we want to come out of this recession we have to replace leaders who are so wrong headed.  There's no value in quarter after quarter of cost cutting.  There's no value in selling off assets for one time gains to cover ongoing losses.  There's no value in shrinking a company without distributing proceeds to the owners for investing elsewhere.  Thus, there's no value to the leadership at Sara Lee.  What's needed is someone at the helm willing to look to the marketplace for new product ideas and then use White Space to innovate those new solutions.  Someone who will put energy and resources behind growth.

The employees, shareholders and vendors at Sara Lee have a lot of scars for waiting – and nothing good.  Even the suburban Chicago town of Downer's Grove, IL is hurt by the loss of jobs.  To get America going again we have to start growing – and there's no better place to start than Sara Lee.  Before it disappears into oblivion – like the onetime Chicago retailer Montgomery Wards! 

Call to Action – Why we have to change

"Deeper Recession Than We Thought" is the Marketwatch headline.  As government data reporters often do, today they revised the economic numbers for 2008.  We now know the start to this recession was twice as bad as reported.  The 3.9% decline was the worst economic performance since the Great Depression of the 1930s.  The consumer spending decline was the worst since 1951 (58 years – a very low percentage of those employed today were even born then.)  Business investment dropped a full 20%.  Residential investment dropped 27%.  Stark numbers.

How did business people react?  Exactly as they were trained to react.  They cut costs.  Layed people off.  Dropped new products.  Stopped R&D and product development.  They quit doing things.  What's the impact?  The decline slows, but it continues.  Just like growth begets growth, cutting begets more decline. 

Then really interesting bad things happen. 

"ComEd loses customers for first time in 56 years" is the Crain's headline.  There are 17,000 fewer locations buying electricity in the greater Chicago area than there were a year ago.  That is amazing.  When you see new homes being built, and new commercial buildings, the very notion that the number of electricity customers contracted is hard to fathom.  People aren't even keeping the lights on any more.  They've gone away.

In the old days we said "go west."  But that hasn't been the case.  Everyone remembers the dot.com bust ending the 1990s.  "Silicon Valley Unemployment Skyrockets" is the Silican Alley Insider lead.  Today unemployment in silicon valley is the highest on record – even higher than the dot bust days.  When even tech jobs are at a nadir, it's clear something is very different this time. 

The old approaches to dealing with a recession aren't working.  While optimism is always high, what we can see is that things have shifted.  The world isn't like it was before.  And applying the same approaches won't yield improved results.  "For Illinois, recession looking milder – but recovery weaker" is another Crain's headline.  Nowhere are there signs of a robust economy.

We can't expect an economic recovery on "Cars for Cash" or "Clunker" programs.  By overpaying for outdated and obsolete cars we can bring forward some purchases.  But this does not build a healthy market for ongoing purchases.  These programs aren't innovation that promotes purchase.  They are a subsidy to a lucky few so they pay significantly less for an existing product.  To recover we must have real growth.  Growth from new products that meet new customer needs in new ways.  Growth built on providing solutions that advantage the buyer.  Only by introducing innovation, and creating value, will customers (businesses or consumer) open their wallets. 

Advertising hasn't disappeared.  But it has gone on-line.  Today you don't have to spend as much to reach your target.  Instead of mass advertising to 1,000 in order to reach the 100 (or 15) you really want, today you can target that buyer through the web and deliver them an advertisement far cheaper.  I didn't learn about Cash for Clunkers from a TV ad, I learned about it on the web.  As did thousands of people that rushed out to take advantage of the program at its introduction – exceeding expectations.  It no longer takes inefficient mass advertising through newspapers or broadcast TV to reach customers – so that market shrinks.  But the market for on-line ads will grow. So Google grows – double digit growth – while the old advertising media keeps shrinking.  To get the economy growing businesses (like Tribune Corporation) have to shift into these new markets, and provide new products and services that help them grow.

I live in Chicago.  Years ago, in the days of The Jungle Chicago grew as an agricultural center. There was a time the West Side of Chicago was known for its smelly stockyards and slaughter houses.  But Chicago  watched its agricultural companies move away.  They moved closer to the farms.  They were replaced by steel mills in places like Gary, IN and Chicago's south side.  But those too shut down, moved to lower cost locations offshore.  These businesses were replaced with assembly plants, like the famous AT&T Hawthorne facility, and manufacturers such as machine tool makers.  Now, for the last decade, these too have been moving away.  With each wave, the less valuable work, the more menial work, shifted to another location where it could be done as good but cheaper and often faster. 

Historically growth continued by replacing those jobs with work tied to the shifting market – jobs that provided more value.  So now, for Chicago to grow it MUST create information jobs.  The market has moved.  Kraft won't regain its glory if it keeps trying to sell more Velveeta.  Kraft has not launched a major new product in over 9 years.  Sara Lee has been shedding businesses and cutting costs for 6 years – getting smaller and losing value.  McDonalds sold its high growth business Chipotles to raise money for defending its hamburger stores by adding new coffee machines.  Motorola has let mobile telephony move to competitors as it remained too Locked-in to old technologies and old products while new companies – like Apple and RIM – brought out innovations that attracted new customes and growth. 

Growth doesn't come from waiting for the economy to improve.  Growth comes from implementing innovation that gives us new solutions.  Every market, whether geographic or product based, requires new solutions to maintain growth.  If we want our economy to improve, we must change our approach.  We can't save our way to prosperity.  Instead we must create solutions that fit future scenarios, introduce new solutions that Disrupt old patterns and use White Space to help customers shift to these products.

If we change our approach we can regain growth.  Otherwise, we can expect to keep getting what we got in 2008.

Now is the time for transformation says HBS prof – GM, newspapers, pharma

Readers of this blog know I've been very pessimistic about the future of GM for well over 2 years.  And I've long extolled the need to change top management.  I'm passing along some quotes from Professor Rosabeth Moss Kanter at the Harvard Business School in "Why Rick Wagoner Had to Go" at Harvard Business School publishing's web site.

"It was only a matter of time before GM's Rick Wagoner would have to go, and the board with him.  I am surprised he lasted this long, a fact that also shows weakness on the board side…. In this tough economic environmnet, if you wait too long to envision and implement transformational changes you are out of the game.  That holds for every industry under attack because of obsolete business models, including newspapers and big pharma…. New leaders at the top can bring a novel perspective, unburdened by the need to justify strategies of the past, and not stuck in a narrow way of thinking…. Companies finding themselves in a downward spiral need fresh views, not just redoubled efforts to do the same thing while waiting for the recession to end….. Now is the time for every company to do what GM failed to do fast enough and imaginatively enough: rethink everything.  What…. takes you into the future, and what is just legacy, continued out of sentiment?"

Thanks Professor Kantor, I agree completely.  GM was stuck Defending & Extending its old Success Formula, and as a result performance deteriorated to the point of failure.  And it's not just GM.  As the good professor points out, media companies that remain tied to newspapes have the same problem.  Today the Sun Times Group, publisher of the Chicago Sun Times declared bankruptcy ("Sun Times Files for Bankruptcy" Marketwatch.com).  There is no longer a major newspaper in Chicago that is not bankrupt.  And this blog has covered how big pharma has stayed too long at the trough of old inventions, missing the move to biologics.

Things are bad.  "All 50 states in recession for first time since the 1970s" is one of two Marketwatch.com headlines, "Global Economy to Shrink in 2009, World Bank Says."  The downturn is expected to be 1.7% globally, a disaster for small and emerging economies.  This is killing global trade (down 6.1%) and whipsawing countries like Russia – moving from growth last year of over 6% to a decline this year of over 4%!  This is the stuff that has led to revolutions!

The only way out of this situation is for organizations to listen to the good professor, and not try to do more of the same.  Markets have shifted – permanently.  Management actions that are designed to weather short-term downturns, mostly by cost-cutting and conserving resources, don't work when markets shift.  Instead, businesses have to develop new Success Formulas that get them out of the Whirlpool's spiral and into the Rapids of Growth.  To do this requires planning based upon future senarios, not what worked before.  Obsessing about competitors globally to develop new solutions.  Not fearing, but rather embracing Disruptions that allow for trying new things in White Space where you have permission and resources to really develop new solutions.  These 4 steps can turn around any organization – if you don't wait too long.